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Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 28, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _______________
Commission file number 1-6352
JOHN H. HARLAND COMPANY
(Exact name of registrant as specified in its charter)
GEORGIA 58-0278260
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2939 Miller Rd.
Decatur, Georgia 30035
(Address of principal executive offices) (Zip code)
(770) 981-9460
(Registrant's telephone number, including area code)
(Not Applicable)
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( ).
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( ).
The number of shares of the registrant's common stock outstanding on April 25,
2003 was 27,790,892.
-1-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS . . . . . . 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
ITEM 4. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . 22
CERTIFICATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
EXHIBIT LIST . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
-2-
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
(In thousands) March 28, December 31,
2003 2002
- ----------------------------------------------------------------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 11,449 $ 19,218
Accounts receivable - net 64,310 58,871
Inventories 16,660 18,191
Deferred income taxes 26,999 26,977
Other 15,556 15,568
- ----------------------------------------------------------------------
Total current assets 134,974 138,825
- ----------------------------------------------------------------------
Other Assets:
Investments 3,585 3,917
Goodwill - net 210,570 210,462
Intangible assets - net 13,457 14,127
Refundable contract payments 22,734 23,281
Other 24,337 25,860
- ----------------------------------------------------------------------
Total other assets 274,683 277,647
- ----------------------------------------------------------------------
Property, plant and equipment 343,885 340,684
Less accumulated depreciation
and amortization 212,458 206,469
- ----------------------------------------------------------------------
Property, plant and equipment - net 131,427 134,215
- ----------------------------------------------------------------------
Total $ 541,084 $ 550,687
======================================================================
See Notes to Condensed Consolidated Financial Statements.
-3-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
(In thousands, except share and March 28, December 31,
per share amounts) 2003 2002
- ----------------------------------------------------------------------
(Unaudited)
Current Liabilities:
Accounts payable $ 26,538 $ 22,599
Deferred revenues 60,075 53,311
Accrued liabilities:
Salaries, wages and employee benefits 25,000 31,039
Taxes 18,225 18,817
Other 20,567 21,320
- ----------------------------------------------------------------------
Total current liabilities 150,405 147,086
- ----------------------------------------------------------------------
Long-Term Liabilities:
Long-term debt, less current maturities 137,385 144,106
Other 25,137 25,501
- ----------------------------------------------------------------------
Total long-term liabilities 162,522 169,607
- ----------------------------------------------------------------------
Total liabilities 312,927 316,693
- ----------------------------------------------------------------------
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 5,794 5,245
Retained earnings 418,208 409,110
Accumulated other comprehensive
loss (882) (330)
Unamortized restricted stock awards (7,311) (5,785)
- ----------------------------------------------------------------------
453,716 446,147
Less 10,155,602 and 9,544,064 shares
in treasury - at cost,
respectively 225,559 212,153
- ----------------------------------------------------------------------
Shareholders' equity 228,157 233,994
- ----------------------------------------------------------------------
Total $ 541,084 $ 550,687
======================================================================
See Notes to Condensed Consolidated Financial Statements.
-4-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
Three Month Period Ended
------------------------
(In thousands, except March 28, March 29,
per share amounts) 2003 2002
- ----------------------------------------------------------------------
Sales:
Product sales $ 160,409 $ 159,316
Service sales 33,016 26,256
- ----------------------------------------------------------------------
Total sales 193,425 185,572
Cost of sales:
Cost of products sold 88,611 91,129
Cost of services sold 10,982 9,217
- ----------------------------------------------------------------------
Total cost of sales 99,593 100,346
Gross Profit 93,832 85,226
Selling, general and
administrative expenses 70,332 68,475
Amortization of other intangibles 670 628
- ----------------------------------------------------------------------
Income From Operations 22,830 16,123
- ----------------------------------------------------------------------
Other Income (Expense):
Interest expense (1,470) (1,584)
Other - net 69 (15)
- ----------------------------------------------------------------------
Total (1,401) (1,599)
- ----------------------------------------------------------------------
Income Before Income Taxes 21,429 14,524
Income taxes 8,250 5,737
- ----------------------------------------------------------------------
Net Income 13,179 8,787
Retained Earnings at
Beginning of Period 409,110 372,164
Cash dividends (2,141) (2,194)
Issuance of treasury
shares under stock plans (1,940) (2,682)
- ----------------------------------------------------------------------
Retained Earnings at
End of Period $ 418,208 $ 376,075
======================================================================
Weighted Average Shares
Outstanding:
Basic 27,873 29,237
Diluted 28,403 30,753
======================================================================
Earnings Per Common Share:
Basic $ 0.47 $ 0.30
Diluted $ 0.46 $ 0.29
======================================================================
Cash Dividends Per
Common Share $ 0.075 $ 0.075
======================================================================
See Notes to Condensed Consolidated Financial Statements.
-5-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Month Period Ended
------------------------
March 28, March 29,
(In thousands) 2003 2002
- -----------------------------------------------------------------------------
Operating Activities:
Net income $ 13,179 $ 8,787
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 9,268 8,746
Amortization 4,999 4,803
Stock-based compensation 597 7,015
Tax benefits from stock-based compensation 405 1,346
Deferred income taxes (626) -
Other 432 628
Change in assets and liabilities net of effects
of businesses acquired:
Accounts receivable (5,530) (2,593)
Inventories and other current assets 369 4,650
Deferred revenues 5,830 261
Accounts payable and accrued liabilities (2,954) 610
Refundable contract payments (2,244) (4,309)
- -----------------------------------------------------------------------------
Net cash provided by operating activities 23,725 29,944
- -----------------------------------------------------------------------------
Investing Activities:
Purchases of property, plant and equipment (6,668) (9,510)
Proceeds from sale of property, plant and equipment 143 1,204
Long-term investments and other assets 1,159 (121)
- -----------------------------------------------------------------------------
Net cash used in investing activities (5,366) (8,427)
- -----------------------------------------------------------------------------
Financing Activities:
Purchases of treasury stock (19,138) (1,568)
Issuance of treasury stock 1,819 4,914
Dividends paid (2,141) (2,194)
Long-term debt - net (6,721) (19,014)
Other - net 53 (397)
- -----------------------------------------------------------------------------
Net cash used in financing activities (26,128) (18,259)
- -----------------------------------------------------------------------------
Changes in cash and cash equivalents (7,769) 3,258
Cash and cash equivalents at beginning of period 19,218 10,096
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 11,449 $ 13,354
=============================================================================
See Notes to Condensed Consolidated Financial Statements.
-6-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 28, 2003
(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements contained in this report are
unaudited but reflect all adjustments which are, in the opinion of management,
necessary for a normal presentation of the results of operations, financial
position and cash flows of the John H. Harland Company and subsidiaries
("Company") for the interim periods reflected. Certain information and note
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted pursuant to applicable rules and regulations of the Securities
and Exchange Commission. The results of operations for the interim periods
reported herein are not necessarily indicative of results to be expected for the
full year. Certain reclassifications have been made in the 2002 financial
statements and notes to financial statements to conform to the 2003
classifications.
The condensed consolidated financial statements included herein should be read
in conjunction with the consolidated financial statements and notes thereto, and
the Independent Auditors' Report included in the Company's Annual Report on Form
10-K for the year ended December 31, 2002 ("2002 Form 10-K").
2. Accounting Policies
Reference is made to the accounting policies of the Company described in the
notes to consolidated financial statements included in the 2002 Form 10-K.
Stock-Based Compensation
The Company accounts for employee stock-based compensation plans using the
recognition and measurement provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. If the Company
accounted for stock-based compensation using the fair value recognition
provisions of Financial Accounting Standards Board (the "FASB") Statement No.
123, "Accounting for Stock-Based Compensation", the Company's net income and
earnings per share for the three month periods ended March 28, 2003 and March
29, 2002 would have changed to the pro forma amounts listed below (in thousands,
except per share amounts):
March 28, March 29,
2003 2002
- ----------------------------------------------------------------------
Net income:
As reported $ 13,179 $ 8,787
Add: stock-based compensation
expense included in reported
net income, net of tax 364 4,279
Deduct: stock-based compensation
expense determined under the
fair value based method for
all awards, net of tax (1,675) (3,100)
- ----------------------------------------------------------------------
Pro forma net income $ 11,868 $ 9,966
======================================================================
Earnings per common share:
As reported
Basic $ 0.47 $ 0.30
Diluted $ 0.46 $ 0.29
Pro forma
Basic $ 0.43 $ 0.34
Diluted $ 0.42 $ 0.32
-7-
Pro forma compensation costs associated with options granted under the employee
stock purchase plan 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 the three month periods ended March 28, 2003 and March 29, 2002:
March 28, March 29,
2003 2002
- ----------------------------------------------------------------------
Fair value per option $ 7.87 $ 9.92
Weighted average assumptions:
Dividend yield 1.4% 1.3%
Expected volatility 41.1% 41.0%
Risk-free interest rate 4.1% 5.1%
Expected life (years) 5.2 6.4
Accounting Prouncements
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. The Company
adopted SFAS 145 on January 1, 2003 and uses 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. Adoption of SFAS 145 did not 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 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 adopted SFAS 146 on
January 1, 2003. Adoption of SFAS 146 did not 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 adopted the recognition and measurement provisions of FIN 45 on January
1, 2003. Adoption of these provisions did not have a material effect on the
Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 provides accounting requirements
for business enterprises to consolidate related entities in which they are
determined to be the primary beneficiary as a result of their variable economic
interests. The interpretation provides guidance in judging multiple economic
interests in an entity and in determining the primary beneficiary. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company adopted
certain provisions of FIN 46 during the first quarter of 2003 and this adoption
did not have a material effect on the Company's financial position or results of
operations. The Company believes that the adoption of the remaining provisions
of FIN 46 will not have a material effect on its financial position or results
of operations.
-8-
3. 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 ("Scantron"), 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.
The combined purchase price for assets acquired through acquisitions in 2002
totaled $94.5 million, net of cash acquired.
The following unaudited pro forma summary presents information as if the
acquisitions of the businesses acquired in 2002 occurred on January 1, 2002 (in
thousands, except per share amounts):
-9-
Three month period ended
March 29, 2002
- ----------------------------------------------------------------------
Net sales $ 196,870
Net income $ 5,972
Earnings per common share:
Basic $ 0.20
Diluted $ 0.19
The unaudited pro forma summary for the period 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. 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 period presented or of future results.
All acquisitions were paid for with cash provided from operating activities and
proceeds from the Company's credit facility. The results of operations of the
acquired businesses have been included in the Company's operations since the
particular acquisition.
4. Goodwill and Intangible Assets
Under the FASB Statement No. 142, "Goodwill and Other Intangibles", 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 changes in the carrying amounts of goodwill by business segment for the
three months ended March 28, 2003 are as follows (in thousands):
Printed Software &
Products Services Scantron Consolidated
- ------------------------------------------------------------------------
Balances as of
December 31, 2002 $ 24,709 $142,099 $ 43,654 $210,462
Purchase price
allocation adjustments - 56 52 108
- ------------------------------------------------------------------------
Balances as of
March 28, 2003 $ 24,709 $142,155 $ 43,706 $210,570
========================================================================
Intangible assets with definitive lives were comprised of the following (in
thousands):
March 28, 2003 December 31, 2002
- ------------------------------------------------------------------------
Gross Net Gross Net
Carrying Accum. Carrying Carrying Accum. Carrying
Amount Amort. Amount Amount Amort. Amount
- ------------------------------------------------------------------------
Developed
technology $24,599 $ (7,908) $16,691 $25,467 $ (7,460) $18,007
Customer
lists 26,033 (16,162) 9,871 26,033 (15,587) 10,446
Trademarks 3,800 (214) 3,586 3,800 (119) 3,681
Content 2,300 (155) 2,145 2,300 (97) 2,203
- ------------------------------------------------------------------------
Total $56,732 $(24,439) $32,293 $57,600 $(23,263) $34,337
========================================================================
-10-
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 sales caption on the statements of income.
Aggregate amortization expense for intangible assets totaled $2.1 million and
$1.7 million for the three month periods ending March 28, 2003 and March 29,
2002, respectively.
The estimated future intangible amortization expense as of March 28, 2003 is as
follows (in thousands):
For the year ending December 31,
Year Amount
- ------------------------------------------------------------------------
Remaining 2003 $ 6,061
2004 $ 7,183
2005 $ 4,888
2006 $ 4,540
2007 $ 3,910
Thereafter $ 5,711
- ------------------------------------------------------------------------
Total $32,293
========================================================================
5. Income Taxes
The effective income tax rate for the three month period ended March 28, 2003
was 38.5% compared to 39.5% for the three month period ended March 29, 2002.
This decrease was due primarily to lower state tax rates and permanent tax
differences in 2003 compared to 2002.
6. Inventories
As of March 28, 2003 and December 31, 2002, inventories consisted of the
following (in thousands):
March 28, December 31,
2003 2002
- ----------------------------------------------------------------------
Raw materials $ 13,921 $ 15,593
Work in progress 685 414
Finished goods 2,054 2,184
- ----------------------------------------------------------------------
Total $ 16,660 $ 18,191
======================================================================
7. Long Term Debt
The Company has a revolving credit facility (the "Credit Facility") with a
syndicate of banks in an amount of $325.0 million. The Credit Facility matures
in 2004 and may be used for general corporate purposes, including acquisitions,
and includes both direct borrowings and letters of credit. The Credit Facility
is unsecured and the Company presently pays an annual commitment fee of 0.175%
on the unused amount of the Credit Facility. Borrowings under the Credit
Facility bear interest on the following indices at the Company's option (plus a
margin as defined): the Federal Funds Rate, the SunTrust Bank Base Rate or
LIBOR. The Credit Facility has certain financial covenants including leverage,
fixed charge and minimum net worth tests. The Credit Facility also has
restrictions that limit the Company's ability to incur additional indebtedness,
grant security interests or sell its assets beyond certain amounts.
At March 28, 2003 the Company had $137.3 million in outstanding cash borrowings,
$5.9 million in outstanding letters of credit and $181.8 million available for
borrowing under the Credit Facility. The average interest rate in effect on
outstanding cash borrowings at March 28, 2003, including the effect of the
Company's interest rate hedging program, was 3.82%.
-11-
The Company recognizes all derivatives at fair value as either assets or
liabilities in the statements of financial position. The Company uses derivative
financial instruments to manage interest rate risk. On the date the interest
rate derivative contract is entered into, the Company designates the derivative
as either a fair value hedge or a cash flow hedge. The Company formally
documents the relationships between hedging instruments and the hedged items, as
well as its risk-management objectives and strategy for undertaking various
hedge transactions. The Company formally assesses, both at the hedge's inception
and on an ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in cash flows of the
hedged items.
The Company enters into interest rate swap agreements to manage its exposure to
interest rate movements by effectively exchanging floating rate payments for
fixed rate payments without the exchange of the underlying principal. Both the
interest rate swaps and the Credit Facility mature in 2004. The interest rate
swaps are structured to amortize on a quarterly basis so that on a percentage
basis, they approximate the Company's forecasted cash flows. The differential
between fixed and variable rates to be paid or received is accrued as interest
rates change in accordance with the agreements and recognized over the life of
the agreements as an adjustment to interest expense. At March 28, 2003, the
notional principal amount of interest rate swaps outstanding was $102 million
and the average fixed rate in effect on the Company's interest rate swap
agreements, including the Company's credit margin, was 4.39%. The net change in
fair value of the swaps at March 28, 2003 is reported in other comprehensive
income (see Note 8). The swaps are highly effective and no significant amounts
for hedge ineffectiveness were reported in net income during the three month
periods ended March 28, 2003 and March 29, 2002.
8. Comprehensive Income
Other comprehensive income for the Company includes foreign currency translation
adjustments, unrealized gains (losses) on investments and changes in fair value
of cash flow hedging instruments. Total comprehensive income for the three month
periods ended March 28, 2003 and March 29, 2002 was as follows (in thousands):
Three Month Period Ended
------------------------
March 28, March 29,
2003 2002
- ----------------------------------------------------------------------
Net income: $ 13,179 $ 8,787
Other comprehensive
income (loss):
Foreign exchange
translation adjustments 52 (428)
Unrealized losses on
investments, net of ($516) and $128
in tax benefits (provisions) (849) (1,769)
Changes in fair value of cash
flow hedging instruments,
net of ($157) and $(301) in tax
benefits (provisions) 245 470
- ----------------------------------------------------------------------
Comprehensive income $ 12,627 $ 7,060
======================================================================
-12-
9. Earnings per Common Share
The computation of basic and diluted earnings per share for the three month
periods ended March 28, 2003 and March 29, 2002 is as follows (in thousands,
except per share amounts):
March 28, March 29,
2003 2002
- ----------------------------------------------------------------------
Computation of basic earnings per common share:
Numerator
Net Income $ 13,179 $ 8,787
- ----------------------------------------------------------------------
Denominator
Average weighted shares
outstanding 27,766 29,148
Average weighted deferred
shares outstanding under
non-employee directors
compensation plan 107 89
- ----------------------------------------------------------------------
Shares outstanding for
basic earnings per share
calculation 27,873 29,237
- ----------------------------------------------------------------------
Basic earnings per share $ 0.47 $ 0.30
======================================================================
Computation of diluted earnings per common share:
Numerator
Net Income $ 13,179 $ 8,787
- ----------------------------------------------------------------------
Denominator
Basic weighted average
shares outstanding 27,873 29,237
Dilutive effect of stock
options and restricted stock 530 1,516
- ----------------------------------------------------------------------
Shares outstanding for
diluted earnings per share
calculation 28,403 30,753
- ----------------------------------------------------------------------
Diluted earnings per share $ 0.46 $ 0.29
======================================================================
-13-
10. Business Segments
The Company operates its business in three segments. The Printed Products
segment ("Printed Products") includes checks and direct marketing activities
marketed primarily to financial institutions. The Software and Services
("Software & Services") segment is focused on the financial institution market
and includes lending and mortgage origination, compliance and closing
applications, database marketing software, core processing applications and
business intelligence solutions. The Scantron segment ("Scantron") represents
products and services sold by the Company's Scantron subsidiary including
scanning equipment and software, scannable forms, survey solutions, curriculum
development, testing 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 located primarily in the United States and Puerto
Rico. There were no significant intersegment sales during the first quarters of
2003 and 2002. 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 referenced in
Note 2.
Management evaluates segment performance based on segment income or loss before
income taxes. Segment income or loss excludes interest income, interest expense,
certain other non-operating gains and losses, all of which are considered
corporate items. Prior to 2003, certain incentive compensation for segment
management was considered to be a corporate item. Corporate assets consist
primarily of cash and cash equivalents, deferred income taxes, investments and
other assets not employed in production. Total assets of each business segment
did not change materially from the amount disclosed in the 2002 Form 10-K.
Selected summarized financial information for the three month periods ended
March 28, 2003 and March 29, 2002 were as follows (in thousands):
Business Segment
-------------------------------
Printed Software &
Products Services Scantron Corporate & Consoli-
Eliminations dated
- -----------------------------------------------------------------------------------
Quarter ended
March 28, 2003:
Net sales $ 127,118 $ 40,715 $ 26,014 $ (422) $ 193,425
Income (loss) 20,996(1) 4,161(1) 3,847 (7,575) 21,429
Quarter ended
March 29, 2002:
Net sales $ 130,757 $ 31,413 $ 23,893 $ (491) $ 185,572
Income (loss) 21,320 3,582 6,169 (16,547) 14,524
(1) Includes certain incentive compensation costs of $848,000 and $714,000 for
Printed Products and Software & Services, respectively, that was included in
Corporate prior to January 1, 2003.
11. Contingencies
In the ordinary course of business, the Company is subject to various legal
proceedings and claims. The Company believes that the ultimate outcome of these
matters will not have a material effect on its financial statements.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company operates its business in three segments. The Printed Products
segment ("Printed Products") includes checks and direct marketing activities
marketed primarily to financial institutions.
The Software and Services segment ("Software & Services") is focused on the
financial institution market and includes lending and mortgage origination,
compliance and closing applications, database marketing software, core
processing applications and business intelligence solutions.
The Scantron segment ("Scantron") includes scanning equipment and software,
scannable forms, survey solutions, curriculum development, testing and
assessment tools and field maintenance services. Scantron sells these products
and services to the education, commercial and financial institution markets.
CRITICAL ACCOUNTING POLICIES
In the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2002 (the "2002 Form 10-K"), the Company's most critical accounting policies
and estimates upon which its financial status depends were identified as those
relating to revenue recognition, impairment of long-lived assets, goodwill and
other intangibles, software and other developmental costs, income taxes and
stock-based compensation. The Company believes there were no significant changes
in the status of its accounting policies during the three months ended March 28,
2003 to warrant further disclosure. Please see the 2002 Form 10-K for additional
disclosure with respect to the Company's critical accounting policies.
RESULTS OF OPERATIONS - FIRST QUARTER OF 2003 VERSUS FIRST QUARTER OF 2002
Consolidated net sales increased 4.2% to $193.4 million in the first quarter of
2003 from $185.6 million in the first quarter of 2002. Sales increases in the
Software & Services and Scantron segments more than offset a decrease in Printed
Products sales. Sales of products, which consist of all Printed Products sales,
software licensing sales, scanning equipment and scannable forms and other
products increased 0.7% to $160.4 million in the first quarter of 2003 from
$159.3 million in the first quarter of 2002. Sales of services, which consist of
software maintenance services, field maintenance services, analytical and
consulting services and other services increased 25.5% to $33.0 million in the
first quarter of 2003 from $26.3 million in the first quarter of 2002.
Printed Products sales decreased 2.8% to $127.1 million in the first quarter of
2003 from $130.8 million in the first quarter of 2002. Volume in domestic
imprint check printing operations decreased 8.0%, which accounted for a majority
of the sales decrease. The volume decrease was attributable primarily to the
loss of a large customer in late 2002, lower volumes from a direct check
marketer and general market volume decline, partially offset by gains in the
community bank market. The impact of the volume decline was moderated by an
improvement in the average price per unit of 7.5% due primarily to a price
increase implemented in July 2002 and to lower volume from customers that are
less favorably priced. Sales in computer checks and related products also
decreased in the first quarter of 2003 compared to the first quarter of 2002 due
primarily to the loss of business with a software company in late 2002 and
decreased sales supporting small business software companies. Sales in direct
marketing activities also decreased in the first quarter of 2003 compared to the
first quarter of 2002 due primarily to the general economic slowdown which
resulted in a decline in large mass mail jobs and fewer openings of brokerage
accounts.
Software & Services product sales increased 22.1% to $18.2 million in the first
quarter of 2003 from $14.9 million in the first quarter of 2002. Sales of
services in Software & Services increased 36.4% to $22.5 million in the first
quarter of 2003 from $16.5 million in the first quarter of 2002. The increase in
sales was due primarily to the acquisitions of Easy Systems, SPARAK and
-15-
INTERLINQ in 2002 (see Note 3 to the Condensed Consolidated Financial Statements
included in this report), which accounted for sales of approximately $9.7
million. Excluding the impact of acquisitions, sales increases in the core
processing product line, lending products and analytical services were more than
offset by decreases in the legacy mortgage lending activities and also in
customer relationship management software. Software & Services backlog at the
end of the first quarter of 2003 increased 37.0% compared with the first quarter
of 2002, and increased 2.2% from the end of the fourth quarter of 2002. The
increase from the first quarter of 2002 was due to acquisitions and stronger
bookings. Excluding the impact of acquisitions, backlog increased 8.5% from the
first quarter of 2002.
Scantron product sales increased 9.9% to $15.5 million in the first quarter of
2003 from $14.1 million in the first quarter of 2002. Scantron sales of services
increased 7.1% to $10.5 million in the first quarter of 2003 from $9.8 million
in the first quarter of 2002. The increases were due primarily to the
acquisition of EdVISION in July 2002 (see Note 3 to the Condensed Consolidated
Financial Statements included in this report), internal growth in field services
and increases in sales of test scoring machines and imaging products, which were
partially offset by reduced sales of optical mark reading equipment due to a
trend in data collection methods moving from optical mark reading to imaging and
other direct input methods.
Consolidated gross profit increased 10.1% to $93.8 million in the first quarter
of 2003 from $85.2 million in the first quarter of 2002, and increased as a
percentage of sales from 45.9% in 2002 to 48.5% in 2003. The improvement was due
to the increase in sales, cost management and productivity improvement
initiatives and a favorable change in sales mix.
Printed Products gross profit in the first quarter of 2003 increased 3.7% over
the first quarter of 2002 and as a percentage of sales was 40.4% in the first
quarter of 2003 compared to 37.9% in the first quarter of 2002. This increase
was due primarily to an increase in the average price per unit and lower
manufacturing costs per unit in its domestic imprint check operations due to
operating efficiencies gained from digital printing technology and process
improvements. Printed Products gross profit was unfavorably impacted by a
decrease in check volumes in the first quarter of 2003 and by a decrease in
gross profit in its direct marketing operations.
Software & Services gross profit in the first quarter of 2003 increased 26.6%
over the first quarter of 2002 due to acquisitions and higher sales in core
processing applications. As a percentage of sales, Software & Services gross
profit decreased to 70.3% in the first quarter of 2003 from 72.0% in the first
quarter of 2002, due primarily to a change in sales mix and acquired operations.
Scantron gross profit in the first quarter of 2003 increased 5.9% over the first
quarter of 2002, due primarily to acquisitions and a change in sales mix. As a
percentage of sales, Scantron gross profit decreased to 53.2% in the first
quarter of 2003 from 54.8% in the first quarter of 2002, due to unfavorable
costs and production inefficiencies experienced during a facility relocation
that occurred during the first quarter of 2003, lower margins associated with
acquired product lines and an unfavorable change in sales mix.
Consolidated selling, general and administrative expenses ("SG&A") increased
$1.9 million, or 2.7%, in the first quarter of 2003 from the first quarter of
2002. These expenses as a percentage of sales were 36.4% in the first quarter of
2003 down from 36.9% in the first quarter of 2002. The increase was due
primarily to the impact of acquisitions was and partially offset by decreases in
stock-based compensation expense. In the first quarter of 2003, stock-based
compensation expense decreased to $0.6 million from $7.0 million in the first
quarter of 2002. The decrease in stock-based compensation expense was due
primarily to a $6.8 million charge in 2002 for the accelerated vesting of
certain restricted stock grants that vested as a result of the Company's
favorable stock price performance.
-16-
Consolidated income from operations increased $6.7 million to $22.8 million in
the first quarter of 2003 from $16.1 million in the first quarter of 2002, due
primarily to the decrease in stock-based compensation in the first quarter of
2003, as previously discussed.
Other Income (Expense) decreased $0.2 million to an expense of $1.4 million in
the first quarter of 2003 from an expense of $1.6 million in the first quarter
of 2002. The decrease was due primarily to lower interest rates during the first
quarter of 2003 compared with the first quarter of 2002.
Consolidated income before income taxes increased $6.9 million to $21.4 million
in the first quarter of 2003 from $14.5 million in the first quarter of 2002,
due to increased income from operations and lower interest expense.
The Company's consolidated effective income tax rates were 38.5% and 39.5% for
the first quarter of 2003 and the first quarter of 2002, respectively. The lower
effective tax rate in the first quarter of 2003 resulted primarily from a
reduction in the effective state rate and a reduction in certain estimated
permanent tax differences compared to the first quarter of 2002.
The Company's net income in the first quarter of 2003 was $13.2 million compared
to $8.8 million in the first quarter of 2002. Basic and diluted earnings per
share were $0.47 and $0.46, respectively, for the first quarter of 2003 compared
to basic and diluted earnings per share of $0.30 and $0.29, respectively, for
the same period in 2002. In addition to the $4.4 million increase in net income
for the first quarter of 2003, a decrease in weighted average shares outstanding
for the first quarter of 2003 compared with the first quarter of 2002 resulting
from the repurchase of common stock also had a favorable effect on basic and
diluted earnings per share.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash flows provided by operating activities decreased $6.2 million to $23.7
million in the first quarter of 2003 from $29.9 million in the first quarter of
2002. The increase in net income in the first quarter of 2003 over the first
quarter of 2002, largely the result of decreased stock-based compensation, was
more than offset by a decrease in the adjustments to reconcile net income to net
cash provided by operating activities, due primarily to the lower stock-based
compensation and related tax benefits in the first quarter of 2003, and changes
in working capital in 2002. The primary uses of funds in the first quarter of
2003 were for purchases of treasury stock, repayment of long-term debt, capital
expenditures, refundable customer contract payments and dividend payments to
shareholders.
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 the first quarter of 2003, the Company purchased 833,932 shares
of its common stock pursuant to this authorization at a cost of approximately
$19.1 million, or an average cost per share of $22.95. As of March 28, 2003, a
total of 2,586,378 shares had been purchased under the share purchase
authorization at an average cost of $21.63 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.
Purchases of property, plant and equipment totaled $6.7 million in the first
quarter of 2003 compared to $9.5 million in the first quarter of 2002. Capital
expenditures in the first quarter of 2003 were primarily for customer care
infrastructure initiatives. Capital expenditures in the first quarter of 2002
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 focus on improving systems
that support sales, marketing and customer service to ensure exceptional service
-17-
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. Through March 28, 2003, $33.5 million has been expended on these
initiatives, of which $23.6 million was capitalized. Total capital expenditures
for the Company are currently expected to be approximately $32 to $37 million in
2003.
As of March 28, 2003, the Company's accumulated other comprehensive income
(loss) was ($0.9) million and consisted of net unrealized gains on investments,
net unrealized losses on cash flow hedging instruments and foreign currency
translation adjustments.
The Company has a $325.0 million revolving Credit Facility with a syndicate of
banks. The Credit Facility matures in 2004 and may be used for general corporate
purposes, including acquisitions, and includes both direct borrowings and
letters of credit. During the first quarter of 2003, the Company repaid $6.7
million of its outstanding long-term debt. As of March 28, 2003, direct
borrowings totaled $137.3 million under the Credit Facility, compared to $144.0
million as of December 31, 2002. There were $5.9 million in outstanding letters
of credit, which were issued under the Credit Facility, leaving $181.8 million
available for borrowings at March 28, 2003.
On March 28, 2003 the Company had $11.4 million in cash and cash equivalents.
The Company believes that its current cash position, funds from operations, the
availability of funds under the Credit Facility and available additional
borrowing capacity will be sufficient to meet anticipated requirements for
working capital, dividends, capital expenditures and other corporate needs for
the foreseeable future. Management is not aware of any condition that would
materially alter this trend.
The Company believes that it possesses sufficient unused debt capacity and
access to capital markets to pursue additional acquisition opportunities.
ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board (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. The Company adopted SFAS 145 on
January 1, 2003 and uses 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. Adoption of SFAS 145
did not 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 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 adopted SFAS 146 on
January 1, 2003. Adoption of SFAS 146 did not 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.
-18-
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 adopted the recognition and measurement provisions of FIN 45 on January
1, 2003. Adoption of these provisions did not have a material effect on the
Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 provides accounting requirements
for business enterprises to consolidate related entities in which they are
determined to be the primary beneficiary as a result of their variable economic
interests. The interpretation provides guidance in judging multiple economic
interests in an entity and in determining the primary beneficiary. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company adopted
certain provisions of FIN 46 during the first quarter of 2003 and this adoption
did not have a material effect on the Company's financial position or results of
operations. The Company believes that the adoption of the remaining provisions
of FIN 46 will not have a material effect on its financial position or results
of operations.
OUTLOOK
The Company believes that its financial position continues to be strong and
expects a positive cash flow from operations in all business segments in 2003.
The Company projects the Printed Products segment's profits will be down in 2003
due to the soft economy, the loss of a major customer and the current level of
spending on customer care infrastructure, order entry systems, marketing
activities and recent pricing trends in Printed Products, which in certain
circumstances may include significant upfront contract incentive payments. In
addition to these factors the Company is not projecting its direct marketing
business to increase from current levels in the near term. The Company
anticipates the Software & Services segment's profitability will continue to
improve steadily as it completes the integration of the 2002 acquisitions. The
Company is projecting the Scantron segment's profits will be down in 2003,
primarily reflecting the impact of state education budget reductions on the
sales of its new technology products.
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.
-19-
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 may continue to 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 additional customers or that
any such loss could be offset by the addition of new customers.
While the Company believes substantial growth opportunities exist in the
Software & Services segment, there can be no assurances that the Company will
achieve its revenue or earnings growth targets. The Company believes there are
many risk factors inherent in its software business, including but not limited
to the retention of talented employees and customers. Also, variables exist in
the development of new software products, including the timing and costs of the
development effort, product performance, functionality, product acceptance,
competition, 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.
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 that
the returns and reports filed with respect to such tax regulations are
materially correct. The results of these Federal and State tax examinations
could produce both favorable and unfavorable adjustments to the Company's total
tax expense either currently or on a deferred basis. At such time when a
favorable or unfavorable adjustment is known, the effect on the Company's
consolidated financial statements is recorded.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
All financial instruments held by the Company are held for purposes other than
trading. The Company is exposed to primarily two types of market risks: interest
rate and equity price.
Interest Rate Risk
The Company is exposed to interest rate risk on its variable rate debt. At March
28, 2003, the Company had outstanding variable rate debt of $137.4 million. In
order to manage its exposure to fluctuations in interest rates, the Company has
entered into interest rate swap agreements, which allow it to raise funds at
floating rates and effectively swap them into fixed rates. At March 28, 2003,
the notional principal amount of interest rate swaps outstanding was $102
million. The Company believes that its interest rate risk at March 28, 2003 was
minimal. The impact on quarterly results of operations of a hypothetical
one-point interest rate change on the outstanding debt as of March 28, 2003
would be approximately $90,000. 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.
-20-
The fair value of the swaps, which represent what the Company would have to pay
to terminate the swaps, reflected a loss of $1.8 million ($1.1 million net of
income taxes) at March 28, 2003. 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 for interest rate swap
agreements that are not terminated early will net to zero over the term of the
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 three months ended March 28, 2003 (in thousands):
Carrying
Value(a) High(b) Low(b)
- ----------------------------------------------------------------------
Investment in:
Bottomline $ 2,747 $ 3,946 $ 2,591
(a) Based on market value as of March 28, 2003
(b) Based on quoted market
prices.
Item 4. 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 Securities Exchange Act of 1934 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.
-21-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, the Company is subject to various legal
proceedings and claims. The Company believes that the ultimate outcome of these
matters will not have a material effect on its financial statements.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Description
3.1 * Amended and Restated Articles of Incorporation (Exhibit B to
registrant's Proxy Statement dated March 12, 1999).
3.2 * Amended and Restated Bylaws, as amended through December 19, 2002
(Exhibit 3.2 to registrant's Annual Report on Form 10-K for the year
ended December 31, 2002).
4.1 * Rights Agreement, dated as of December 17, 1998, between registrant
and First Chicago Trust Company of New York (Exhibit 4.1 to
registrant's Registration Statement on Form 8-K dated July 1, 1999).
4.2 See Articles IV, V and VII of registrant's Amended and Restated
Articles of Incorporation, filed as Exhibit 3.1, and Articles I, V and
VIII of registrant's Bylaws, filed as Exhibit 3.2.
11.1 Computation of Per Share Earnings.+
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Indicates exhibit previously filed with the Securities and Exchange Commission
as indicated in parentheses and incorporated herein by reference.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarterly period ended March
28, 2003.
- --------
+ Data required by SFAS No. 128, "Earnings Per Share," is provided in Note 9 to
the Condensed Consolidated Financial Statements included in this report.
-22-
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JOHN H. HARLAND COMPANY
05/12/2003 /s/ J. Michael Riley
Date: _________________ By:_____________________________
J. Michael Riley
Vice President and Controller
(Duly Authorized Officer and
Chief Accounting Officer)
-23-
CERTIFICATIONS
I, Timothy C. Tuff, certify that:
1. I have reviewed this quarterly report on Form 10-Q of John H.
Harland Company;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly 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 we 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
quarterly 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 quarterly report
(the "Evaluation Date"); and
c) Presented in this quarterly 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
function):
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 quarterly report whether or not 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.
Date: 05/12/2003
/s/ Timothy C. Tuff
-----------------------
Timothy C. Tuff
Chairman, President and
Chief Executive Officer
-24-
I, Charles B. Carden, certify that:
1. I have reviewed this quarterly report on Form 10-Q of John H.
Harland Company;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly 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 we 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
quarterly 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 quarterly report
(the "Evaluation Date"); and
c) Presented in this quarterly 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
function):
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 quarterly report whether or not 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.
Date: 05/12/2003
/s/ Charles B. Carden
----------------------
Charles B. Carden
Senior Vice President and
Chief Financial Officer
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EXHIBIT LIST
Exhibit Description
3.1 * Amended and Restated Articles of Incorporation (Exhibit B to
registrant's Proxy Statement dated March 12, 1999).
3.2 * Amended and Restated Bylaws, as amended through December 19, 2002
(Exhibit 3.2 to registrant's Annual Report on Form 10-K for the year
ended December 31, 2002).
4.1 * Rights Agreement, dated as of December 17, 1998, between registrant
and First Chicago Trust Company of New York (Exhibit 4.1 to
registrant's Registration Statement on Form 8-K dated July 1, 1999).
4.2 See Articles IV, V and VII of registrant's Amended and Restated
Articles of Incorporation, filed as Exhibit 3.1, and Articles I, V and
VIII of registrant's Bylaws, filed as Exhibit 3.2.
11.1 Computation of Per Share Earnings.+
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Indicates exhibit previously filed with the Securities and Exchange Commission
as indicated in parentheses and incorporated herein by reference.
- --------
+ Data required by SFAS No. 128, "Earnings Per Share," is provided in Note 9 to
the Condensed Consolidated Financial Statements included in this report.
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