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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, 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 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.| |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of the close of business on June 28, 2002 was $821,046,299.
The number of shares of the Registrant's Common Stock outstanding on March 21
2003, was 27,748,058.
A portion of the Registrant's Proxy Statement dated March 19, 2003, is
incorporated by reference in Part III hereof.
John H. Harland Company and Subsidiaries
Index to Annual Report on Form 10-K
Page
Part I
Item 1: Business 3
Item 2: Properties 8
Item 3: Legal Proceedings 8
Item 4: Submission of Matters to a Vote of Security Holders 9
Executive Officers of the Registrant 9
Part II
Item 5: Market for the Registrant's Common Equity and
Related Stockholder Matters 9
Item 6: Selected Financial Data 10
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 7A: Quantitative And Qualitative Disclosures About
Market Risk 10
Item 8: Financial Statements and Supplementary Data 10
Item 9: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 10
PART III
Item 10: Directors and Executive Officers of the Registrant 10
Item 11: Executive Compensation 10
Item 12: Security Ownership of Certain Beneficial Owners
and Management 10
Item 13: Certain Relationships and Related Transactions 11
Item 14: Controls and Procedures 11
PART IV
Item 15: Exhibits, Financial Statement Schedule and
Reports on Form 8-K 12
-2-
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,
testing and assessment products and maintenance 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 14 of the Notes to
Consolidated Financial Statements on page F39 of this Annual Report on Form 10-K
with respect to information concerning the Company's business segments,
including segment sales for each of the last three fiscal years.
Recent Developments
The Company completed four acquisitions in 2002, each of which the
Company believes strengthens its position in key market segments. The four
acquisitions were:
Easy Systems, Inc., acquired in May 2002. Easy Systems was a provider
of branch automation solutions primarily for the community bank market. The
acquired operations are now part of the Company's Software and Services segment.
EdVISION Corporation, acquired in July 2002. EdVISION was a provider of
curriculum development and assessment tools for the education industry. The
acquired operations are now part of the Company's Scantron segment.
SPARAK Financial Systems, LLC, acquired in September 2002. SPARAK was a
provider of core systems for community banks. The acquired assets are now part
of the Company's Software and Services segment.
INTERLINQ Software Corporation, acquired in October 2002. INTERLINQ was
a provider of mortgage loan production and servicing systems. The acquired
operations are now part of the Company's Software and Services segment.
Recent developments also include the appointment of John Heald as
president of Harland Printed Products in December 2002. Mr. Heald now directs
the operations of the Company's Printed Products segment.
The Company's three business segments introduced a number of new
products and services in 2002. The Company believes these new products and
services help strengthen its relationships with 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 $523.6 million accounted
for 68% of the Company's consolidated sales in 2002.
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.
-3-
Printed Products has two primary competitors in the sale of checks to
financial institutions. They are national financial printers that specialize in
check printing, one of whom has substantially greater sales and financial
resources than the Company. The Company believes that the competitive factors
influencing buying decisions within the Printed Products segment include
pricing (which in certain circumstances may include significant upfront
contract incentive payments), service, quality, and the ability to increase
customer operational efficiencies and profitability. The Company has lost
business with some of its larger customers, primarily due to competitive
pricing, resulting in lower volumes and profitability. There is no assurance
that the Company will not lose other significant customers or that any such
losses could be offset by the addition of new customers. Other competitive
pressures on the Printed Products segment 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.
Printed Products markets its products and services primarily in the
United States. Printed Products has three distinct sales forces. Two of the
sales forces focus on the financial institution market, including community,
regional and national banks, credit unions and brokerage houses. One sales force
sells primarily checks and forms and the other sells direct marketing and
investment services products. The third sales force concentrates on financial
software companies and office supply superstores.
Printed Products maintains 14 production facilities in the United
States, which consist of nine imprint plants, two computer checks facilities,
one facility dedicated to direct marketing and brokerage productions and two
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.
In 2000, Printed Products 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 2002, all of the Company's domestic
imprinting facilities had been converted to digital technology. The conversion
of all nine facilities cost approximately $45 million.
Printed Products has brought customer service for its personal checks
business back in-house, a program that began in 2000 and concluded in early
2002. Customer service for this part of the Company's business had been
outsourced in 1996. The Company is now investing in new systems and
infrastructure for its customer service operations, which it believes will help
Printed Products improve service and functionality for its customers and
increase revenue per unit for Printed Products. The new systems are expected to
cost approximately $60 million over the four-year period ending in 2004, of
which approximately $38.0 million will be capital expenditures. As of December
31, 2002, $30.1 million has been expended on these initiatives, of which $21.4
million was capitalized.
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.
-4-
Software and Services
Software and Services operations are conducted through Harland
Financial Solutions, Inc. ("HFS"), a wholly-owned subsidiary of the Company, and
are composed of Delivery Systems, Retail Solutions, Core Systems, Mortgage
Solutions and Analytical Services. HFS sells a variety of products and services
that are designed to help its customers strengthen profitable relationships with
their customers. These products and services include lending and mortgage
origination and servicing applications, database marketing software, core
processing systems, customer relationship management ("CRM") software, branch
automation and business intelligence solutions. Segment sales for 2002 were
$138.1 million, which accounted for 18% of consolidated sales.
Delivery Systems sells loan and deposit origination and compliance
software to the financial institution market. The Company believes that Delivery
Systems sells 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 a market leader. One of the Company's new
offerings is financial.center, a web-based loan and deposit origination solution
that was introduced in 2002.
Retail Solutions helps financial institutions increase the
profitability of customer relationships through CRM software and branch
automation software.
Retail Solutions' CRM software, Touche(TM), is an enterprise-wide
system that allows financial institutions to manage every aspect of the customer
relationship. The Company believes it is one of the most complete CRM solutions
designed specifically for financial institutions.
Retail Solutions' 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 that customers are most
likely to purchase. Financial institutions use this information to implement
targeted marketing campaigns.
Retail Solutions' branch automation solutions provide comprehensive
sales, service and contact management capabilities for the branch office or
telephone banking center. The acquisition of Easy Systems expanded HFS's
presence in the branch automation market for community banks and credit unions.
Core Systems sells host processing application software to both credit
unions and banks. Its products centralize customer information and offer
real-time processing of transactions from every delivery channel. HFS has
integrated its core processing solution for credit unions, the ULTRADATA
System(TM), with 10 other Harland products and services and believes that this
is an example of how HFS can differentiate itself in the market. The acquisition
of SPARAK expanded HFS's core processing solutions into the community bank
market.
Mortgage Solutions provides mortgage loan origination, production and
servicing solutions. The Company believes that the acquisition of INTERLINQ
gives HFS a leadership position in this market segment. Like Delivery Systems,
Mortgage Solutions is largely a compliance business.
-5-
Analytical Services sells behavioral model services to financial
institutions, enabling them to, among other things, identify their customers
most at risk for switching financial institutions, as well as a consumer's
propensity to purchase a financial product and the financial product a consumer
is most likely to purchase next.
HFS backlog, which consists primarily of contracted products and
services prior to delivery, was $43.9 million and $29.8 million for the years
ended December 31, 2002 and 2001, respectively. The Company expects to fill
substantially all of such backlog within the current year.
The market for providing technological solutions to financial
institutions is highly competitive and fragmented. The Company believes there is
one other company that competes with all HFS business units and there are two
other competitors whose product offerings compete with product offerings of
several, but not all, HFS business units. There are also other competitors that
offer one or more specialized products or services that compete with the
Software and Services segment. The Company believes that competitive factors
influencing buying decisions for HFS product offerings include product features
and functionality, customer support, price and vendor financial stability.
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 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, survey services and curriculum
development and assessment tools. Field maintenance services include
installation, maintenance and repairs for computer and related equipment, as
well as Scantron optical mark recognition equipment. Segment sales for 2002
were $107.8 million, which accounted for 14% of consolidated sales.
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. It allows students take tests using
handheld devices that provide instantaneous feedback to both the student and
teacher.
Scantron expanded the products and services it sells to the education
market with the acquisition of EdVISION. EdVISION's products include Performance
Series(TM), which enables educators to assess a student's grade-level
proficiency in a number of subjects and Curriculum Designer(TM), which allows
educators to develop comprehensive education plans aligned to state and
national education standards.
Scantron also provides a total solution for customers' forms-based
transactions, including printing, distributing, processing and electronic
archiving.
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. The Company believes that factors influencing the buying
decisions within the Scantron segment include pricing, service, quality, product
offerings and the ability to customize programs.
-6-
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.
Foreign Sales
The Company conducts business in Mexico and Canada. Sales outside the
United States totaled $10.0 million, $12.2 million and $10.2 million for the
years ended December 31, 2002, 2001 and 2000, respectively.
Research and Development
The Company's research and development costs are primarily costs
incurred related to the development of software and the enhancement of existing
software products. 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. The Company incurred
expenses totaling $31.4 million, $29.1 million and $17.4 million in 2002, 2001
and 2000, respectively, for research and development activities.
Government Regulation
Under the Gramm-Leach-Bliley Act, financial institutions and their
service providers are responsible for developing, implementing and maintaining
reasonable administrative, technical and physical safeguards to protect the
security, confidentiality and integrity of non-public personal information
regarding financial institution customers. Under the regulations, the Company is
required to develop a comprehensive information security program to ensure the
security and confidentiality of customer information, and design and implement
appropriate information safeguards to control identified risks. The Company is
in the process of developing its information security program, which must be
implemented no later than May 23, 2003.
Employees
As of December 31, 2002, the Company and its subsidiaries employed
approximately 5,200 people.
Availability of Reports
The Company makes available free of charge through its website,
www.harland.com, its annual report on Form 10-K, quarterly reports on Form 10-Q
and current reports on Form 8-K and amendments to those reports filed pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as
soon as reasonably practicable after the Company files such material with, or
furnishes it to, the SEC.
-7-
ITEM 2. PROPERTIES
As of December 31, 2002, the Company and its subsidiaries owned and
leased facilities throughout the United States and in Canada, Puerto Rico and
Mexico. The following table provides a description of the Company's principal
facilities:
Location Owned or Leased Function
- --------------------------------------------------------------------------------
Printed Products:
Atlanta, GA Owned Corporate headquarters,
administration and sales and
marketing
Atlanta, GA Owned Information technology
Atlanta, GA Owned Operation support
Atlanta, GA Owned Production and distribution
Atlanta, GA Leased Customer service center
Bolingbrook, IL Leased Production and distribution
Clearwater, FL Owned Production and distribution
Columbia, SC Owned Production and distribution
Conyers, GA Leased Production and distribution
Edgewood, MD Leased Direct marketing services
Glen Burnie, MD Leased Production and distribution
Grapevine, TX Leased Production and distribution
Greensboro, NC Owned Production and distribution
Hato Rey, Puerto Rico Leased Production, distribution
and sales
Lakewood, CO Owned Production and distribution
Mexico City, Mexico Leased Production and distribution
Milton, WA Leased Production and distribution
Salt Lake, UT Owned Production, distribution and
customer service center
San Diego, CA Owned Production and distribution
Software and Services:
Atlanta, GA Leased Administration, development
and support
Bellevue, WA Leased Development and support
Bothell, WA Leased Development and support
Burnsville, MN Leased Development and support
Carrollton, TX Leased Development and support
Dayton, OH Leased Development and support
Denver, CO Leased Development and support
Englewood Cliffs, NJ Leased Development and support
Fargo, ND Leased Development and support
Jonesboro, AR Leased Development and support
Lake Mary, FL Leased Development and support
Orlando, FL Leased Development and support
Pleasanton, CA Leased Development and support
Portland, OR Leased Development and support
Vienna, VA Leased Development and support
Scantron:
Irvine, CA Leased Administration, production,
development and support
Omaha, NE Owned Field services, administration
and support
San Diego, CA Leased Development and support
Toronto, Ontario Leased Sales and support
The Company's leases on the properties it does not own have expiration dates
ranging from 2003 to 2013.
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.
-8-
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 55 Chairman, President and Chief Executive
Officer
Charles B. Carden 58 Senior Vice President and Chief Financial
Officer
John T. Heald, Jr. 57 President, Harland Printed Products
John C. Walters 62 Senior Vice President, Secretary and
General Counsel
Mr. Tuff joined the Company as President and Chief Executive Officer in
1998 and was named Chairman in 2000. 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. Carden joined the Company in 1999 as Vice President and Chief
Financial Officer. Mr. Carden was named Senior Vice President and Chief
Financial Officer in 2003. He previously served as Executive Vice President and
Chief Financial Officer of Mariner Post-Acute Network, a health care provider,
since 1996.
Mr. Heald joined the Company in December 2002 from Baldwin Technology
Company where he served as Chief Executive Officer for the manufacturer of
controls and accessories for the printing industry since 2001. Previously he
served as Executive Vice President - Operations of Sappi Fine Paper NA, a
leading producer of coated fine paper for two years. He was previously employed
by Union Camp Corporation, a worldwide producer of paper and packaging
products, for 22 years, last serving as Executive Vice President - Packaging
Operations.
Mr. Walters joined the Company in 1996 as Senior Vice President and
General Counsel and was named Secretary in 1999.
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
The Company's common stock is listed on the New York Stock Exchange
under the symbol "JH." As of March 10, 2003, the Company had 4,717 shareholders
of record. See the information with respect to quarterly market information and
dividend information for the Company's common stock, which is set forth on page
F43. 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.
-9-
ITEM 6. SELECTED FINANCIAL DATA
See the information with respect to selected financial data on page
F43.
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
F13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the information with respect to Quantitative And Qualitative
Disclosures About Market Risk on page F11 under the captions 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 F14 through F43.
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 19, 2003 (the
"Proxy Statement").
The information regarding Executive Officers required herein is
included in Part I of this Annual Report on Form 10-K and incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive compensation required herein 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
AND RELATED STOCKHOLDER MATTERS
The following table presents information regarding securities
authorized for issuance under equity compensation plans as of December 31, 2002:
-10-
Equity Compensation Plan Information
Number of
securities
Number remaining
of available for
securities Weighted- future issuance
to be average under equity
issued upon exercise compensation
exercise of price of plans
outstanding outstanding (excluding
options, options, securities
warrants warrants reflected in
and rights and rights column (a))
Plan Category (a) (b) (c)
- ---------------------------------------------------------------------------
Equity compensation plans
approved by security holders 2,190,350 $19.59 1,350,790
Equity compensation plans
not approved by security
holders(1) 1,897,875(2) 19.68 740,112
- ---------------------------------------------------------------------------
Total 4,088,225(2) $19.63 2,090,902
===========================================================================
(1)Equity compensation plans not approved by security holders include the
Company's 2000 Stock Option Plan and the Non-Employee Director Deferred
Compensation Plan. See Note 9 to the Consolidated Financial Statements on page
F33 for descriptions of such plans.
(2)Does not include 106,800 unissued but allocated shares under the Non-Employee
Director Deferred Compensation plan.
The other information regarding security ownership of certain
beneficial owners and management 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.
ITEM 14. CONTROLS AND PROCEDURES
The Company's disclosure controls and procedures are designed to
ensure that information required to be disclosed in the reports that the
Company files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that such information is accumulated
and communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Within the 90 days prior to this report, the Company evaluated, under
the supervision and with the participation of management, including the Chief
Executive Officer and Chief Financial Officer, the effectiveness of the design
and operation of the Company's disclosure controls and procedures, pursuant to
Exchange Act Rule 13a-14 and Rule 13a-15. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information that is required to be included in the Company's periodic
SEC filings. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of this evaluation.
-11-
PART IV
ITEM 15. 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 F14
Consolidated Statements of Income F16
Consolidated Statements of Cash Flows F17
Consolidated Statements of Shareholders' Equity F18
Notes to Consolidated Financial Statements F19
Independent Auditors' Report F41
Management's Responsibility for Financial Statements F42
Supplemental Financial Information (unaudited) F43
(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. Plus (+) indicates management contracts and compensatory arrangements
required to be filed pursuant to Item 14(c) of this annual report.)
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 December 19, 2002.
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 ("8-K") dated
August 23, 2000).
4.2 * First Amendment dated October 19, 2000 to the Revolving Credit
Agreement (Exhibit 4.2 to the Registrant's Annual Report on
Form 10-K ("10-K") for the year ended December 31, 2000).
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 (Exhibit 4.4 to the 2001 10-K).
4.5 * Rights Agreement, dated as of December 17, 1998, between
Registrant and First Chicago Trust Company of New York
(Exhibit 4.1 to the 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 and John C. Walters.
10.2 + Employment Agreement, dated December 2, 2002, between Registrant
and John T. Heald, Jr.
10.3 * + Noncompete and Termination Agreement, dated as of January 1, 2002,
between Registrant and Timothy C. Tuff (Exhibit 10.3 to the
2001 10-K).
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, Heald, Tuff and Walters (Exhibit 10.4 to the 2000 10-K).
-12-
10.6 + Restricted Stock Agreement dated April 24, 2002 between Registrant
and Mr. Tuff.
10.7 * + Supplemental Retirement Agreement, dated as of January 1, 2002,
between Registrant and Mr. Tuff (Exhibit 10.7 to the 2001 10-K).
10.8 * John H. Harland Company 1999 Stock Option Plan, as amended
(Exhibit 99.1 to the Registrant's Registration Statement on Form S-8,
dated January 14, 2000, File No. 333-94727).
10.9 * John H. Harland Company 2000 Stock Option Plan, as amended
(Exhibit 99.1 to the Registrant's Registration Statement on Form S-8,
dated November 29, 2000, 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 Compensation Plan for Non-Employee
Directors, as amended (Exhibit 10.12 to the 2001 10-K).
21 Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche, LLP.
99.1 CEO Certification as of December 31, 2002.
99.2 CFO Certification as of December 31, 2002.
(b) Reports on Form 8-K.
None.
-13-
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/ J. Michael Riley 3/21/03
- ------------------------ ---------
J. Michael Riley Date
Vice President and
Controller
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/ William S. Antle III 3/18/03 /s/ Charles B. Carden 3/24/03
- ------------------------ --------- ------------------------ ---------
William S. Antle III Date Charles B. Carden Date
Director Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Robert J. Clanin 3/21/03 /s/ John D. Johns 3/18/03
- ------------------------ --------- ------------------------ ---------
Robert J. Clanin Date John D. Johns Date
Director Director
/s/ Richard K. Lochridge 3/18/03 /s/ John J. McMahon, Jr. 3/18/03
- ----------------------- --------- ------------------------ ---------
Richard K. Lochridge Date John J. McMahon, Jr. Date
Director Director
/s/ G. Harold Northrop 3/24/03 /s/ Larry L. Prince 3/18/03
- ----------------------- --------- ------------------------ ---------
G. Harold Northrop Date Larry L. Prince Date
Director Director
/s/ J. Michael Riley 3/21/03 /s/ Eileen M. Rudden 3/08/03
- ----------------------- --------- ------------------------ ---------
J. Michael Riley Date Eileen M. Rudden Date
Vice President and Director
Controller
(Principal Accounting Officer)
/s/ Jesse J. Spikes 3/17/03 /s/ Timothy C. Tuff 3/20/03
- ----------------------- --------- ------------------------ ---------
Jesse J. Spikes Date Timothy C. Tuff Date
Director Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
-14-
CERTIFICATIONS
I, Timothy C. Tuff certify that:
1. I have reviewed this annual report on Form 10-K of John H. Harland Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Timothy C. Tuff 3/25/2003
________________________ _________________________
Timothy C. Tuff Date
Chairman, President and
Chief Executive Officer
-15-
I, Charles B. Carden certify that:
1. I have reviewed this annual report on Form 10-K of John H. Harland Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Charles B. Carden 3/25/2003
________________________ _________________________
Charles B. Carden Date
Senior Vice President and
Chief Financial Officer
-16-
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, 2002
Management's Discussion and Analysis of
Results of Operations and Financial Condition F2
Consolidated Financial Statements
and Notes to Consolidated Financial Statements F14
Independent Auditors' Report F41
Management's Responsibility For Financial Statements F42
Supplemental Financial Information (Unaudited) F43
Financial Statement Schedule S1
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 and Services") is focused
on the financial institution market and includes lending and mortgage
origination, compliance and closing applications, database marketing software,
core processing applications, customer relationship software and business
intelligence solutions.
The Scantron segment ("Scantron") includes scanning equipment and
software, scannable forms, survey solutions, curriculum development and
assessment tools and field maintenance services. Scantron sells these products
and services to the education, commercial and financial institution markets.
During 2002, the Company elected to reclassify certain expense items in
its consolidated statements of income. The reclassifications affected the
categories of Cost of Sales and Selling, General and Administrative expenses.
The change represents the reclassification of software product development costs
previously shown as part of Cost of Sales. Financial data for all periods have
been restated to reflect the impact of the reclassifications. The
reclassifications had no impact on net income or shareholders' equity as
previously reported.
Results of Operations
2002 versus 2001
Consolidated net sales for the year ended December 31, 2002 were $767.8
million compared to $743.2 million for the year ended December 31, 2001, an
increase of 3.3%. Sales of products, which consist of all Printed Products
sales, software licensing sales, scanning equipment and scannable forms and
other products, were $652.5 million in 2002 compared to $636.1 million in 2001,
an increase of 2.6%. Sales of services, which consist of software maintenance
services, field maintenance services, analytical and consulting services and
other services were $115.3 million in 2002 compared to $107.1 million in 2001,
an increase of 7.6%.
Printed Products sales were $523.6 million in 2002 compared to $527.3
million in 2001, a decrease of 0.7%. Lower volumes in traditional check printing
operations, which decreased 6.6% in 2002 from 2001, accounted for a majority of
the decrease in sales. The volume decline was primarily attributable to a loss
of market share and a decline in orders received from a direct check marketer.
The impact of these two factors was moderated by an improvement of 5.1% in
average price per unit due to lower volume with a direct check marketer that is
less favorably priced than traditional customers, and also to price increases.
Sales in direct marketing operations also decreased due to the general economic
slowdown, which resulted in lower credit card promotions and fewer openings of
online brokerage accounts. The sales decreases were partially offset by sales of
computer checks and related products, which increased in 2002 compared to 2001
due to a fulfillment program for a software customer initiated in late 2001 and
increases in the computer checks commercial referral business.
Software and Services product sales were $66.7 million in 2002 compared
to $54.8 million in 2001, an increase of 21.7%. Sales of services in Software
and Services were $71.4 million in 2002 compared to $66.5 million in 2001, an
increase of 7.4%. Combined, Software and Services sales increased from $121.3
million in 2001 to $138.1 million in 2002 primarily due to the acquisitions of
-F2-
Easy Systems, SPARAK and INTERLINQ (see Note 2 to the Consolidated Financial
Statements) and also to increased sales of core systems applications, customer
relationship management applications and branch automation applications. Sales
of lending and account opening applications increased slightly in 2002 compared
to 2001, primarily due to a trend of a higher proportion of term license
agreements during 2001 and the first six months of 2002 whereby revenue
recognition was deferred from the current period into future periods. This trend
changed during the latter portion of 2002 with a higher proportion of book and
ship sales, which are recognized as revenue when shipped. The change during the
latter portion of 2002 was enough to offset the effect of higher term license
sales during the first six months of 2002. Sales of mortgage lending solutions
increased in 2002 due to the INTERLINQ acquisition, which was partially offset
by the decision of a major customer to bring software development in-house in
late 2001.
Scantron product sales were $63.9 million in 2002 compared to $55.3
million in 2001, an increase of 15.6%. Scantron sales of services were $43.9
million in 2002 compared to $40.6 million in 2001, an increase of 8.1%. Scantron
combined sales were $107.8 million in 2002 compared to $95.9 million in 2001, an
increase of 12.4%. The increase was due in part to the Scanning Systems and
EdVISION acquisitions made by Scantron during 2001 and 2002 (see Note 2 to the
Consolidated Financial Statements), 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 continuing trend in
data collection methods from optical mark reading to imaging and other direct
input methods.
Consolidated gross profit increased by 7.2% from $340.7 million in 2001
to $365.4 million in 2002 and increased as a percentage of sales from 45.8% in
2001 to 47.6% in 2002. The increase in consolidated gross profit was the result
of a favorable change in sales mix, cost management and productivity improvement
initiatives.
Printed Products gross profit increased 2.2% in 2002 from 2001 and
increased as a percentage of sales from 38.0% in 2001 to 39.1% in 2002, a result
of the combination of an increase in average price per unit and cost reductions
resulting from process improvements and new technology. The increase in Printed
Products gross profit in 2002 from 2001 occurred primarily in its checks
operations and was partially offset by a decrease in gross profit in direct
marketing operations due primarily to the decrease in direct marketing sales.
Software and Services gross profit increased 14.6% and, as a percent of sales,
increased to 71.0% in 2002 from 70.5% in 2001 primarily due to the newly
acquired businesses, increased sales of products and services, and cost
management activities. Scantron gross profit increased by 14.1% over 2001 and
increased as a percentage of sales to 57.8% in 2002 from 57.0% in 2001 primarily
due to improved margins in existing products and services.
Consolidated selling, general and administrative expenses ("SG&A")
totaled $266.0 million in 2002 compared to $238.2 million in 2001, an increase
of 11.7%. As a percentage of sales, SG&A increased from 32.0% in 2001 to 34.6%
in 2002. The increase in SG&A was due in part to the impact of acquisitions,
higher expenses for customer care initiatives in Printed Products and increases
in stock-based compensation expense. Customer care initiatives in Printed
Products were focused on improving systems that support sales, marketing and
customer service. Stock-based compensation expense totaled $9.9 million in 2002
compared to $5.3 million in 2001 primarily due to accelerated vesting of
restricted stock grants during 2002 that vested as a result of the Company's
favorable stock price performance (see Note 9 to the Consolidated Financial
Statements). SG&A was also unfavorably impacted in 2002 by higher costs
associated with the move of customer service activities in-house which were
provided by an outside provider in prior years, increases in marketing
expenditures, upgrade expenses for the Company's financial and human resource
systems and severance expenses related to management reductions in 2002.
-F3-
Amortization of intangibles in 2002 decreased by $11.4 million from
2001 primarily due to the elimination of goodwill amortization in 2002 as a
result of the adoption of the Financial Accounting Standards Board ("FASB")
Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") (see Note
3 to the Consolidated Financial Statements). In 2002, the Company wrote off $3.0
million of acquired in-process research and development costs related to the
acquisition of INTERLINQ (see Note 2 to the Consolidated Financial Statements).
Consolidated income from operations increased $5.3 million to $93.8
million in 2002 from $88.5 million in 2001 due to the increase in gross profit
and the elimination of goodwill amortization in 2002 that were partially offset
by increases in SG&A expenses and the write-off of acquired in-process research
and development costs in 2002.
Other Income (Expense) decreased from an expense of $17.7 million in
2001 to an expense of $8.5 million in 2002. The decrease was primarily due to a
$7.8 million write-down in 2001 of the Company's equity investment in Netzee,
Inc. ("Netzee") and to decreased interest expense. Interest expense was lower in
2002 due to lower interest rates and lower average levels of debt outstanding in
2002 compared with 2001. In December 2002, the Company realized a loss of $1.8
million on the disposition of debt and equity investments resulting from the
sale of Netzee.
Consolidated income before income taxes increased $14.5 million to
$85.3 million in 2002 compared to $70.8 million in 2001 as a result of the
aforementioned items.
The Company's effective income tax rate was 38.5% in 2002 and 45.0% in
2001. The decrease in the effective tax rate was primarily due to the
elimination of goodwill amortization in 2002, most of which was nondeductible
for tax purposes, and to a $1.3 million valuation allowance included in 2001 for
a portion of the capital loss tax benefit related to the write-down of the
investment in Netzee. The tax rate in 2002 was also affected by state tax
credits and favorable adjustments related to prior years resulting from the
resolution of an IRS examination for the years 1996 through 1998, which were
partially offset by the impact of the in-process research and development charge
that was nondeductible for tax purposes. See Note 7 to the Consolidated
Financial Statements for factors affecting the tax rate in each year.
Net income for 2002 was $52.4 million compared to $39.0 million for
2001. Basic and diluted earnings per share for 2002 were $1.80 and $1.73,
respectively, compared to basic and diluted earnings per share of $1.34 and
$1.31, respectively, in 2001. Net income for 2002 included charges related to
accelerated vesting of certain restricted stock grants, net of the resulting
reduction of amortization expense, an in-process research and development charge
related to an acquisition, and the loss on the disposition of debt and equity
investments resulting from the sale of Netzee. These adjustments reduced diluted
earnings by $0.28 per share. Net income for 2001 included charges for the
write-down of the investment in Netzee, costs associated with accelerated
vesting of certain restricted stock grants and severance costs related to a
plant consolidation, all of which reduced diluted earnings by $0.27 per share.
Net Income for 2001 also included goodwill amortization equivalent to $0.34 per
share. Effective January 1, 2002, goodwill amortization was discontinued as a
result of the adoption of SFAS 142 (see Note 3 to the Consolidated Financial
Statements).
-F4-
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%. Sales of products, which consist of all Printed Products
sales, software licensing sales, scanning equipment and scannable forms and
other products, were $636.1 million in 2001 compared to $664.2 million in 2000,
a decrease of 4.2%. Sales of services, which consist of software maintenance
services, field maintenance services, analytical and consulting services, and
other services were $107.1 million in 2001 compared to $56.5 million in 2000, an
increase of 89.8%.
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 a 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 and Services product sales were $54.8 million in 2001 compared
to $42.4 million in 2000, an increase of 29.3%. Sales of services in Software
and Services were $66.5 million in 2001 compared to $18.1 million in 2000.
Combined sales of product and services for Software and Services increased
100.5% from $60.5 million in 2000 to $121.3 million in 2001 primarily due to the
acquisition of Concentrex Incorporated ("Concentrex")(see Note 2 to the
Consolidated Financial Statements). Comparing the September through December
periods of 2000 and 2001, where the results are comparable relative to the
acquisition of Concentrex, Software and Services 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 deferred contract payments
and revenue recognition into future periods.
Scantron product sales were $55.3 million in 2001 compared to $55.0
million in 2000, an increase of 0.6%. Scantron sales of services were $40.6
million in 2001 compared to $38.4 million in 2000, an increase of 5.7%. Scantron
combined sales were $95.9 million in 2001 compared to $93.4 million in 2000, an
increase of 2.7%. The increase in Scantron sales was primarily due to
acquisitions and internal growth in Scantron field services and survey solutions
operations. In 2001, Scantron scanning related 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 to the Consolidated
Financial Statements) being offset by a decrease in optical mark reading
equipment sales, a result of a trend in data collection methods from optical
mark reading to imaging and other direct input methods.
Consolidated gross profit increased by 14.2% from $298.4 million in
2000 to $340.7 million in 2001 and increased as a percentage of sales from 41.4%
in 2000 to 45.8% 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 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
-F5-
price per unit, process improvements and new technology. Software and Services
gross profit, as a percent of sales, increased to 70.5% in 2001 from 61.3% in
2000 primarily due to a full year's effect of the Concentrex acquisition.
Scantron gross profit increased by 8.1% over 2000 and increased as a percentage
of sales to 57.0% in 2001 from 54.1% in 2000 due to lower costs resulting from a
restructuring in 2000 and efficiencies gained from consolidating printing
operations into a single facility in 2001.
SG&A totaled $238.2 million in 2001 compared to $205.9 million in 2000,
an increase of 15.7%. As a percentage of sales, SG&A increased from 28.6% in
2000 to 32.0% 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 9 to the Consolidated Financial Statements). 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 5 to the Consolidated Financial Statements)
which was primarily for impairment of intangible assets and severance-related
expenses. The impairment of intangibles was a result of the Company's
examination of the long-term viability of product offerings in two of its
Software and Services operations. Subsequent to the acquisition of Concentrex in
August 2000, the Company decided to discontinue certain DOS-based products and
migrate customers to similar Concentrex product offerings or to a web-based
product 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 and Services operations. The revision of
expectations required an adjustment of the carrying value of the operation's
long-term assets to the fair 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 an expense of $17.7 million in 2001. The increase was primarily due to a
$7.8 million write-down of the Company's equity investment in Netzee in 2001
combined with a $2.9 million non-recurring gain on the sale of a Company
investment in 2000. A decrease in interest expense in 2001, due to decreases in
average debt levels and interest rates, partially offset the increase in other
expense.
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
costs and impairment of intangibles that were in restructuring costs. See Note 7
to the Consolidated Financial Statements for factors affecting the tax rate in
each year.
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,
-F6-
respectively, compared to basic and diluted earnings per share of $1.01 and
$1.00, respectively, in 2000. Net income for 2001 included charges for the
write-down of the investment in Netzee, costs associated with accelerated
vesting of certain restricted stock grants and severance costs related to a
plant consolidation, all of which reduced diluted earnings by $0.27 per share.
Net income for 2000 included charges for restructuring and acquired in-process
research and development costs, which reduced diluted earnings by $0.66 per
share. These were partially offset 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.
Financial Condition, Capital
Resources and Liquidity
Cash flows provided from operations in 2002 were $140.3 million, an
increase of 15.1% over $121.9 million for 2001 primarily due to changes in
working capital and increased net income adjusted for depreciation and
amortization. Changes in working capital included continued improvement in
collections of accounts receivable in 2002 due in part to an increase in the
percentage of customers billed electronically. Other sources of cash were $20.0
million from increased borrowings and $11.4 million of proceeds received for
common stock issued under the Company's stock option and employee stock purchase
plans. The primary uses of cash in 2002 were for the acquisition of new
businesses, capital expenditures, repurchases of treasury stock, dividend
payments to shareholders and refundable contract payments.
Purchases of property, plant and equipment totaled $32.1 million in
2002 compared to $47.5 in 2001. Capital expenditures during both periods were
primarily for digital printing equipment and customer care infrastructure
initiatives. The Company is now fully operational with digital printing
technology in all of its domestic personal check imprint operations. The
Company's customer care infrastructure initiatives focused 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 spend approximately $60.0 million on customer care
infrastructure 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. As of December 31, 2002, $30.1 million has been expended on these
initiatives, of which $21.4 million was capitalized. In 2003, total capital
expenditures for the Company are expected to be approximately $32 - $37 million.
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 to acquire new
businesses, used to fund the Company's stock benefit and compensation plans or
for other corporate purposes. During 2002, the Company purchased 1,307,300
shares of its common stock under this authorization at a cost of $27.7 million
or an average cost of $21.19 per share. As of December 31, 2002, a total of
1,752,446 shares had been purchased under the share purchase authorization at an
average cost of $20.96 per share. In January 2003, the Company's Board of
Directors authorized the repurchase of an additional 3.0 million shares, upon
completion of the existing authorization.
The Company has a $325.0 million revolving credit facility (the "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, 2002, direct
borrowings totaled $144.0 million under the facility. There were $5.7 million in
outstanding letters of credit, which were issued under the Credit Facility,
leaving $175.3 million available for borrowings at December 31, 2002.
-F7-
On December 31, 2002, the Company had $19.2 million in cash and cash
equivalents and $175.3 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.
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, 2002
(in millions):
Contractual Payments Due by Period
Obligations -----------------------------------------------------------
and Commitments Total 2003 2004 2005 2006 2007 2008+
- -----------------------------------------------------------------------------
Long-term debt $144.2 $ 0.1 $144.1 $ - $ - $ - $ -
Operating leases 88.3 15.5 13.3 12.3 10.4 9.8 27.0
Capital leases 0.1 0.1 - - - - -
Acquisition related
contingent payments 4.0 - 2.0 2.0 - - -
- ------------------------------------------------------------------------------
Total $236.6 $ 15.7 $159.4 $ 14.3 $ 10.4 $ 9.8 $ 27.0
==============================================================================
Acquisitions
All acquisitions in 2002, 2001 and 2000 were paid for with cash
provided from operating activities and proceeds from the Company's Credit
Facility. The acquisitions were accounted for using the purchase method of
accounting and, accordingly, the results of operations of the acquired
businesses have been included in the Company's operations since the particular
acquisition.
2002 Acquisitions
On October 15, 2002, Harland Financial Solutions, Inc. ("HFS"), a
wholly-owned subsidiary of the Company, acquired 100% of the equity in INTERLINQ
Software Corporation ("INTERLINQ") for approximately $23.0 million, net of cash
acquired. INTERLINQ was a leading provider of mortgage loan origination,
production and servicing solutions. As part of the acquisition, the Company
acquired in-process research and development costs totaling $3.0 million, which
were immediately expensed following the acquisition. These costs represented the
fair value of certain acquired research and development projects that were
determined to have not reached technological feasibility. As a result of the
acquisition, the Company believes HFS has a leadership position in the mortgage
loan origination market and good growth opportunity in the mortgage servicing
market.
On September 20, 2002, HFS extended its core systems offering with the
acquisition of certain assets and related liabilities of SPARAK Financial
Systems, LLC ("SPARAK") for approximately $31.9 million, net of cash acquired.
The acquisition agreement includes a contingent purchase payment not to exceed
$2.0 million to be made in the event certain growth targets are achieved as
defined in the agreement. The contingent purchase payment is payable in 2004 and
will be recorded as an increase in goodwill, to the extent such payment is
-F8-
ultimately made. SPARAK was a leading provider of integrated hardware and
software systems for community banks. The acquisition was completed to build on
the HFS leadership position in the financial institutions market and add
additional value for SPARAK's existing customers, as well as for other community
banks nationwide.
On July 24, 2002, Scantron Corporation, a wholly-owned subsidiary of
the Company, acquired 100% of the equity in EdVISION Corporation ("EdVISION")
for approximately $28.8 million, net of cash acquired. Related to the
acquisition of EdVISION, the Company entered into an incentive agreement with
certain individuals that includes contingent payments to be made in the event
certain growth targets are achieved as defined in the incentive agreement. These
contingent payments, which will not exceed $2.0 million, are payable during or
before 2005 and will be expensed at the time of payment, to the extent such
payments are ultimately made. EdVISION was a leading provider of curriculum
development and assessment tools for the education industry. This acquisition
expands Scantron's ability to offer advanced testing and assessment tools in the
education market.
On May 28, 2002, HFS acquired 100% of the equity in Easy Systems, Inc.
("Easy Systems") 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 addition of Easy Systems allows HFS
to offer financial institutions proven and leading-edge solutions to help them
strengthen customer relationships while improving operations.
2001 Acquisitions
In March 2001, the Company's Scantron subsidiary acquired 100% of the
equity in 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.
2000 Acquisition
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 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 6 to the Consolidated Financial Statements). As part of
the acquisition, the Company acquired in-process research and development costs
of $8.2 million, which were immediately expensed following the acquisition, and
which represented the fair value of certain acquired research and development
projects that were determined to have not reached technological feasibility.
Outlook
The Company believes that its financial position continues to be strong
and expects positive cash flows from operations in all business segments in
2003. The Company expects the Printed Products segment's profits will be down
slightly in 2003 due to the loss of a major customer and increased spending on
certain initiatives including customer care infrastructure, order entry systems
and marketing activities. The Company anticipates the Software and Services
segment's profitability will continue to improve steadily as it completes the
integration of the 2002 acquisitions. Excluding the impact of acquisitions, the
Company believes Software and Services and Scantron should be high single digit
revenue growth businesses. The Company is projecting the Scantron segment will
increase profits nominally in 2003 primarily reflecting its internal growth.
-F9-
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
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
(which in certain circumstances may include significant upfront contract
incentive payments) 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 and 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 and Services business, including
but not limited to the retention of employee talent and customers. Also,
variables exist in the development of new Software and Services products,
including the timing and costs of the development effort, product performance,
functionality, product acceptance, competition, the Company's ability to
integrate acquired companies, 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 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, and the Company's ability to integrate
acquired companies, all of which could have an adverse impact on the Company's
business.
-F10-
As a matter of due course, the Company and its subsidiaries are subject
to various Federal and State tax examinations. 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.
Quantitative and Qualitative
Disclosures About 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, 2002, the Company had outstanding variable rate debt of $144.0
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. The notional
principal amount of interest rate swaps outstanding was $114.0 million at
December 31, 2002 and $98.0 million at December 31, 2001. The Company believes
that its interest rate risk at December 31, 2002 was minimal. The impact on
annual results of operations of a hypothetical one-point interest rate change on
the outstanding debt as of December 31, 2002 would be approximately $300,000.
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, 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.
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. The change in market value has been accounted for as a
component of other comprehensive income. The following presents the Company's
investment in Bottomline reflecting the high and low closing market prices for
the year ended December 31, 2002 (in thousands):
Carrying
Value(a) High(b) Low(b)
- ----------------------------------------------------------------------
Investment in
Bottomline $3,044 $6,250 $1,920
(a) Based on market value as of December 31, 2002.
(b) Based on quoted market prices.
-F11-
Accounting Pronouncements
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements 4, 44 and 64, Amendment to FASB Statement 13, and Technical
Corrections" ("SFAS 145"). One of the major changes of SFAS 145 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 does not believe the adoption of SFAS 145 will have a material
effect on the Company's financial position or results of operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146") SFAS 146 requires
recording of 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. The Company will adopt
the provisions of SFAS 146 for exit or disposal activities initiated after
December 31, 2002 and does not believe the adoption will have a material effect
on the Company's financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
Indebtedness of Others" ("FIN 45"), which requires companies to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 provides specific guidance
identifying the characteristics of contracts that are subject to its guidance in
its entirety from those only subject to the initial recognition and measurement
provisions. The recognition and measurement provisions of FIN 45 are effective
on a prospective basis for guarantees issued or modified after December 31,
2002. The Company does not believe the adoption of FIN 45 will have a material
effect on the Company's financial position or results of operations.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"). SFAS 148
amends FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), and provides guidance to companies electing to voluntarily change to the
fair value method of accounting for stock-based compensation. In addition, this
statement amends SFAS 123 to require more prominent and more frequent
disclosures in financial statements regarding the effects of stock-based
compensation. The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock-based compensation plans and,
effective December 15, 2002, adopted the disclosure provisions of SFAS 148. The
adoption of the disclosure provisions of SFAS 148 did not 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,
income taxes and stock-based compensation.
The Company considers its revenue recognition policy as critical to its
reported results of operations primarily in its Software and Services and
Scantron segments. For software that is installed and integrated by the Company,
revenue 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.
-F12-
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 the third quarter of 2001 and in the
second quarter of 2002, the Company recorded charges of $7.8 million and $0.3
million, respectively, before income taxes for write-downs of an equity
investment that was subsequently disposed of during the fourth quarter of 2002.
In 2000, the Company recorded a charge of $9.4 million for a write-down of
intangible and other assets.
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. The Company analyzes its
goodwill for impairment on an annual basis. In 2002, the Company engaged an
independent valuation firm to perform a goodwill impairment test. Based upon the
analysis, there was no impairment of goodwill.
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 the Company's estimates change in
the future.
The Company applies APB 25 and related interpretations in accounting
for its stock-based compensation plans and applies the disclosure-only
provisions of SFAS 123, as amended by SFAS 148. No stock-based compensation cost
is reflected in net income for options or purchases under the employee stock
purchase plan. Pro forma disclosures of net income and earnings per share are
included in the Stock-Based Compensation section of Note 1 to the Consolidated
Financial Statements as if compensation cost for options granted under the
Company's stock-based compensation plans and purchases under the employee stock
purchase plan had been determined based on the fair value at the grant dates
consistent with the provisions of SFAS 123.
-F13-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31,
2002 2001
- -------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,218 $ 10,096
Accounts receivable from customers, less
allowance for doubtful accounts of $2,814
and $4,819 58,871 64,335
Inventories:
Raw materials 15,593 17,309
Work in process 414 765
Finished goods 2,184 1,688
Deferred income taxes 26,977 25,621
Property held for sale 4,295 1,075
Other 11,273 11,948
- -------------------------------------------------------------------------------
Total current assets 138,825 132,837
- -------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS:
Investments 3,917 7,896
Goodwill - net 210,462 125,409
Intangibles - net 14,127 9,312
Deferred income taxes - 6,604
Refundable contract payments 23,281 27,563
Other 25,860 19,899
- -------------------------------------------------------------------------------
Total investments and other assets 277,647 196,683
- -------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 3,121 3,555
Buildings and improvements 44,907 51,054
Machinery and equipment 259,950 242,152
Furniture and fixtures 15,718 14,970
Leasehold improvements 12,637 11,179
Additions in progress 4,351 11,350
- -------------------------------------------------------------------------------
Total property, plant and equipment 340,684 334,260
Less accumulated depreciation and amortization 206,469 191,534
- -------------------------------------------------------------------------------
Property, plant and equipment - net 134,215 142,726
- -------------------------------------------------------------------------------
TOTAL $550,687 $472,246
===============================================================================
-F14-
CONSOLIDATED BALANCE SHEETS (continued)
December 31,
2002 2001
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 22,599 $ 23,880
Deferred revenues 53,311 31,240
Accrued liabilities:
Salaries, wages and employee benefits 31,039 27,077
Taxes 18,817 16,729
Other 21,320 22,483
- -------------------------------------------------------------------------------
Total current liabilities 147,086 121,409
- -------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Long-term debt 144,106 124,118
Deferred income taxes 1,750 -
Other 23,751 24,695
- -------------------------------------------------------------------------------
Total long-term liabilities 169,607 148,813
- -------------------------------------------------------------------------------
Total liabilities 316,693 270,222
- -------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (see Note 13)
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 5,245 -
Retained earnings 409,110 372,164
Accumulated other comprehensive income (loss):
Foreign currency translation adjustments (829) 196
Unrealized gains on investments - net 1,834 4,858
Fair value of cash flow hedging
instruments - net (1,335) (1,344)
Unamortized restricted stock awards (5,785) (8,218)
- -------------------------------------------------------------------------------
446,147 405,563
- -------------------------------------------------------------------------------
Less 9,544,064 and 8,977,790 shares in
treasury, at cost 212,153 203,539
- -------------------------------------------------------------------------------
Total shareholders' equity 233,994 202,024
- -------------------------------------------------------------------------------
TOTAL $550,687 $472,246
===============================================================================
See Notes to Consolidated Financial Statements.
-F15-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year ended December 31,
2002 2001 2000
- ----------------------------------------------------------------------------------
Sales:
Product sales $ 652,543 $ 636,069 $ 664,219
Service sales 115,264 107,134 56,458
- ----------------------------------------------------------------------------------
Total sales 767,807 743,203 720,677
- ----------------------------------------------------------------------------------
Cost of sales:
Cost of products sold 363,557 365,771 389,840
Cost of services sold 38,899 36,746 32,472
- ----------------------------------------------------------------------------------
Total cost of sales 402,456 402,517 422,312
- ----------------------------------------------------------------------------------
Gross Profit 365,351 340,686 298,365
Selling, general and administrative
expenses 265,984 238,167 205,930
Amortization of goodwill - 11,229 7,057
Amortization of other intangibles 2,594 2,764 2,261
Acquired in-process research and
development charge 3,000 - 8,248
Restructuring charge - - 14,451
- ----------------------------------------------------------------------------------
Income From Operations 93,773 88,526 60,418
- ----------------------------------------------------------------------------------
Other Income (Expense):
Interest expense (6,236) (9,933) (10,379)
Gain (loss) on sale of investments (1,785) - 2,903
Investment write-down (303) (7,848) -
Other - net (194) 76 1,322
- ----------------------------------------------------------------------------------
Total (8,518) (17,705) (6,154)
- ----------------------------------------------------------------------------------
Income Before Income Taxes 85,255 70,821 54,264
Income taxes 32,823 31,847 25,567
- ----------------------------------------------------------------------------------
Net Income $ 52,432 $ 38,974 $ 28,697
==================================================================================
Earnings Per Common Share
Basic $ 1.80 $ 1.34 $ 1.01
Diluted $ 1.73 $ 1.31 $ 1.00
==================================================================================
See Notes to Consolidated Financial Statements.
-F16-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
2002 2001 2000
- -----------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 52,432 $ 38,974 $ 28,697
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 36,853 33,259 29,595
Amortization 19,772 28,062 18,867
Investment write-down 303 7,848 -
Stock-based compensation 9,895 5,318 788
Tax benefits from stock-based compensation 3,119 1,100 39
Noncash portion of restructuring charge - - 12,415
Acquired in-process research and
development charge 3,000 - 8,248
Loss (gain) on sale of assets 1,615 (52) (2,426)
Deferred income taxes 10,578 2,174 15,867
Other - net (466) 3,436 1,420
Changes in assets and liabilities net of
effects of businesses acquired:
Accounts receivable 10,629 28,028 (7,682)
Inventories and other current assets 7,335 19,152 12,411
Deferred revenues 5,336 (15,568) 8,760
Accounts payable and accrued liabilities (12,496) (17,988) (25,398)
Refundable contract payments (7,559) (11,818) (12,959)
- -----------------------------------------------------------------------------------
Net cash provided by operating activities 140,346 121,925 88,642
- -----------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (32,090) (47,503) (40,474)
Proceeds from sale of property, plant and equipment 1,926 418 412
Proceeds from sale of investments - - 3,350
Payments for acquisition of businesses -
net of cash acquired (94,485) (7,509) (143,195)
Note receivable 93 1,983 (5,000)
Other - net 23 1,458 (4,842)
- -----------------------------------------------------------------------------------
Net cash used in investing activities (124,533) (51,153) (189,749)
- -----------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Short-term borrowings - net - - 155
Credit facility proceeds (payments) - net 20,000 (61,000) 184,995
Repayment of long-term debt (125) (6,477) (100,000)
Purchases of treasury stock (27,707) (10,092) (7,000)
Issuance of treasury stock 11,439 6,925 2,315
Dividends paid (8,777) (8,728) (8,519)
Debt issuance costs paid (18) (58) (1,369)
Other - net (1,503) 274 (813)
- -----------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (6,691) (79,156) 69,764
- -----------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 9,122 (8,384) (31,343)
Cash and cash equivalents at beginning of year 10,096 18,480 49,823
- -----------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 19,218 $ 10,096 $ 18,480
===================================================================================
Supplemental cash flow information:
Interest paid $ 5,767 $ 10,617 $ 8,741
Income taxes paid 19,808 24,612 23,302
Exchange of net noncash assets for investment
in Netzee, Inc. - - 8,139
===================================================================================
See Notes to Consolidated Financial Statements.
-F17-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 2002, 2001, and 2000
-----------------------------------------------------------------------------------
(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, 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, $0.30 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, $0.30 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
Net income 52,432 52,432
Other comprehensive income (loss):
Foreign currency
translation adjustments (1,025) (1,025)
Unrealized losses on investments,
net of $326 in tax benefits (3,190) (3,190)
Reclassification for investment
gain and write-down included
in net income 166 166
Changes in fair value of cash
flow hedging instruments,
net of $6 in tax provision 9 9
-------------
Comprehensive income 48,392
-------------
Cash dividends, $0.30 per share (8,777) (8,777)
Purchase of 1,307,300 shares of
treasury stock (27,707) (27,707)
Issuance of 741,026 shares of
treasury stock under stock
compensation plans (138) (5,091) 23,484 (6,816) 11,439
Other 5,383 (1,618) (4,391) 9,249 8,623
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 $ 37,907 $ 5,245 $ 409,110 $ (330) $ (212,153) $(5,785) $ 233,994
====================================================================================================================
See Notes to Consolidated Financial Statements.
-F18-
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. 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 5).
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.
If the market value of an investment declines below its cost, the Company
evaluates whether the decline is temporary or other than temporary. The Company
considers several factors in determining whether a decline is temporary
including the length of time market value has been below cost, the magnitude of
the decline, financial prospects of the business and the Company's intention to
hold the security. If a decline in market value of an investment is determined
to be other than temporary, the carrying amount is written down and included in
current earnings. In June 2002 and 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 $0.3 million in 2002 and $7.8 million in 2001. In December
2002, the Company realized a $1.8 million loss on the disposition of debt and
equity investments resulting from the sale of Netzee. The following is a summary
of investments at December 31, 2002 and 2001 (in thousands):
-F19-
Available-for-sale securities
-----------------------------
Cost Market Value
- --------------------------------------------------------------
2002
Corporate equity securities $ 1,734 $ 3,611
Other equity investments 222 306
- --------------------------------------------------------------
Total 1,956 3,917
==============================================================
2001
Corporate equity securities 2,174 7,019
Other equity investments 409 877
- --------------------------------------------------------------
Total $ 2,583 $ 7,896
==============================================================
Goodwill and Other Intangibles
In June 2001, the Financial Accounting Standards Board ("FASB") 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.
Effective January 1, 2002, the Company adopted the remaining portions of SFAS
142 and discontinued amortizing goodwill (see Note 3 for the effects of adopting
this standard).
Goodwill represents the excess of acquisition costs over the fair value
of net assets of businesses acquired. Goodwill acquired prior to July 1, 2001
was amortized on a straight-line basis over periods from 11 to 40 years through
2001 after which time amortization of goodwill was discontinued. The Company
reviews goodwill for impairment annually in accordance with the provisions of
SFAS 142. In 2002, the Company engaged an independent valuation firm to perform
a goodwill impairment test. Based on the analysis, there was no impairment of
goodwill upon adoption of SFAS 142.
Other intangible assets consist primarily of purchased customer lists,
developed technology, content and trademarks that were acquired in business
combinations. Other intangible assets are generally amortized on a straight-line
basis over periods ranging from four to ten years. Amortization periods of
intangible assets are periodically reviewed to determine whether events or
circumstances warrant revision to estimated useful lives. Carrying values of
other intangibles are periodically reviewed to assess recoverability based on
expectations of undiscounted cash flows and operating income for each related
business unit.
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.
Depreciation expense was $36.9 million, $33.3 million and $29.6 million
in 2002, 2001 and 2000, respectively.
-F20-
Revenue Recognition
The Company recognizes product and services revenue when persuasive
evidence of a non-cancelable arrangement exists, delivery has occurred and/or
services have been rendered, the price is fixed or determinable, collectibility
is reasonably assured, legal title and economic risk is transferred to the
customer and when an economic exchange has taken place.
For multiple-element software arrangements, total revenue is allocated
to each element based on the fair value method or the residual method when
applicable. Under the fair value method, the total revenue is allocated among
the elements based upon the relative fair value of each element as determined
through vendor-specific objective evidence. Under the residual method, the fair
value of the undelivered maintenance and training elements, as determined based
on vendor-specific objective evidence, is deferred and the remaining (residual)
arrangement is recognized as software product revenue at the time of delivery.
Maintenance fees are deferred and recognized ratably over the maintenance
period, which is usually twelve months. Training revenue is recognized as the
services are performed.
Revenue from licensing of software under usage-based contracts is
recognized ratably over the term of the agreement or on an actual usage basis.
Revenue from licensing of software under term license agreements is recognized
ratably over the term of the agreement.
For software that is installed and integrated by the customer, revenue
is recognized upon shipment assuming functionality has already been proven and
there are no customizations that would cause a substantial acceptance risk. For
software that is installed and integrated by the Company, revenue 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.
The contractual terms of software sales do not provide for product
returns or allowances. However, on occasion, the Company may allow for returns
or allowances primarily in the case of a new product release. Provisions for
estimated returns and sales allowances are established by the Company
concurrently with the recognition of revenue and are based on a variety of
factors including actual return and sales allowance history and projected
economic conditions. The Company has not incurred any significant amount of
returns or sales allowances in 2002, 2001 or 2000.
Service revenues are comprised of revenues derived from software
maintenance agreements, field maintenance services, analytical and consulting
services and training services.
Shipping and Handling
Revenue received from shipping and handling fees is reflected in net
sales. Costs related to shipping and handling are included in cost of goods
sold.
Self-Insurance
The Company is primarily self-insured for workers' compensation and
group medical costs. Provisions for losses expected under these programs are
recorded based on the Company's estimates of the aggregate liabilities for the
claims incurred. Payments for claims beyond one year have been discounted.
Translation of Foreign Currencies
Financial statement accounts that are maintained in foreign currencies
are translated into U.S. dollars as follows. Assets and liabilities denominated
in foreign currencies are translated at end-of-period exchange rates. Results of
-F21-
operations denominated in foreign currencies are translated using average
exchange rates for the year. The resulting currency translation adjustments are
reported in accumulated other comprehensive income. Realized currency exchange
gains and losses resulting from transactions are included in earnings as
incurred and were not significant in 2002, 2001 or 2000.
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock-based compensation plans and applies
the disclosure-only provisions of FASB Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), as amended by FASB Statement No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS
148").
The Company recognizes stock-based compensation expense for restricted
stock granted to employees and also for the deferred compensation plan for
non-employee directors. No stock-based compensation cost is reflected in net
income for options or purchases under the employee stock purchase plan. Had
compensation cost for options granted under the Company's stock-based
compensation plans and purchases under the employee stock purchase plan been
determined based on the fair value at the grant dates consistent with 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):
2002 2001 2000
- -------------------------------------------------------------------------
Net income:
As reported $ 52,432 $ 38,974 $ 28,697
Add: stock-based compensation
expense included in reported
net income, net of tax 6,036 3,244 481
Deduct: stock-based compensation
expense determined under the
fair value based method for
all awards, net of tax (11,117) (4,497) (4,085)
- --------------------------------------------------------------------------
Pro forma net income $ 47,351 $ 37,721 $ 25,093
==========================================================================
Earnings
per common share:
As reported
Basic $ 1.80 $ 1.34 $ 1.01
Diluted $ 1.73 $ 1.31 $ 1.00
Pro forma
Basic $ 1.63 $ 1.30 $ 0.88
Diluted $ 1.57 $ 1.26 $ 0.87
See Note 9 for more information regarding the Company's stock
compensation plans and the assumptions used to prepare the pro forma information
presented above.
Earnings Per Common Share
Earnings per common share for all periods have been computed under the
provisions of FASB Statement No. 128, "Earnings Per Share." In 2001 and 2000,
the net income used in the calculation of diluted earnings per common share was
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
2002, 2001 and 2000 was $52,432,000, $39,143,000 and $28,968,000, respectively.
The average number of common shares used in the calculation of basic earnings
per common share for 2002, 2001 and 2000 was 29,120,776, 29,073,406 and
28,468,887, respectively. The average number of common shares and potentially
-F22-
dilutive common shares used in the calculation of diluted earnings per common
share for 2002, 2001 and 2000 was 30,243,686, 29,984,345 and 28,831,637,
respectively. Potentially dilutive common shares that were not included in the
calculation of diluted earnings per share for 2002, 2001 and 2000 because they
were anti-dilutive were 57,000, 151,000, and 1,011,000, respectively. The
potentially dilutive common shares relate to options and restricted stock
granted 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 products that do not qualify for
capitalization. Research and development costs, which are primarily costs
incurred related to the development of software, totaled $31.4 million, $29.1
million and $17.4 million in 2002, 2001 and 2000, respectively.
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 FASB Statement No. 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 six 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. A valuation allowance is provided for deferred tax
assets for which realization cannot be considered likely.
Risk Management Contracts
The Company recognizes all derivatives at fair value as either assets
or liabilities in the consolidated balance sheets and changes in the fair values
of such instruments are recognized currently in earnings unless specific hedge
accounting criteria are met. If specific hedge accounting criteria are met, the
Company recognizes the changes in fair value of these instruments in other
comprehensive income.
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 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.
During 2002 and 2001, the Company recorded the changes in values
related to cash flow hedges in other comprehensive income which was not
material. In 2002 and 2001, the Company did not have any hedging instruments
that were designated as fair value hedges.
-F23-
New Accounting Standards
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements 4, 44 and 64, Amendment to FASB Statement 13, and Technical
Corrections" ("SFAS 145"). 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 No. 4 are effective for fiscal years beginning
after May 15, 2002. The Company does not believe the adoption of SFAS 145 will
have a material effect on the Company's financial position or results of
operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires
recording of 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. The Company will adopt
the provisions of SFAS 146 for exit or disposal activities initiated after
December 31, 2002 and does not believe the adoption will have a material effect
on the Company's financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
Indebtedness of Others" ("FIN 45"), which requires companies to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 provides specific guidance
identifying the characteristics of contracts that are subject to its guidance in
its entirety from those only subject to the initial recognition and measurement
provisions. The recognition and measurement provisions of FIN 45 are effective
on a prospective basis for guarantees issued or modified after December 31,
2002. The Company does not believe the adoption of FIN 45 will have a material
effect on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS 148, which amends SFAS 123 and
provides guidance to companies electing to voluntarily change to the fair value
method of accounting for stock-based compensation. In addition, SFAS 148 amends
SFAS 123 to require more prominent and more frequent disclosures in financial
statements regarding the effects of stock-based compensation. The Company
applies APB 25 and related interpretations in accounting for its stock-based
compensation plans and, effective December 15, 2002, adopted the disclosure
provisions of SFAS 148. The adoption of the disclosure provisions of SFAS 148
did not have a material effect on the Company's financial position or results of
operations.
Reclassifications
In the fourth quarter of 2002, the Company reclassified certain expense
items in its consolidated income statements. The reclassifications affected the
categories of Cost of Sales and Selling, General and Administrative expenses.
The change represents the reclassification of software product development costs
previously shown as part of Cost of Sales. Financial data for all periods
presented have been restated to reflect the impact of the reclassifications. The
reclassifications had no impact on net income or shareholders' equity as
previously reported. Certain other reclassifications have been made in the 2000
and 2001 financial statements and notes to financial statements to conform to
the 2002 classifications.
-F24-
2. Acquisitions
All acquisitions in 2002, 2001 and 2000 were paid for with cash
provided from operating activities and proceeds from the Company's credit
facility. The results of operations of each acquired business have been included
in the Company's operations beginning as of the date of the particular
acquisition.
2002 Acquisitions
On October 15, 2002, Harland Financial Solutions, Inc. ("HFS"), a
wholly-owned subsidiary of the Company, acquired 100% of the equity in INTERLINQ
Software Corporation ("INTERLINQ") for approximately $23.0 million, net of cash
acquired. INTERLINQ was a leading provider of mortgage loan origination,
production and servicing solutions. As part of the acquisition, the Company
acquired in-process research and development costs totaling $3.0 million, which
were immediately expensed following the acquisition. These costs represented the
fair value of certain acquired research and development projects that were
determined to have not reached technological feasibility. As a result of the
acquisition, the Company believes HFS has a leadership position in the mortgage
loan origination market and good growth opportunity in the mortgage servicing
market.
On September 20, 2002, HFS extended its core systems offering with the
acquisition of certain assets and related liabilities of SPARAK Financial
Systems, LLC ("SPARAK") for approximately $31.9 million, net of cash acquired.
The acquisition agreement includes a contingent purchase payment not to exceed
$2.0 million to be made in the event certain growth targets are achieved as
defined in the agreement. The contingent purchase payment is payable in 2004 and
will be recorded as an increase in goodwill, to the extent such payment is
ultimately made. SPARAK was a leading provider of integrated hardware and
software systems for community banks. The acquisition was completed to build on
the HFS leadership position in the financial institutions market and add
additional value for SPARAK's existing customers, as well as for other community
banks nationwide.
On July 24, 2002, Scantron Corporation, a wholly-owned subsidiary of
the Company, acquired 100% of the equity in EdVISION Corporation ("EdVISION")
for approximately $28.8 million, net of cash acquired. Related to the
acquisition of EdVISION, the Company entered into an incentive agreement with
certain individuals that includes contingent payments to be made in the event
certain growth targets are achieved as defined in the incentive agreement. These
contingent payments, which will not exceed $2.0 million, are payable during or
before 2005 and will be expensed at the time of payment to the extent such
payments are ultimately made. EdVISION was a leading provider of curriculum
development and assessment tools for the education industry. This acquisition
expands Scantron's ability to offer advanced testing and assessment tools in the
education market.
On May 28, 2002, HFS acquired 100% of the equity in Easy Systems, Inc.
("Easy Systems") 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 addition of Easy Systems allows HFS
to offer financial institutions proven and leading-edge solutions to help them
strengthen customer relationships while improving operations.
-F25-
The combined purchase price for assets acquired through acquisitions in
2002 totaled $94.5 million, net of cash acquired. The following table summarizes
the estimated fair values of the assets acquired and liabilities assumed on the
acquisition dates (in thousands):
Weighted Average
Useful Life
Value in Years
- ---------------------------------------------------------------
Current assets $ 8,751
Property, plant and equipment 1,653
Goodwill 81,121
Intangibles:
Developed technology 13,570 6
Customer lists 6,150 9
Acquired in-process
research and development 3,000 -
Trademarks 3,800 10
Content 2,300 10
--------
Total intangibles 28,820
Other assets 5,718
- ---------------------------------------------------------------
Total assets acquired 126,063
- ---------------------------------------------------------------
Current liabilities 25,429
Other 6,149
- ---------------------------------------------------------------
Total liabilities assumed 31,578
- ---------------------------------------------------------------
Net assets $ 94,485
===============================================================
The allocation of purchase price to intangible assets included $3.0
million for acquired in-process research and development costs that were written
off at the date of acquisition. Those write-offs are disclosed separately in the
statements of income. The remaining $25.8 million of acquired intangible assets
have a weighted-average useful life of approximately 7.7 years.
The preliminary allocations of the purchase price to the assets and
liabilities acquired in 2002 resulted in $81.1 million allocated to goodwill of
which $26.2 million is expected to be deductible for tax purposes. Goodwill of
$56.2 million and $24.9 million was assigned to the Company's Software and
Services and Scantron business segments, respectively. The allocations of
purchase price are subject to refinement as the Company finalizes the valuation
of certain assets and liabilities.
The following unaudited pro forma summary presents information as if
the acquisitions of the businesses acquired in 2002 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):
(Unaudited) 2002 2001
- -----------------------------------------------------------
Net sales $ 798,663 $ 793,312
Net income $ 48,805 $ 31,423
Earnings per common share:
Basic $ 1.68 $ 1.08
Diluted $ 1.61 $ 1.06
The unaudited pro forma summary for all periods presented includes
adjustments for increased amortization of intangible assets and increased
interest expense. The pro forma summary also includes the write-off of acquired
in-process research and development costs totaling $3.0 million for each of the
years ended December 31, 2002 and 2001. The unaudited pro forma summary 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.
-F26-
2001 Acquisitions
In March 2001, the Company's Scantron subsidiary acquired 100% of the
equity in 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 consideration paid, $5.8 million was allocated to goodwill of
which $5.7 million was assigned to the Scantron segment. The pro forma effects
on results of operations for the 2001 business acquisitions were not material.
2000 Acquisition
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 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 6).
The consideration paid was 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 $ 18,450 -
Goodwill 96,140 11
Other intangible assets 7,041 7
Developed technology 8,761 4
Net assets held for sale 8,242 -
Acquired in-process research
and development 8,248 -
- --------------------------------------------------------------------------
Total $ 146,882
==========================================================================
As part of the acquisition, the Company acquired in-process research
and development costs totaling $8.2 million, which were immediately expensed
following the acquisition. These costs represented the fair value of certain
acquired research and development projects that were determined to have not
reached technological feasibility.
A portion of the consideration paid 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 $1.0 million and $3.0 million were
outstanding at December 31, 2002 and December 31, 2001, respectively. In June
2002 and 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 $0.3 million and $7.8 million, respectively. In December 2002, the
Company realized a $1.8 million loss on the disposition of debt and equity
investments resulting from the sale of Netzee.
-F27-
3. Goodwill and Intangibles
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.
The following presents a reconciliation of net income and earnings per
share information for the years ended December 31, 2002, 2001 and 2000 adjusted
for the provisions of SFAS 142 to exclude the amortization of goodwill and other
indefinite-lived intangibles (in thousands, except per share amounts):
2002 2001 2000
- -------------------------------------------------------------------------
Net income:
As reported $ 52,432 $ 38,974 $ 28,697
Add: Goodwill amortization,
net of tax effect - 10,366 6,228
- -------------------------------------------------------------------------
Adjusted net income $ 52,432 $ 49,340 $ 34,925
=========================================================================
Basic earnings per share:
As reported $ 1.80 $ 1.34 $ 1.01
Goodwill amortization - $ 0.36 $ 0.22
Adjusted $ 1.80 $ 1.70 $ 1.23
Diluted earnings per share:
As reported $ 1.73 $ 1.31 $ 1.00
Goodwill amortization - $ 0.34 $ 0.22
Adjusted $ 1.73 $ 1.65 $ 1.22
The changes in the carrying amounts of goodwill by business segment for
the years ended December 31, 2002 and 2001 are as follows (in thousands):
Printed Software and Consoli-
Products Services Scantron dated
- --------------------------------------------------------------------------
Balances as of
December 31, 2000 $ 25,729 $ 91,226 $ 13,929 $130,884
Goodwill acquired
during 2001 8 5,708 5,716
Purchase price
allocation adjustments 38 - 38
Amortization of goodwill (1,165) (9,136) (928) (11,229)
- --------------------------------------------------------------------------
Balances as of
December 31, 2001 24,572 82,128 18,709 125,409
Goodwill acquired
during 2002 56,176 24,945 81,121
Purchase price
allocation adjustments 137 3,795 - 3,932
- --------------------------------------------------------------------------
Balances as of
December 31, 2002 $ 24,709 $142,099 $ 43,654 $210,462
==========================================================================
-F28-
Intangible assets with definitive lives consist of developed
technology, customer lists, trademarks and content. Intangibles were comprised
of the following (in thousands):
December 31, 2002 December 31, 2001
------------------------------ -----------------------------
Gross Net Gross Net
Carrying Accum. Carrying Carrying Accum. Carrying
Amount Amort. Amount Amount Amort. Amount
- -------------------------------------------------------------------------
Developed
technology $25,467 $ (7,460) $18,007 $16,319 $ (5,024) $11,295
Customer
lists 26,033 (15,587) 10,446 23,510 (14,198) 9,312
Trademarks 3,800 (119) 3,681 - - -
Content 2,300 (97) 2,203 - - -
- -------------------------------------------------------------------------
Total $57,600 $(23,263) $34,337 $39,829 $(19,222) $20,607
=========================================================================
Carrying amounts of developed technology and content 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.
Aggregate amortization expense for intangible assets totaled $7.5
million and $6.4 million for the years ended December 31, 2002 and 2001,
respectively.
The estimated intangible amortization expense for each of the next five
years beginning January 1, 2003 is as follows (in thousands):
For the year ending December 31,
2003 $ 8,164
2004 $ 7,183
2005 $ 4,888
2006 $ 4,540
2007 $ 3,910
4. Property Held for Sale
At December 31, 2002, property held for sale consisted of the Company's
Printed Product facilities in Portland, OR and St. Louis, MO. These facilities
were closed in 2002 as part of a production consolidation program and
reclassified as held for sale during 2002. At December 31, 2001, property held
for sale consisted of a Printed Products facility located in Hartford, CT, which
had been closed in a prior consolidation program, and certain equipment acquired
in the Docuprint acquisition. In 2002, the Company sold the Hartford facility
and the Docuprint related equipment. No gain or loss was recognized in 2002 on
these transactions. In 2001, the Company recorded a charge of $0.2 million to
adjust the basis of the Hartford facility to its estimated fair value.
Management is actively marketing the sale of the Portland and St. Louis
facilities and believes these facilities will be sold in 2003.
Property held for sale at December 31, 2002 and 2001 consists of the
following (in thousands):
2002 2001
- ---------------------------------------------------------------
Land $ 434 $ 67
Buildings and improvements 3,775 921
Machinery and equipment 50 87
Furniture and fixtures 36 -
- ---------------------------------------------------------------
Property held for sale $4,295 $1,075
===============================================================
-F29-
5. 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
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
customers to similar Concentrex product offerings or to a web-based product 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 business
segment are presented in Note 14.
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.
The cash and noncash elements of the restructuring charge for each of
the years ended December 31, 2002, 2001 and 2000, 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
- -------------------------------------------------------------------------------
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
===============================================================================
2002
Employee severance 46 - (46) - -
Other 56 - (56) - -
- -------------------------------------------------------------------------------
Total $ 102 $ - $ (102) $ - $ -
===============================================================================
-F30-
6. Long-Term Debt
Long-term debt consisted of the following as of December 31, 2002 and
2001 (in thousands):
2002 2001
- -------------------------------------------------------------------------
Revolving credit facility $ 144,000 $ 124,000
Other 189 173
- -------------------------------------------------------------------------
Total 144,189 124,173
Less current portion 83 55
- -------------------------------------------------------------------------
Long-term debt $ 144,106 $ 124,118
=========================================================================
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 among other
items, leverage, fixed charge and minimum net worth requirements. 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, 2002, the Credit Facility consisted of $144.0 million
in outstanding cash borrowings, $5.7 million in outstanding letters of credit
and $175.3 million available for borrowing. The average interest rate in effect
on outstanding cash borrowings at December 31, 2002, including the effect of the
Company's interest rate hedging program (see Note 12), was 3.98%.
Other long-term debt relates to other miscellaneous obligations. At
December 31, 2002, 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 2003 and $144.1
million in 2004.
7. Income Taxes
The income tax provision for the years ended December 31, 2002, 2001
and 2000 consisted of the following (in thousands):
2002 2001 2000
- -------------------------------------------------------------------------
Current:
Federal $ 19,806 $ 25,747 $ 7,225
State 2,439 3,926 2,475
- -------------------------------------------------------------------------
Total 22,245 29,673 9,700
- -------------------------------------------------------------------------
Deferred:
Federal 9,001 2,119 13,302
State 1,577 55 2,565
- -------------------------------------------------------------------------
Total 10,578 2,174 15,867
- -------------------------------------------------------------------------
Total income taxes $ 32,823 $ 31,847 $ 25,567
=========================================================================
-F31-
The tax effects of significant items comprising the Company's net
deferred tax assets as of December 31 were as follows (in thousands):
2002 2001
- ---------------------------------------------------------------------------
Current deferred tax asset:
Accrued vacation $ 3,021 $ 3,157
Deferred revenues 1,570 360
Accrued liabilities 4,023 6,637
Benefit of net operating loss carryforwards 12,332 8,629
Allowance for doubtful accounts 1,307 1,917
Other 4,724 4,921
- --------------------------------------------------------------------------
Total 26,977 25,621
- --------------------------------------------------------------------------
Non-current deferred tax asset (liability):
Difference between book and tax basis
of property (28,413) (11,269)
Deferred revenues 2,844 2,040
Deferred compensation 2,344 2,476
Postretirement benefits obligation 5,342 5,348
Capital loss carryforwards 27,927 24,595
Unrealized loss on investments 726 406
Acquisition and restructuring reserves 195 532
Benefit of net operating loss carryforwards 12,328 5,260
Other 1,334 3,305
- --------------------------------------------------------------------------
Total 24,627 32,693
Valuation allowance (26,377) (26,089)
- --------------------------------------------------------------------------
Non-current deferred tax asset (liability) (1,750) 6,604
- --------------------------------------------------------------------------
Net deferred tax asset $ 25,227 $ 32,225
==========================================================================
During 2001, the Company utilized approximately $1.7 million of capital
losses recognized in a prior year to offset unrealized capital gains associated
with investments recorded in other comprehensive income. A substantial portion
of the remaining capital loss carryforwards will expire after 2004.
The Company had federal net operating loss and tax credit carryforwards
of approximately $64.0 million available as of December 31, 2002 that expire
after 2007. A substantial amount of these federal tax carryforwards were
acquired in the acquisitions the Company made in 2000 and 2002. Therefore,
utilization of these tax attributes is subject to an annual limitation under the
Internal Revenue Code and Regulations. In addition to the federal tax
carryforwards, the Company has various state net operating losses and state
investment credit carryforwards that the Company expects to utilize before
expiration.
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 allowance
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 $2.1 million
related to certain deferred tax assets acquired from Concentrex.
-F32-
The following reconciles the income tax provision at the U.S. federal
income tax statutory rate of 35% to that in the financial statements (in
thousands):
2002 2001 2000
- -------------------------------------------------------------------------
Statutory rate $ 29,839 $ 24,787 $ 18,992
State and local income taxes, net
of Federal income tax benefit 2,396 2,669 3,453
Non-deductible goodwill
amortization - 3,156 3,326
Other comprehensive items - - (4,942)
Change in valuation allowance 65 1,789 3,168
In-process research and development
costs 1,050 - 2,887
Benefits from tax credits (593) (441) (1,078)
Other - net 66 (113) (239)
- --------------------------------------------------------------------------
Income tax provision $ 32,823 $ 31,847 $ 25,567
==========================================================================
8. Shareholders' Equity
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 purposes. During 2002, the Company purchased 1,307,300 shares of its
common stock under this authorization at a cost of $27.7 million or an average
cost of $21.19 per share. As of December 31, 2002, a total of 1,752,446 shares
had been purchased under the share purchase authorization at an average cost of
$20.96 per share. In January 2003, the Company's Board of Directors authorized
the repurchase of an additional 3.0 million shares, upon completion of the
existing authorization.
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, $180.00 worth of common
stock for $90.00, subject to adjustment based on the market value of such common
stock at that time. 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.
9. 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 2002, 2001, and 2000, employees exercised
options to purchase 111,883, 116,450 and 148,415 shares, respectively. Options
granted under the ESPP were at prices ranging from $18.30 to $24.51 in 2002,
$12.03 to $18.62 in 2001, and $11.98 to $12.75 in 2000. At December 31, 2002,
there were 639,435 shares of common stock reserved for purchase under the ESPP.
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
-F33-
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 the issuance of up to 3,000,000 shares through stock options and
grants of restricted stock. 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.
In 2002, the Company adopted the 2002 Stock Option Plan which
authorizes the issuance of up to 1,000,000 shares through stock options and
grants of restricted stock. The 2002 plan is substantially similar to the 1999
plan.
As of December 31, 2002, there were 5,466,107 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 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 December 2002, the conditions for early vesting were met on 120,450
shares after the Company's common stock outperformed the S&P 500 in 2002 and
2001.
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
for ten consecutive trading days and two thirds of the grant vest when the
closing stock price similarly reaches at least $27.00. In August 2001, the
vesting conditions for one third of these shares were met and, in February 2002,
the vesting conditions on the remaining two thirds were met.
In April 2002, upon approval of the 2002 Stock Option Plan by the
Company's shareholders, the Company's Chief Executive Officer was granted 50,000
restricted shares. The restrictions expire annually on 12,500 shares beginning
in December 2002. He was also granted an option at such time to purchase 400,000
shares at $31.00 per share. This option has a ten-year life and was fully vested
and exercisable at the date of grant.
In 1998, the Board of Directors granted 50,000 restricted shares of the
Company's common stock to the Company's Chief Executive Officer. The
restrictions expired on 25,000 shares in October 2001 and on 12,500 shares in
October 2002. The restrictions expire on the remaining 12,500 shares in October
2003. All restricted stock granted to the Company's Chief Executive Officer
vests in the event of a change in control, termination of employment without
cause or resignation for good reason.
-F34-
A summary of option transactions during the three years ended December
31, 2002, follows:
Weighted
Average
Exercise
Shares Price
- -------------------------------------------------------------------------
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
Options granted 1,656,675 24.84
Options canceled (438,300) 18.25
Options exercised (566,749) 16.11
- -------------------------------------------------------------------------
Outstanding - December 31, 2002 4,088,225 $ 19.63
=========================================================================
The following table summarizes information pertaining to options
outstanding and exercisable as of December 31, 2002:
Options Outstanding
- -------------------------------------------------------------------------
Weighted
Average Weighted
Remaining Average
Range of Contractual Exercise
Exercise Prices Options Life(Years) Price
- -------------------------------------------------------------------------
$12.75 to $13.94 1,142,350 6.77 $ 13.59
$14.31 to $15.44 604,850 7.19 15.14
$16.19 to $20.00 409,400 6.44 19.24
$20.06 to $24.03 1,277,625 8.96 22.18
$25.26 to $31.88 654,000 8.95 29.60
- -------------------------------------------------------------------------
Total 4,088,225 7.83 $ 19.63
=========================================================================
Options Exercisable
- -------------------------------------------------------------------------
Weighted
Average
Range of Exercise
Exercise Prices Options Price
- -------------------------------------------------------------------------
$12.75 to $13.94 657,500 $ 13.50
$14.31 to $15.44 157,900 15.12
$16.19 to $20.00 267,700 19.78
$20.06 to $24.03 81,800 22.12
$25.26 to $31.88 455,000 31.11
- -------------------------------------------------------------------------
Total 1,619,900 $ 20.07
=========================================================================
-F35-
A summary of restricted stock transactions during the three years ended
December 31, 2002, follows:
Weighted
Average
Shares Fair Value
- -------------------------------------------------------------------------
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
Restricted stock issued 310,600 24.08
Restrictions lifted (413,055) 21.53(a)
Restricted stock forfeited (88,600) 19.11
- -------------------------------------------------------------------------
Outstanding - December 31, 2002 297,900 $ 23.39
=========================================================================
(a)Does not include the impact of $3.85 per share related to restrictions lifted
on 267,205 shares where a new measurement of compensation cost based on the
market value on the vesting date was required by FASB Interpretation No. 44
provisions related to tax withholdings. Such cost was included in the results of
operations in 2002.
The Company has a deferred compensation plan for its non-employee
directors covering a maximum of 200,000 shares. At December 31, 2002 and 2001,
there were 180,385 and 186,982 shares, respectively, reserved for issuance of
which 106,800 and 87,854 shares, respectively, were allocated but unissued. The
remaining 73,585 and 99,128 shares, respectively, were reserved and unallocated
under the directors compensation plan.
For the years ended December 31, 2002, 2001 and 2000, the Company
recognized expense related to stock-based compensation (for restricted stock
granted to employees and the deferred compensation plan for non-employee
directors) of $9,895,000, $5,318,000, and $788,000, respectively.
Pro forma compensation costs (see Note 1) associated with options
granted under the ESPP were 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, 2002, 2001 and 2000:
2002 2001 2000
- -------------------------------------------------------------------
Fair value per option $10.33 $7.65 $5.91
Weighted average assumptions:
Dividend yield 1.2% 1.6% 2.1%
Expected volatility 41.0% 33.2% 34.7%
Risk-free interest rate 4.8% 5.0% 6.0%
Expected life (years) 5.8 8.5 8.2
10. 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 at the rate of
$0.50 for every dollar contributed up to a maximum Company-matching contribution
of 3% of qualified annual compensation. The Company recognized matching
contributions to the 401(k) plan of $4.2 million in 2002, $3.3 million in 2001,
and $3.9 million in 2000. Additional contributions may be made from accumulated
and/or current net profits. In 2002 and 2001, additional contributions to the
401(k) plan of $1.4 million and $1.0 million were recognized by the Company.
-F36-
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 2002, 2001 and 2000 were not significant.
The Company has unfunded deferred compensation agreements with certain
current and former officers. The present value of cash benefits payable under
the agreements is being provided over the periods of active employment and
totaled $3.6 million at December 31, 2002 and $3.8 million at December 31, 2001.
The charges to expense for these agreements were not significant.
11. Postretirement Benefits
The Company sponsors two defined postretirement benefit plans that
cover certain 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, 2002 and 2001, the accumulated postretirement
benefit obligation ("APBO") under such plans was $19.5 million and $20.8
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):
2002 2001
- ----------------------------------------------------------------------
APBO as of January 1:
Retirees $ 17,383 $ 10,641
Fully eligible participants 3,376 7,308
- ----------------------------------------------------------------------
20,759 17,949
Net change in APBO:
Interest costs 1,419 1,433
Benefits paid (2,031) (1,973)
Retiree contributions 893 966
Change in discount rate (1,526) 2,384
- ----------------------------------------------------------------------
Total net change in APBO (1,245) 2,810
- ----------------------------------------------------------------------
APBO as of December 31:
Retirees 19,514 17,383
Fully eligible participants - 3,376
- ----------------------------------------------------------------------
19,514 20,759
Unrecognized net loss (5,999) (7,776)
- ----------------------------------------------------------------------
Accrued postretirement cost -
included in other liabilities $ 13,515 $ 12,983
======================================================================
-F37-
Net periodic postretirement costs ("NPPC") are summarized as follows
(in thousands):
2002 2001 2000
- -----------------------------------------------------------------------
Interest on APBO $ 1,419 $ 1,433 $ 1,499
Net amortization 251 225 504
Service costs - - 360
- -----------------------------------------------------------------------
Total $ 1,670 $ 1,658 $ 2,363
=======================================================================
In 2000, the Company eliminated employer subsidies for all future
retirees except those that had twenty or more years of service as of December
31, 2000 and retired prior to December 31, 2002.
Medical costs were assumed to increase by 12.0% in 2002 and 9.0% in
2003 and increases are projected to decline gradually to 5% in 2009 and to
remain at that level thereafter. Participant contributions were assumed to
increase by 30% in 2002 and 25% in 2003 and increases are projected to decline
gradually to 5% in 2009 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 $1.7 million and the NPPC by $109,000. 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 $92,000. The weighted
average discount rate used in determining the APBO was 6.5% in 2002, 7.0% in
2001 and 7.5% in 2000.
12. 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, 2002 and 2001, 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
carrying values of investments, long-term debt and interest rate swaps
approximate their fair value.
During 2002 and 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 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, 2002 and December 31, 2001, the notional principal
amount of interest rate swaps outstanding was $114.0 million and $98.0 million
respectively. 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, 2002 and 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 2002 and 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, 2002 in the event
of nonperformance by any one counterparty. The Company enters into transactions
only with financial institution counterparties that have a long-term credit
-F38-
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.
13. 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 $15.9 million in 2002, $15.8 million in 2001
and $13.4 million in 2000. Minimum annual rentals under noncancelable leases at
December 31, 2002 are as follows (in thousands):
Capital Operating
Leases Leases
- -------------------------------------------------------------------
2003 $ 90 $ 15,487
2004 53 13,316
2005 2 12,338
2006 - 10,386
2007 - 9,844
Thereafter - 27,024
- -------------------------------------------------------------------
Total $ 145 $ 88,395
===================================================================
At December 31, 2002, imputed interest on capital leases was $13,000
and the present value of minimum capital lease payments was $132,000.
In connection with acquisitions, the Company has entered into
agreements to pay up to $4.0 million during and prior to 2005. These payments
are contingent on certain growth targets being met by certain of the businesses
acquired in 2002 (see Note 2).
14. 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 and Services") segment is focused on the financial
institution market and includes lending and mortgage origination, compliance and
closing applications, database marketing software, core systems 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, curriculum
development and assessment tools and field maintenance services. Scantron sells
these products and services to the education, commercial and financial
institution 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 1.
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.
-F39-
Summarized financial information for 2002, 2001 and 2000 is as follows
(in thousands):
Business Segment
------------------------------
Printed Software and
Products Services Scantron Corporate & Consoli-
Eliminations dated
- -----------------------------------------------------------------------------------
2002
Net sales $ 523,630 $ 138,139 $ 107,822 $ (1,784) $ 767,807
Income (loss) 88,324 13,613 29,232 (45,914) 85,255
Identifiable assets 221,892 202,674 77,169 48,952 550,687
Depreciation and
amortization 41,591 9,598 2,844 2,592 56,625
Acquired in-process
research and development
costs - 3,000 - - 3,000
Capital expenditures 26,214 2,073 3,702 101 32,090
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 244,592 130,581 41,003 56,070 472,246
Amortization of goodwill 1,165 9,136 928 - 11,229
Depreciation and other
amortization 35,781 8,668 3,053 2,590 50,092
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 228,942 166,631 37,952 95,023 528,548
Amortization of goodwill 1,165 5,066 826 - 7,057
Depreciation and other
amortization 30,028 5,070 3,805 2,502 41,405
Acquired in-process
research and development
costs - 8,248 - - 8,248
Capital expenditures 37,706 991 1,126 651 40,474
-F40-
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, 2002 and 2001, and the related
consolidated statements of income, cash flows and shareholders' equity for each
of the three years in the period ended December 31, 2002. Our audits also
included the financial statement schedule listed in Item 15(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, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, 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 taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Notes 1 and 3 to the consolidated financial
statements, on January 1, 2002, the Company changed its method of accounting
for goodwill to conform to Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets.
/s/Deloitte & Touche LLP
________________________
Deloitte & Touche LLP
Atlanta, Georgia
January 27, 2003
-F41-
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. 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 and monitoring 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, President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
January 27, 2003
-F42-
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 29 June 28 September 27 December 31
-------------------------------------------------------------------------------
2002(a):
Net sales $ 185,572 $ 184,486 $ 189,636 $ 208,113
Gross profit(b) 85,341 85,926 91,389 102,695
Net income 8,787 12,923 15,992 14,730(c)
Per common share:
Basic earnings 0.30 0.44 0.55 0.51
Diluted earnings 0.29 0.42 0.53 0.50
Dividends paid 0.075 0.075 0.075 0.075
Stock market price:
High 30.95 34.81 30.99 27.97
Low 21.00 28.20 22.89 18.20
------------Quarter ended --------
March 30 June 29 September 28 December 31
-------------------------------------------------------------------------------
2001:
Net sales $ 191,291 $ 187,267 $ 179,563 $ 185,082
Gross profit(b) 85,869 85,838 82,790 86,189
Net income 10,273 10,937 5,079(d) 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 19.00 23.70 24.90 22.51
Low 13.13 17.59 18.41 18.95
(a) In 2002, the Company acquired four businesses (see Note 2 to the
Consolidated Financial Statements).
(b) See the Reclassifications section of Note 1 to the Consolidated Financial
Statements regarding the reclassification of certain expenses in the
consolidated income statements.
(c) Fourth quarter 2002 results include a $3.0 million charge after income
taxes for acquired in-process research and development costs related to
the acquisition of INTERLINQ and a $1.1 million loss after income taxes
on debt and equity investments related to the sale of Netzee, Inc. (see
Note 1 and Note 2 to the Consolidated Financial Statements).
(d) 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 to the Consolidated Financial Statements).
SELECTED FINANCIAL DATA
---------- Year ended December 31 ---------
2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------
Net sales $767,807 $743,203 $720,677 $702,512 $673,947
Net income (loss) 52,432 38,974 28,697 42,684 (20,647)
Total assets 550,687 472,246 528,548 397,933 397,501
Long-term debt 144,106 124,118 191,617 106,446 107,071
Per common share:
Basic earnings (loss) 1.80 1.34 1.01 1.39 (0.66)
Diluted earnings (loss) 1.73 1.31 1.00 1.37 (0.66)
Cash dividends 0.30 0.30 0.30 0.30 0.30
Average number of shares outstanding:
Basic 29,121 29,073 28,469 30,638 31,087
Diluted 30,244 29,984 28,832 31,261 31,087
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, 2002 there were 4,596 shareholders of record.
See Note 1 to the Consolidated Financial Statements regarding an investment
write-down in 2002 and 2001, Note 2 to the Consolidated Financial Statements
regarding acquisitions in 2002, 2001 and 2000 and Note 5 to the Consolidated
Financial Statements regarding restructuring charges in 2000.
-F43-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In thousands of dollars)
- ---------------------------------------------------------------------------------------------
COLUMN A COLUMN B ---- COLUMN C ---- COLUMN D COLUMN E
ADDITIONS BALANCE
BALANCE CHARGED TO CHARGED TO AT END
AT BEGINNING COSTS AND OTHER OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS(2) PERIOD
- ---------------------------------------------------------------------------------------------
Year Ended December 31, 2002
Allowance for doubtful accounts $ 4,819 $ (915) $ 710 $ 1,800 $ 2,814
======= ========= ======= ======= =======
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
======= ========= ======= ======= =======
Notes:
(1) Represents recovery of previously written-off and credit balance accounts
receivable and balances established at acquisition related to accounts
receivable of acquired operations.
(2) Represents write-offs of uncollectible accounts receivable.
-S1-