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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-K
(Mark One)
|x| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
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.|X|
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 25, 2004 was $803,412,959.
The number of shares of the Registrant's Common Stock outstanding on February
25, 2005 was 27,437,591.
A portion of the Registrant's Proxy Statement for its 2005 Annual Meeting of
Shareholders 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 9
Item 4: Submission of Matters to a Vote of Security Holders 9
Item 4A: 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
Item 9A: Controls and Procedures 10
Item 9B: Other Information 11
PART III
Item 10: Directors and Executive Officers of the Registrant 11
Item 11: Executive Compensation 11
Item 12: Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 12
Item 13: Certain Relationships and Related Transactions 12
Item 14: Principal Accountant Fees and Services 12
PART IV
Item 15: Exhibits and Financial Statement Schedules 13
-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 15 of the Notes to
Consolidated Financial Statements in 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
On March 11, 2005, the Company received verbal notification that a major
customer in its Printed Products segment will not renew its current contract
that expires in March 2006.
On November 12, 2004, the Company acquired London Bridge Phoenix
Software Inc. ("Phoenix System"). Phoenix System provides core processing
systems in both in-house and service bureau configurations. The Company believes
that Phoenix System strengthens its position in the mid-to-large community bank
market.
On July 7, 2004, the Company also acquired certain item processing and
electronic document management solutions assets and operations from Mitek
Systems, Inc. The Company believes that the acquisition of these assets will
help its customers take advantage of certain efficiencies afforded by the Check
21 legislation which took effect on October 28, 2004, and relates to electronic
check processing by financial institutions.
In the third quarter of 2004, the Company completed the reorganization
of its Printed Products segment. The reorganization was announced in 2003 and
included a plant consolidation program and a reduction of selling, general and
administrative expenses.
The Company took a pre-tax impairment charge of $7.9 million in the
third quarter of 2004, equivalent to $0.18 per share on a fully diluted basis.
The charge is related to the development of new customer care systems for the
Company's Printed Products segment. The Company determined that upgrading
certain existing systems would be more economical than continued development of
portions of the new systems.
On April 30, 2004, the Company acquired certain electronic mortgage
document products and operations from Greatland(TM) Corporation. The Company
believes that the acquisition of these assets will help it build on its position
in offering compliance solutions.
The Company's three business segments introduced a number of new
products and services in 2004. The Company believes these new products and
services will 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 and analytical
services businesses and computer checks and forms business. Segment sales of
$488.7 million accounted for 61.2% of the Company's consolidated sales in 2004.
-3-
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. The
analytical services business sells behavioral model services to financial
institutions, enabling them to, among other things, identify their customers
most at risk of switching financial institutions, as well as a consumer's
propensity to purchase a particular financial product.
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 which 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 became the exclusive
provider of check printing services with a major customer in 2004, resulting in
an increase in check volumes beginning in the fourth quarter. The Company lost
business with some of its larger customers in 2003, due primarily to competitive
pricing, resulting in lower volumes and profitability during the first nine
months of 2004 compared to the same period in 2003. 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 four distinct sales forces. One focuses on
financial institutions, a second on brokerage houses, the third sells direct
marketing and analytical services, while the fourth concentrates on financial
software companies and office supply superstores.
Printed Products completed a year-long reorganization in the third
quarter of 2004. As part of the reorganization, Printed Products reduced the
number of its domestic production facilities from 14 to 9. 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. The conversion of all domestic
imprint facilities, which cost approximately $45 million, was completed by the
end of 2002. As part of the reorganization discussed above, Printed Products
converted its Puerto Rico and business check facilities to digital technology.
The Company took a pre-tax impairment charge of $7.9 million in the
third quarter of 2004, equivalent to $0.18 per share on a fully diluted basis.
The charge is related to the development of new customer care systems for its
Printed Products segment. Total expenditures for the customer care project over
the four-year period ending in 2004, including the amount written off, were
approximately $57 million. The Company anticipates that it will spend
approximately $4 million, primarily in 2005, to complete the remaining new
systems, and it will spend approximately $14 to $18 million over the 2005-2007
period to enhance certain existing systems and infrastructure to replace
portions of the systems being discontinued.
In 2004, the Company introduced a new product in Printed Products
called HarlandImpact. HarlandImpact combines the Company's digital printing
technology with its Stratics behavioral models to deliver marketing messages
targeted at individual consumers in their check books. The Company believes that
the combination of its digital printing technology and behavioral models
represents a competitive advantage in the market.
-4-
Principal raw materials used by Printed Products include safety paper,
form paper and MICR bond paper. Printed Products purchases other material, such
as vinyl, inks, checkboards, packaging material and miscellaneous supplies from
a number of suppliers. The Company believes that adequate raw materials will be
available to support Printed Products' operations.
The Company believes that the loss of any one customer in the Printed
Products segment would not have a materially adverse effect on the Company's
consolidated operations.
Software and Services
Software and Services' operations are conducted through Harland
Financial Solutions, Inc. ("HFS"), a wholly owned subsidiary of the Company, and
are composed of two primary business groups: Retail and Lending Solutions and
Core Systems. 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, business intelligence solutions, customer relationship
management ("CRM") software, branch automation solutions and core processing
systems. Segment sales in 2004 were $193.8 million, which accounted for 24.3% of
the Company's consolidated sales.
Retail and Lending Solutions includes the Company's Delivery Systems,
Mortgage Solutions and Retail Solutions businesses. Delivery Systems sells loan
and deposit origination and compliance software to the financial institution
market. The Company believes 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.
Mortgage Solutions provides mortgage loan origination, production and
servicing solutions. Like Delivery Systems, Mortgage Solutions is largely a
compliance business. The Company believes HFS has a leadership position in this
market segment. The Company introduced a new product, E3, which is a web-based
platform solution for mortgage loan production, at the end of the first quarter
of 2004.
Retail Solutions helps financial institutions increase the
profitability of customer relationships through CRM software and branch
automation software.
Retail Solutions' CRM software, Touche(R), is a complete
enterprise-wide solution that allows financial institutions to manage all
aspects of the customer relationship. The Company believes it is one of the most
complete CRM solutions designed specifically for financial institutions. The
Touche Analyzer TM module provides tools to create marketing campaigns, segment
customers by demographic criteria, determine customer and product profitability,
and provide research, reporting and campaign management. Touche Sales & Service
TM handles all customer contacts, sales and referral activities, as well as
problem resolution and service requests. Touche Messenger TM is the interaction
management component responsible for fully automated, multi-channel, one-to-one
campaign management to customers at every point of contact.
Retail Solutions' branch automation offerings include ENCORE!(R) and
EZTeller(R). These systems enhance the customer experience through integrated
teller, platform and call center tools designed for banks of all sizes.
-5-
Core Systems sells host processing application software to both credit
unions and banks. Its products centralize customer information and facilitate
high speed and reliable processing of transactions from every delivery channel.
HFS has integrated its core processing solution for credit unions, the
ULTRADATA(R) System, and its core processing solution for banks, the SPARAK(R)
System, with 12 other Harland products and services and believes that this is an
example of how HFS can differentiate itself in the market. The acquisition of
Phoenix System expanded HFS' core processing solutions for mid-to-large
community banks and thrifts.
HFS backlog, which consists primarily of contracted products and
services prior to delivery, was $108.6 million and $101.6 million for the years
ended December 31, 2004 and 2003, respectively. The Company expects to deliver
approximately 45% of the 2004 backlog within the next twelve months. Due to the
long-term nature of certain service contracts, primarily in the Core Systems
service bureau business, the balance of the 2004 backlog will be delivered
beyond the next twelve months. Approximately 49% of the 2003 backlog was filled
in 2004.
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, of 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, curriculum planning
software and testing and assessment tools. Field maintenance services include
installation, maintenance and repairs for computers and related equipment, as
well as for Scantron optical mark recognition equipment. Segment sales for 2004
were $116.6 million, which accounted for 14.6% of the Company's consolidated
sales.
Scantron has a solid leadership position in the in-classroom testing
and assessment market, where more than 80% of all high schools, colleges and
universities use at least one Scantron product. In addition to the traditional
Scantron system, which consists of a scanner, forms and software, Scantron
introduced Achievement Series, a new product for the education market, in 2004.
Achievement Series is a content-neutral testing platform that allows educators
to create their own tests, as well as incorporate content from third-party
publishers. Scantron has entered into strategic partnerships with several test
providers to expand Achievement Series presence in the market. Other new
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. These two products were
obtained through the acquisition of EdVISION Corporation in 2002.
Scantron also provides a total solution for customers using forms-based
data collection methods, including printing, distributing, processing and
electronic archiving.
-6-
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 one of the largest
providers 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.
There is a seasonal fluctuation in volumes sold by Scantron to the
educational market, but this 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 $15.6 million, $9.2 million and $10.0 million for the
years ended December 31, 2004, 2003 and 2002, respectively.
Research and Development
The Company's research and development costs are primarily incurred in
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 and prior to its availability for sale are capitalized. The Company
incurred expenses totaling $21.9 million, $22.6 million and $14.5 million in
2004, 2003 and 2002, respectively, for research and development activities.
Government Regulation
The Company is subject to the Gramm-Leach-Bliley Act (the "GLB Act").
Under the GLB 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. The Company believes it is in compliance with
the GLB Act.
Employees
As of December 31, 2004, the Company and its subsidiaries employed
approximately 4,850 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
(the "Exchange Act"), as soon as reasonably practicable after the Company files
such material with, or furnishes it to, the SEC.
The Company's Corporate Governance Principles and Practices, Audit
Committee Charter, Governance Committee Charter and its Code of Business Conduct
and Ethics are also available on its website and are available in print to any
shareholder upon request. Requests for copies of any of these documents should
be directed in writing to Investor Relations, John H. Harland Company, P.O. Box
105250, Atlanta, Georgia 30348, or by telephone to (770) 593-5128.
-7-
ITEM 2. PROPERTIES
As of December 31, 2004, 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 Operations 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
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
Mexico City, Mexico Leased Production and distribution
Milton, WA Leased Production and distribution
Salt Lake, UT Owned Production, distribution and
customer service center
Software & Services:
Atlanta, GA Leased Development and support
Bellevue, WA Leased Development and support
Birmingham, AL Leased Development and support
Bothell, WA Leased Development and support
Carrollton, TX Leased Development and support
Miamisburg, OH Leased Development and support
Denver, CO Leased Development and support
Des Moines, IA Leased Service bureau
Eagan, MN Leased Development and support
Englewood Cliffs, NJ Leased Development and support
Fargo, ND Leased Development and support
Grand Rapids, MI Leased Development and support
Lake Mary, FL Leased Administration, development
and support
Pleasanton, CA Leased Development and support
Portland, OR Leased Development and support
Poway, CA 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 Support
The Company's leases on the properties it does not own have expiration dates
ranging from 2005 to 2013.
-8-
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, the Company is subject to various
legal proceedings and claims. The Company believes that the ultimate outcome of
these matters will not have a material effect on its financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. 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 57 Chairman, President and Chief Executive
Officer
Arlene S. Bates 53 Senior Vice President, Human Resources
Charles B. Carden 60 Senior Vice President and Chief Financial
Officer
John T. Heald, Jr. 59 President, Harland Printed Products
John C. Walters 64 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.
Ms. Bates has been employed by the Company since 1980 and has served as
Vice President of Human Resources since 1993 and was named Senior Vice President
in 2003.
Mr. Carden joined the Company in 1999 as Vice President and Chief
Financial Officer and was named Senior Vice President and Chief Financial
Officer in 2003.
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.
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 February 25, 2005, the Company had 3,187
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 F57. 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-
During the fourth quarter ended December 31, 2004, the Company made the
following purchases of treasury stock:
Total
Number of Maximum
Shares Number of
Total Average Purchased Shares
Number Price as Part of Remaining
of Paid Publicly Under
Shares Per Announced Authorized
Period Purchased Share Program(1) Program
- -------------------------------------------------------------------------
September 25 - October 31 50,000 $32.56 50,000 1,841,422
November 1 - November 30 411,800 34.00 411,800 1,429,622
December 1 - December 31 250,900 35.59 250,900 1,178,722
- -------------------------------------------------------------------------
Total 712,700 $34.46 712,700 1,178,722
=========================================================================
(1) On January 28, 2003, the Company's Board of Directors authorized the
purchase of up to 3,000,000 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. Unless terminated earlier by resolution of the
Company's Board of Directors, the 2003 stock repurchase program will expire when
the Company has repurchased all shares authorized for repurchase under the
program. As of December 31, 2004, a total of 1,821,278 shares had been purchased
under the 2003 stock repurchase program at an average cost of $31.21 per share.
ITEM 6. SELECTED FINANCIAL DATA
See the information with respect to selected financial data on page
F57.
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
F18.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the information with respect to Quantitative And Qualitative
Disclosures About Market Risk on page F18 under the caption Interest Rate Risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the information with respect to Financial Statements and
Supplementary Data on pages F19 through F57.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of management,
including the principal executive officer and principal financial officer, the
Company conducted an evaluation of its disclosure controls and procedures, as
such term is defined under Rule 13a-15(e) promulgated under the Exchange Act.
Based on this evaluation, such officers concluded that the Company's disclosure
controls and procedures were effective as of December 31, 2004.
-10-
Management's Report on Internal Control Over Financial Reporting
See the information with respect to Management's Report on Internal
Control Over Financial Reporting as well as the Report of Independent Registered
Public Accounting Firm thereon on pages F54 and F55.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company's internal control over
financial reporting during the Company's fourth fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
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 2005 Annual Meeting of Shareholders (the "Proxy
Statement").
The information regarding Executive Officers required herein is
included in Part I of this Annual Report on Form 10-K and under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy
Statement and incorporated herein by reference.
The Company has adopted a Code of Business Conduct and Ethics. A copy
of the Code of Business Conduct and Ethics is attached to this Annual Report on
Form 10-K as Exhibit 14 and is available through the Company's website,
www.harland.com. The Company intends to disclose any amendments to its Code of
Business Conduct and Ethics and any waiver from a provision of the code granted
to any executive officer on its website within five business days following such
amendment or waiver.
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.
-11-
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, 2004:
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 1,460,190 $21.45 1,027,313
Equity compensation plans
not approved by security
holders(1) 1,525,050 (2) 20.81 354,791
- ---------------------------------------------------------------------------
Total 2,985,240 (2) $21.12 1,382,104
===========================================================================
(1) Equity compensation plans not approved by security holders include the
Company's 2000 Stock Option Plan and the Compensation Plan for Non-Employee
Directors. See Note 10 to the Consolidated Financial Statements on page F42 for
descriptions of such plans.
(2) Does not include 159,237 unissued but allocated shares under the
Compensation Plan for Non-Employee Directors.
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. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information regarding principal accountant fees and services
required herein is incorporated by reference to the information under the
caption entitled "Fees Paid to Independent Auditors" in the Proxy Statement."
-12-
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Page in
this
Annual
Report
on Form
10-K
-------
(a)1. Financial Statements:
Consolidated Balance Sheets F19
Consolidated Statements of Income F21
Consolidated Statements of Cash Flows F22
Consolidated Statements of Shareholders' Equity F23
Notes to Consolidated Financial Statements F24
Management's Responsibility for Financial Statements F52
Report of Independent Registered Public Accounting Firm F53
Management's Report on Internal Control over Financial Reporting F54
Report of Independent Registered Public Accounting Firm F55
Supplemental Financial Information (unaudited) F57
(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 15(b) of this annual report.)
3.1 * Amended and Restated Articles of Incorporation (Exhibit 3.1 to
Registrant's Quarterly Report on Form 10-Q for the three
months ended March 26, 2004).
3.2 * Bylaws, as amended through December 19, 2002 (Exhibit 3.2 to
the Registrant's Annual Report on Form 10-K ("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 the 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.
10.1 * + Form of Noncompete and Termination Agreement between
Registrant and Arlene S. Bates, Charles B. Carden and John C.
Walters (Exhibit 10.1 to the 2002 10-K).
10.2 * + Employment Agreement, dated December 2, 2002, between
Registrant and John T. Heald, Jr. (Exhibit 10.2 to the 2002
10-K).
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 * + Form of Restricted Stock Agreement between Registrant and
Ms. Bates, Messrs. Carden, Heald and Walters (Exhibit 10.4 to
the 2000 10-K).
10.5 + Restricted Stock Agreements dated April 1, 2004 between
Registrant and Ms. Bates and Messrs. Carden, Heald and
Walters.
10.6 * + Supplemental Retirement Agreement, dated as of January 1,
2002, between Registrant and Mr. Tuff (Exhibit 10.7 to the
2001 10-K).
10.7 * 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).
10.8 * 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).
10.9 * John H. Harland Company 2002 Stock Option Plan (Exhibit A to
the Registrant's Proxy Statement dated March 20, 2002).
10.10 * John H. Harland Company Employee Stock Purchase Plan, as
amended through July 24, 2003 (Exhibit 10.10 to the 2003
10-K).
10.11 * John H. Harland Company Compensation Plan for Non-Employee
Directors, as amended (Exhibit 10.12 to the 2001 10-K).
10.12 2005 Compensation Plan for Non-Employee Directors
10.13 * Amended and Restated Credit Agreement dated as of February 4,
2004 among Registrant and the Lenders named therein
(Exhibit 10.12 to the 2003 10-K).
11.1 Computation of Per Share Earnings.(1)
14 Code of Business Conduct and Ethics, as amended.
21 Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche, LLP.
31.1 Certification Pursuant to Rule 13a-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Rule 13a-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
-13-
- --------
(1) Data required by SFAS No. 128, "Earnings Per Share," is provided in Note 1
to the Consolidated Financial Statements included in this report.
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 3/14/2005
- ------------------------ ---------
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 3/9/2005 /s/ Charles B. Carden 3/14/2005
- ------------------------ --------- ------------------------ ---------
William S. Antle III Date Charles B. Carden Date
Director Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Robert J. Clanin 3/10/2005 /s/ John D. Johns 3/9/2005
- ------------------------ --------- ------------------------ ---------
Robert J. Clanin Date John D. Johns Date
Director Director
/s/ Richard K. Lochridge 3/8/2005 /s/ John J. McMahon, Jr. 3/8/2005
- ------------------------ --------- ------------------------ ---------
Richard K. Lochridge Date John J. McMahon, Jr. Date
Director Director
/s/ G. Harold Northrop 3/8/2005 /s/ Larry L. Prince 3/8/2005
- ------------------------ --------- ------------------------ ---------
G. Harold Northrop Date Larry L. Prince Date
Director Director
/s/ J. Michael Riley 3/14/2005 /s/ Eileen M. Rudden 3/10/2005
- ------------------------ --------- ------------------------ ---------
J. Michael Riley Date Eileen M. Rudden Date
Vice President and Director
Controller
(Principal Accounting Officer)
/s/ Jesse J. Spikes 3/9/2005 /s/ Timothy C. Tuff 3/14/2005
- ------------------------ --------- ------------------------ ---------
Jesse J. Spikes Date Timothy C. Tuff Date
Director Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
-15-
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, 2004
Management's Discussion and Analysis of
Results of Operations and Financial Condition F2
Consolidated Financial Statements
and Notes to Consolidated Financial Statements F19
Management's Responsibility For Financial Statements F52
Report of Independent Registered Public Accounting Firm F53
Management's Report on Internal Control over Financial Reporting F54
Report of Independent Registered Public Accounting Firm F55
Supplemental Financial Information (Unaudited) F57
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,
direct marketing activities and analytical services marketed primarily to
financial institutions. The Software and Services segment ("Software &
Services") is focused on the financial institution market and includes core
processing applications and services for credit unions and community banks,
lending and mortgage origination applications, mortgage servicing applications,
branch automation applications and customer relationship management
applications. The Scantron segment ("Scantron") includes scanning equipment and
software, scannable forms, survey solutions, curriculum planning software,
testing and assessment tools, training and field maintenance services. Scantron
sells these products and services to the education, commercial and financial
institution markets.
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 intangible assets, 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 & Services and Scantron
segments. For software that is installed, customized 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 Company reviews long-lived assets and certain intangible assets for
impairment when events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In the third quarter of 2004, the
Company recorded a charge of $7.9 million before income taxes related to certain
portions of the Printed Products customer care infrastructure project. During
the second and fourth quarters of 2004, the Company recorded a combined charge
of $2.4 million before income taxes on a Printed Products facility to adjust the
basis of the facility to its estimated fair value. The facility was closed
pursuant to the Printed Products plant consolidation plan. In the second quarter
of 2002, the Company recorded a charge of $0.3 million before income taxes for
write-downs of an equity investment that was subsequently disposed of during the
fourth quarter of 2002.
The Company makes estimates and assumptions regarding future cash flows
in its review of the carrying values of goodwill and other intangible assets to
assess recoverability. If these estimates and assumptions change in the future
(which may occur due to changes in the Company's business prospects, market
trends or other economic factors which would impact projected annual sales,
operating profit and cash flows), the Company may be required to record
impairment charges. The Company analyzes its goodwill for impairment on an
annual basis. No impairment of goodwill was identified during the years ended
December 31, 2004, 2003 and 2002.
The carrying value of the Company's net deferred tax assets (net of
valuation allowances) assumes the Company will be able to generate sufficient
future taxable income in certain tax jurisdictions. 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 of future
taxable income in those jurisdictions decrease. The Company may be required to
release all or a portion of recorded valuation allowances against its deferred
tax assets resulting in lower income tax expense, except for such allowances for
deferred tax assets related to acquisitions, the release of which would reduce
goodwill. The release of valuation allowances would result from changes in the
Company's estimates of realized capital gains, utilization of state net
operating loss carryforwards and utilization of acquired tax credits subject to
annual limitations.
-F2-
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock-based compensation plans and applies the
disclosure-only provisions of the Financial Accounting Standards Board ("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"). 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.
Reclassifications
During 2004, the Company reclassified certain items in its consolidated
income statements. The reclassifications affected the categories of Selling,
General and Administrative expenses, Asset Impairment Charges and Gain on
Disposal of Assets - net. The change primarily reflects the reclassification of
Asset Impairment Charges and Gain on Disposal of Assets - net from Selling,
General and Administrative expenses to separate line items. Financial data for
all periods presented have been reclassified for comparability. The
reclassifications and transfers had no impact on net income or shareholders'
equity as previously reported. Certain incentive compensation costs within
Selling, General and Administrative expense in 2002 were reclassified from
Corporate to the Printed Products and Software & Services segments to conform to
the 2004 and 2003 classifications. Certain other reclassifications have been
made in the 2003 and 2002 financial statements and notes to financial statements
to conform to the 2004 classifications.
Significant Events
In September 2004, the Company concluded that upgrading certain
existing customer care systems in its Printed Products segment would be more
economical than continued development of portions of certain new customer care
systems for the segment. The decision to terminate development efforts required
a non-cash pre-tax impairment charge of $7.9 million. The Company will continue
with development and implementation of the remaining portions of the customer
care infrastructure project for the Printed Products segment.
In September 2003, the Company announced a reorganization of its
Printed Products operations including the consolidation of its domestic
manufacturing operations from 14 plants to 9 plants, which was completed during
the third quarter of 2004. Two of the facilities that were closed were leased.
One of these facilities is under lease through late 2005 and the other is under
lease through mid-2010. During the third quarter of 2004, the Company sublet the
latter facility to a third party for the remaining term of the lease.
In addition to the plant consolidation, Printed Products implemented
other staffing reductions beginning in the fourth quarter of 2003 which were
completed during the third quarter of 2004. These actions were primarily due to
excess capacity in production facilities resulting from efficiencies realized
from digital printing technology and lower volumes attributable to the losses of
certain large customers, including a direct check marketer, and general market
volume decline. The Company believes these actions bring its production and
support structures in line with its business levels. Management expects to
achieve savings increasing to approximately $20 million on an annual run rate
basis by the end of 2005 as a result of the reorganization.
The net pre-tax expenses associated with the plant consolidations
totaled $8.1 million consisting of employee severance ($2.8 million), revision
of depreciable lives and salvage values of furniture and equipment, asset
impairment charge and disposal gains and losses ($2.3 million), relocation and
other costs ($2.1 million) and contract termination costs related to leaseholds
($0.9 million). The net pre-tax expenses associated with other staffing
reduction actions totaled $4.5 million consisting of employee severance costs.
-F3-
The following table presents the net expenses by income statement
caption for plant consolidation and other staffing reduction actions for the
years ended December 31, 2004 and 2003 (in thousands):
2004 2003
- ---------------------------------------------------------------------------
Plant consolidation expenses:
Cost of products sold $5,347 $3,950
Asset impairment charges 2,444 -
Gain on disposal of assets - net (3,612) -
- ---------------------------------------------------------------------------
Total $4,179 $3,950
===========================================================================
Other staffing reduction actions:
Cost of products sold $ - $ 30
Selling, general and administrative expenses 1,644 2,871
===========================================================================
RESULTS OF OPERATIONS
2004 versus 2003
Sales
Consolidated sales for the years ended December 31, 2004 and 2003 were
as follows (in thousands):
2004 2003
- ----------------------------------------------------------------------
% of % of
Amount Total Amount Total
- ----------------------------------------------------------------------
Sales:
Printed Products $488,688 61.2% $498,257 63.3%
Software & Services 193,843 24.3% 176,833 22.5%
Scantron 116,643 14.6% 113,236 14.4%
Eliminations (687) (0.1%) (1,658) (0.2%)
- ---------------------------------------------------------------------
Total $798,487 100.0% $786,668 100.0%
======================================================================
Consolidated sales for the year ended December 31, 2004 were $798.5
million, compared to $786.7 million for the year ended December 31, 2003, an
increase of $11.8 million, or 1.5%. Software & Services and Scantron sales
increases more than offset a decrease in Printed Products sales. Sales of
products, which consist of all Printed Products sales (except analytical
services), software licensing sales, scanning equipment and scannable forms,
hosted software applications and other products decreased $0.1 million, from
$640.9 million in 2003 to $640.8 million in 2004. Sales of services, which
consist of software maintenance services, field maintenance services, core
processing services, analytical and consulting services and other services
increased $11.9 million, or 8.1%, to $157.7 million in 2004 from $145.8 million
in 2003.
-F4-
Printed Products sales were $488.7 million in 2004 compared to $498.3
million in 2003, a decrease of $9.6 million, or 1.9%. Domestic imprint check
printing operations, which accounted for a majority of the Printed Products
sales, were unfavorably impacted by a decrease in the average price per unit of
5.4% partially offset by a volume increase of 1.8%. The decrease in the average
price per unit was due primarily to incentives and price reductions resulting
from contract renewals and lower pricing for a major new customer. The volume
increase was primarily due to the addition of a major new customer in December
2004, the favorable impact of package size reductions as well as increased
volumes in large accounts partially offset by a continued general market decline
and the loss of certain customers during 2003. The Company estimates the general
market volume decline in check products due to the continuing expansion of
alternative payment systems is currently 4% to 5% on an annual basis. Sales of
computer checks and related products increased 2.5% in 2004 from 2003 due
primarily to the addition of a new retail customer in 2004 and increased sales
with an existing customer in 2004. Sales for direct marketing activities
decreased 4.9% in 2004 from 2003 due primarily to lower analytical services
sales attributable to contracts not being renewed with certain major banks,
lower direct marketing sales in several large accounts and lower investment
services sales.
Software & Services sales increased $17.0 million, or 9.6%, to $193.8
million in 2004 from $176.8 million in 2003. The increase in sales was due
primarily to a full year of operations for the Premier Systems, Inc. ("PSI")
acquisition in 2003 and the acquisition of Phoenix System in 2004 and certain
assets and operations of Greatland Corporation and Mitek Systems in 2004 (see
Note 2 to the Consolidated Financial Statements). Excluding the impact of the
acquisitions, Software & Services sales increased approximately $4.2 million, or
2.4%, due primarily to increases in core systems and retail solutions sales.
Core systems sales increases were primarily due to increased customer
installations of banking systems and increased sales for credit union service
bureau services which were partially offset by decreased sales of credit union
systems. Retail solutions sales increases were primarily due to higher sales of
branch automation products, partially offset by lower sales of customer
relationship management applications. Increased sales resulting from the release
of a new mortgage loan product in 2004 were offset by decreased sales of other
mortgage loan servicing and production products.
At December 31, 2004, Software & Services backlog was $108.6 million,
an increase of $7.0 million from the backlog at December 31, 2003. The increase
in backlog was due to acquisitions partially offset by the drawdown of backlog
related to the new mortgage product and weaker bookings in credit union and
banking systems over the last 12 months. Excluding the impact of acquisitions,
backlog decreased 3.4% from December 31, 2003. Approximately $48.5 million or
44.7% of the backlog at December 31, 2004 is expected to be delivered over the
next twelve months and $60.1 million or 55.3% is expected to be delivered beyond
the next twelve months due to the long-term nature of certain service contracts.
Scantron sales were $116.6 million in 2004 compared to $113.2 million
in 2003, an increase of $3.4 million, or 3.0%, due primarily to increases in
sales of testing forms, software and services in the education market, survey
services and field services, partially offset by decreased sales of custom data
collection forms and imaging solutions. Sales of custom data collection forms
were lower for commercial market applications and non-testing applications in
the education market due to a continuing trend in data collection methods moving
away from optical mark reading to imaging and direct input technologies.
Scantron backlog at December 31, 2004 was $18.0 million, of which $17.2 million
is expected to be delivered in twelve months or less.
-F5-
Gross Profit
Consolidated gross profit and gross profit by segment for the years
ended December 31, 2004 and 2003 were as follows (in thousands):
2004 2003
- ----------------------------------------------------------------------
% of % of
Amount Sales(a) Amount Sales(a)
- ----------------------------------------------------------------------
Gross Profit:
Printed Products $194,073 39.7% $199,126 40.0%
Software & Services 130,991 67.6% 120,294 68.0%
Scantron 65,919 56.5% 62,428 55.1%
- ----------------------------------------------------------------------
Total $390,983 49.0% $381,848 48.5%
======================================================================
(a) Percentage of sales for each segment is calculated using sales for that
segment.
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 decreased $5.1 million, or 2.5%, to
$194.1 million in 2004 from 2003 and decreased as a percentage of sales from
40.0% in 2003 to 39.7% in 2004. The decrease in gross profit occurred in
computer checks and related products, direct marketing and checks. The decrease
in computer checks and related products was due primarily to lower pricing for a
large software customer, costs related to the implementation of digital printing
technology and increased plant consolidation costs partially offset by higher
volumes. The decrease in direct marketing was due primarily to lower sales and
increased plant consolidation costs. The decrease in checks was due primarily to
lower pricing in domestic checks and international operations and increased cost
of sales in bank forms operations partially offset by higher volumes in domestic
checks. A reduction in the Printed Products accrued vacation liability of $1.3
million, which was recorded in the fourth quarter of 2004 as a result of a
policy change for employees' paid time off, partially offset the impact of those
unfavorable factors. Printed Products gross profit was unfavorably impacted in
2004 and 2003 by plant consolidation costs of $5.3 million and $4.0 million,
respectively (see Note 5 to the Consolidated Financial Statements).
Software & Services gross profit increased $10.7 million, or 8.9%, from
2003 to $131.0 million in 2004 due primarily to acquisitions and the combined
impact of increased sales and lower costs for its other businesses. As a
percentage of sales, Software & Services gross profit decreased to 67.6% for
2004 from 68.0% for 2003 due primarily to the impact of acquired operations and
a change in sales mix. Excluding the impact of acquisitions, Software & Services
gross profit increased approximately 3.7% in 2004 compared to 2003 due primarily
to an increase in sales in bank core processing applications and branch
automation applications for financial institutions, lower costs and a change in
sales mix.
Scantron gross profit increased $3.5 million, or 5.6%, from 2003 to
$65.9 million in 2004 due primarily to an increase in sales, a change in sales
mix and to unfavorable costs and production inefficiencies experienced during a
facility relocation that occurred in the first quarter of 2003. As a percentage
of sales, Scantron gross profit increased to 56.5% in 2004 from 55.1% in 2003.
-F6-
Selling, General and Administrative Expenses ("SG&A")
Consolidated SG&A for the years ended December 31, 2004 and 2003 were
as follows (in thousands):
2004 2003
- ----------------------------------------------------------------------
% of % of
Amount Sales(a) Amount Sales(a)
- ----------------------------------------------------------------------
SG&A:
Printed Products $121,022 24.8% $130,585 26.2%
Software & Services 102,111 52.7% 99,543 56.3%
Scantron 32,908 28.2% 36,594 32.3%
Corporate 32,975 23,605
- ----------------------------------------------------------------------
Total $289,016 36.2% $290,327 36.9%
======================================================================
(a) Percentage of sales for each segment is calculated using sales for that
segment.
Printed Products SG&A decreased $9.6 million, or 7.3%, to $121.0
million in 2004 from $130.6 million in 2003 due in part to lower selling,
division support, client support and marketing expenses in 2004 resulting from
cost reduction initiatives and staffing reduction severance charges of $2.9
million in 2003 compared to $1.6 million in 2004. A reduction in the Printed
Products accrued vacation liability of $1.6 million as a result of a policy
change for employees' paid time off also had a favorable impact on SG&A in the
fourth quarter of 2004. The decrease in Printed Products SG&A was partially
offset by an increase in certain incentive compensation in 2004 compared to 2003
and to an increase in call center expenses.
Software & Services SG&A increased $2.6 million, or 2.6%, to $102.1
million in 2004 from $99.5 million in 2003 due to the impact of acquisitions
during 2003 and 2004, which was partially offset by cost reduction initiatives
implemented during the year for its other businesses.
Scantron's SG&A decreased $3.7 million, or 10.1%, to $32.9 million in
2004 from $36.6 million in 2003. The decrease was due primarily to lower selling
and marketing expenses and lower product development costs resulting from cost
reduction initiatives implemented in late 2003.
Corporate SG&A increased $9.4 million, or 39.7%, to $33.0 million in
2004 from $23.6 million in 2003. The increase was due primarily to increased
restricted stock amortization expense resulting from higher utilization of
restricted stock grants in 2004 compared to 2003 and accelerated vesting of
certain restricted stock grants in 2004 as a result of the Company's favorable
stock price performance (see Note 10 to the Consolidated Financial Statements),
increased audit fees largely attributable to Sarbanes-Oxley compliance,
increased deferred compensation expenses resulting primarily from a change in
life expectancy assumptions, increased professional fees for tax services,
increased incentive compensation expenses, increased expenses related to
environmental liabilities and increased insurance costs.
Asset Impairment Charges
Asset impairment charges in 2004 totaled $10.3 million and consisted of
a $7.9 million asset impairment charge related to the decision to terminate
development efforts on certain portions of Printed Products customer care
infrastructure project and a $2.4 million charge on a Printed Products facility
to adjust the basis of the facility to its estimated fair value. The facility
was closed in 2004 pursuant to the Printed Products plant consolidation plan.
-F7-
Gain on Disposal of Assets - net
During 2004, the Company realized a net gain of $3.4 million on the
disposal of assets primarily due to a Printed Products plant
consolidation-related net gain of $3.7 million realized on a facility that was
closed and sold during the first quarter of 2004. During 2003, the Company
realized a net gain of $1.2 million primarily consisting of a $0.8 million gain
in Printed Products on the sale of a former check printing facility and a $0.2
million gain in Corporate on the sale of certain property.
Amortization of Other Intangible Assets
Amortization of other intangible assets increased $0.5 million, or
14.6%, to $3.8 million in 2004 compared to $3.3 million in 2003 due primarily to
the impact of acquired operations.
Consolidated Income From Operations
Consolidated income from operations increased $1.9 million, or 2.1%, to
$91.3 million for 2004 from $89.4 million for 2003 primarily due to increased
gross profit, lower SG&A and increased gains on disposal of assets, which were
substantially offset by asset impairment charges and increased amortization of
other intangible assets, all of which are described in more detail above.
Other Income (Expense)
Other Income (Expense) increased $0.8 million to an expense of $3.4
million in 2004 from an expense of $2.6 million in 2003. The increase was due
primarily to a decrease in gains on sales of investments from $3.0 million in
2003 to $0.1 million in 2004 partially offset by lower average interest rates in
effect during 2004 compared to 2003 because of lower amounts borrowed at fixed
rates, lower debt outstanding during 2004 compared to 2003 and gains in 2004 on
investments held in a rabbi trust for the Company's deferred compensation plan
for certain employees.
Consolidated Income Before Income Taxes
Consolidated income before income taxes increased $1.1 million, or
1.3%, to $87.9 million for 2004 from $86.8 million for 2003 due to increased
income from operations and decreased interest expense partially offset by a
decrease in gains on sales of investments.
Income Taxes
The Company's consolidated effective income tax rates were 37.3% and
35.5% for 2004 and 2003, respectively. The higher effective tax rate for 2004
resulted primarily from the favorable impact of a release of a valuation
allowance related to the utilization of capital loss carryforwards on the 2003
effective tax rate and an increase in the effective state tax rate for 2004.
Favorable adjustments in 2004 related to the partial closure of a review of the
Company's income tax filings for 1999 and 2000 by the Internal Revenue Service
and prior year foreign transfer pricing agreements partially offset the factors
that increased the effective tax rate. See Note 8 to the Consolidated Financial
Statements for factors affecting the tax rate in each year.
Net Income and Earnings Per Share
The Company's net income for 2004 was $55.1 million compared to $56.0
million for 2003, a decrease of $0.9 million, or 1.5%. Basic and diluted
earnings per share were $2.02 and $1.96, respectively, for 2004 compared to
basic and diluted earnings per share of $2.02 and $1.97 respectively, for 2003.
Net income for 2004 included a pre-tax impairment charge of $7.9 million related
to the decision not to complete certain portions of Printed Products customer
care infrastructure project, equivalent to $0.17 per share on a diluted basis,
and pre-tax charges of $5.8 million related to the reorganization of the
Company's Printed Products segment, equivalent to $0.13 per share on a diluted
basis. Net income for 2003 included pre-tax charges totaling $6.9 million
related to the Printed Products reorganization, equivalent to $0.15 per share on
a diluted basis, and a $3.0 million pre-tax gain on the sale of investments
equivalent to $0.11 per share on a diluted basis.
-F8-
RESULTS OF OPERATIONS
2003 versus 2002
Sales
Consolidated sales for the years ended December 31, 2003 and 2002 were
as follows (in thousands):
2003 2002
- ----------------------------------------------------------------------
% of % of
Amount Total Amount Total
- ----------------------------------------------------------------------
Sales:
Printed Products $498,257 63.3% $526,201 68.5%
Software & Services 176,833 22.5% 135,568 17.7%
Scantron 113,236 14.4% 107,822 14.0%
Eliminations (1,658) (0.2%) (1,784) (0.2%)
- ----------------------------------------------------------------------
Total $786,668 100.0% $767,807 100.0%
======================================================================
Consolidated sales for the year ended December 31, 2003 were $786.7
million, compared to $767.8 million for the year ended December 31, 2002, an
increase of $18.9 million, or 2.5%. Software & Services and Scantron sales
increases more than offset a decrease in Printed Products sales. Sales of
products decreased $11.6 million, or 1.8%, from $652.5 million in 2002 to $640.9
million in 2003. Sales of services increased $30.5 million, or 26.5%, to $145.8
million in 2003 compared to $115.3 million in 2002. Sales of products consist of
all Printed Products sales (except for analytical services), software licensing
sales, scanning equipment and scannable forms, hosted software applications and
other products. Sales of services consist of software maintenance services,
field maintenance services, analytical and consulting services and other
services.
Printed Products sales were $498.3 million in 2003 compared to $526.2
million in 2002, a decrease of $27.9 million, or 5.3%. Lower volumes in domestic
imprint check printing operations, which decreased 9.4% in 2003 from 2002,
accounted for a majority of the decrease in Printed Product sales. The volume
decline was primarily attributable to losses of certain large customers, lower
volumes from a direct check marketer due to the loss of that business in late
2003 and general market volume decline. The impact of the volume decline was
moderated by an improvement of 3.8% in average price per unit primarily due to a
price increase implemented in July 2002 and the impact of the loss of certain
large customers that were less favorably priced. Sales of computer checks and
related products also decreased in 2003 compared to 2002 due primarily to the
loss of business with a software company in late 2002, partially offset by the
addition of business with another software company in early 2003. Sales in
direct marketing increased slightly due to higher volumes of statement mailings,
partially offset by lower volumes from credit card promotions. Sales of
analytical services also increased in 2003 compared to 2002 due primarily to
services rendered to two large customers.
-F9-
Software & Services sales for 2003 increased $41.3 million, or 30.4%,
from 2002, due primarily to the impact of a full year of operations for
acquisitions that were made in 2002 as well as an acquisition made in June 2003
(see Note 2 to the Consolidated Financial Statements). Excluding the impact of
acquisitions, Software & Services sales increased 2.2% in 2003 compared to 2002
due primarily to increases in sales of core processing products and services,
lending and deposit origination products and services and branch automation
applications, which more than offset decreases in sales of mortgage loan
origination, production and servicing solutions and sales of customer
relationship management software and related database marketing applications and
add-on products. Sales of core processing products and services increased due
primarily to an increase in credit union customer installations, seat licenses
and ship and book sales as well as increased hardware sales for banking systems.
Sales of lending products and services increased primarily due to higher ship
and book sales, higher maintenance revenue and the impact of subscription
contracts over the past year. Retail solutions sales were unfavorably impacted
by a decrease in sales of customer relationship management applications,
database marketing applications and add-on products, partially offset by higher
sales of branch automation applications.
At December 31, 2003, Software & Services backlog was $101.6 million,
an increase of $57.7 million from the backlog at December 31, 2002. The increase
in backlog was due primarily to acquisitions and stronger bookings. Excluding
the impact of acquisitions, backlog increased 24.1% from December 31, 2002.
Approximately $49.7 million, or 48.9%, of the backlog at December 31, 2003 is
expected to be delivered over the next twelve months and $51.9 million, or
51.1%, is expected to be delivered beyond the next twelve months due to the
long-term nature of certain service contracts.
Scantron sales were $113.2 million in 2003 compared to $107.8 million
in 2002, an increase of $5.4 million, or 5.0%, due primarily to a full year of
operations in 2003 from the acquisition of EdVISION in July 2002 (see Note 2 to
the Consolidated Financial Statements), increases in sales of testing forms in
the education market, imaging products and services, survey services and field
services, which were partially offset by reduced sales of custom data collection
forms. Sales of custom data collection forms were lower for commercial market
applications and non-testing applications in the education market due to a
continuing trend in data collection methods moving away from optical mark
reading to imaging and other direct input technologies.
Gross Profit
Consolidated gross profit and gross profit by segment for the years
ended December 31, 2003 and 2002 were as follows (in thousands):
2003 2002
- ----------------------------------------------------------------------
% of % of
Amount Sales(a) Amount Sales(a)
- ----------------------------------------------------------------------
Gross Profit:
Printed Products $199,126 40.0% $206,586 39.3%
Software & Services 120,294 68.0% 96,415 71.1%
Scantron 62,428 55.1% 61,434 57.0%
- ----------------------------------------------------------------------
Total $381,848 48.5% $364,435 47.5%
======================================================================
(a) Percentage of sales for each segment is calculated using sales for that
segment.
Consolidated gross profit of $381.8 million in 2003 increased $17.4
million, or 4.8%, from $364.4 million in 2002 and increased as a percentage of
sales from 47.5% in 2002 to 48.5% in 2003. The increase in consolidated gross
profit was the result of a favorable change in sales mix, cost management and
productivity improvement initiatives.
-F10-
Printed Products gross profit decreased $7.5 million, or 3.6%, in 2003
from 2002 but increased as a percentage of sales from 39.3% to 40.0% in 2003.
The decrease in gross profit occurred primarily in domestic imprint check
operations due to plant consolidation costs and reduced volume, an unfavorable
change in mix in direct marketing activities and decreases in sales of computer
checks and related products partially offset by increases in analytical services
gross profit. The improvement in gross profit as a percentage of sales was due
primarily to efficiencies realized from digital printing technology, process
improvements and a favorable change in price and product mix. As stated earlier,
Printed Products gross profit was unfavorably impacted in 2003 by plant
consolidation costs of $4.0 million, which were incurred primarily during the
fourth quarter of 2003. These plant consolidation costs relate to a plan to
consolidate Printed Products manufacturing operations from 14 plants to 9 plants
during 2004 (see Note 5 to the Consolidated Financial Statements).
Software & Services gross profit for 2003 increased $23.9 million, or
24.8%, over 2002, due primarily to acquisitions. As a percentage of sales,
Software & Services gross profit decreased to 68.0% for 2003 compared to 71.1%
for 2002 due primarily to the impact of acquired operations and a change in
sales mix. Excluding the impact of acquisitions, Software & Services gross
profit increased approximately 1.3% in 2003 compared to 2002 primarily due to an
increase in sales in bank core processing applications and branch automation
applications for financial institutions.
Scantron gross profit increased by $1.0 million, or 1.6%, over 2002 to
$62.4 million in 2003 due primarily to the addition of the former EdVISION
products and services acquired in July 2002. As a percentage of sales, Scantron
gross profit decreased from 57.0% for 2002 to 55.1% in 2003 due primarily to an
unfavorable change in sales mix and to costs and production inefficiencies
experienced during a facility relocation that occurred in the first quarter of
2003.
Selling, General and Administrative Expenses
Consolidated SG&A for the years ended December 31, 2003 and 2002 were
as follows (in thousands):
2003 2002
- ----------------------------------------------------------------------
% of % of
Amount Sales(a) Amount Sales(a)
- ----------------------------------------------------------------------
SG&A:
Printed Products $130,585 26.2% $120,858 23.0%
Software & Services 99,543 56.3% 80,295 59.2%
Scantron 36,594 32.3% 31,929 29.6%
Corporate 23,605 32,162
- ----------------------------------------------------------------------
Total $290,327 36.9% $265,244 34.5%
======================================================================
(a) Percentage of sales for each segment is calculated using sales for that
segment.
Printed Products SG&A increased $9.7 million, or 8.0%, in 2003 compared
to 2002 due in part to $2.9 million of reorganization costs incurred during the
fourth quarter of 2003 (see Note 5 to the Consolidated Financial Statements),
increased selling and marketing activities and customer care activities.
Software & Services SG&A increased $19.2 million, or 24.0%, in 2003
compared to 2002 due primarily to the impact of acquisitions and to increased
expenditures related to product development of a mortgage services application.
Scantron's SG&A increased $4.7 million, or 14.6%, in 2003 compared to
2002 due primarily to the acquisition of EdVISION, increased selling and
marketing expenses related to developing a national sales force for software
products and services in the education market and increased product development
costs.
-F11-
Corporate SG&A decreased $8.6 million, or 26.6%, in 2003 compared to
2002 due primarily to decreases in stock-based compensation costs related to
restricted stock grants, decreased amortization expense for the Company's
financial and human resource systems which became fully amortized at the end of
2002 and early 2003, respectively, and to upgrade expenses incurred in 2002 for
the Company's financial and human resource systems. Stock-based compensation
totaled $2.4 million in 2003 compared to $9.9 million in 2002. The decrease in
stock-based compensation was due primarily to expenses resulting from the
accelerated vesting of certain restricted stock grants in 2002 (see Note 10 to
the Consolidated Financial Statements). These grants vested as a result of the
Company's favorable stock price performance.
Gain on Disposal of Assets - net
In 2003, the Company realized a net gain of $1.2 million primarily
consisting of a $0.8 million gain in Printed Products on the sale of a former
check printing facility and a $0.2 million gain in Corporate on the sale of
certain property.
Amortization of Other Intangible Assets/Acquired In-Process Research and
Development Charge
Amortization of other intangible assets increased to $3.3 million in
2003 compared to $2.6 million in 2002 due primarily to the impact of acquired
operations partially offset by the impact of certain intangible assets that were
fully amortized during 2002. 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
Consolidated income from operations decreased $4.4 million, or 4.7%, to
$89.4 million for 2003 from $93.8 million for 2002 due primarily to Printed
Products SG&A staffing reduction costs of $2.9 million in 2003 and other
increases in SG&A in 2003 discussed above, partially offset by the impact of an
acquired in-process research and development charge in 2002.
Other Income (Expense)
Other Income (Expense) decreased by $5.9 million from an expense of
$8.5 million for 2002 to an expense of $2.6 million for 2003. The decrease was
due primarily to gains on sales of investments of $3.0 million in 2003 (see Note
1 to the Consolidated Financial Statements) and a loss of $1.8 million in 2002
on the disposition of equity and debt investments in Netzee, Inc. ("Netzee").
Interest expense decreased $0.9 million from 2002 primarily due to lower
interest rates during 2003 compared with 2002, which was partially offset by the
impact of higher average borrowings.
Consolidated Income Before Income Taxes
Consolidated income before income taxes increased $1.5 million, or
1.8%, to $86.8 million for 2003 from $85.3 million for 2002. The impact of
investment gains in 2003 and investment losses in 2002 more than offset the
decrease in consolidated income from operations in 2003.
Income Taxes
The Company's consolidated effective income tax rates were 35.5% and
38.5% for 2003 and 2002, respectively. The lower effective income tax rate for
2003 resulted primarily from the release of a valuation allowance related to the
utilization of capital loss carryforwards, a reduction in the effective state
tax rate, a favorable renewal of an industrial revenue grant related to the
Company's operations in Puerto Rico and a reduction of certain estimated
permanent tax differences. The effective tax rate for 2002 included favorable
adjustments related to state tax credits and adjustments related to prior years
due to the resolution of an IRS examination, which were partially offset by the
impact of an in-process research and development charge that was nondeductible
for tax purposes. See Note 8 to the Consolidated Financial Statements for
factors affecting the tax rate in each year.
-F12-
Net Income and Earnings Per Share
The Company's net income for 2003 was $56.0 million compared to $52.4
million for 2002, an increase of $3.6 million, or 6.9%. Basic and diluted
earnings per share were $2.02 and $1.97, respectively, for 2003 compared to
basic and diluted earnings per share of $1.80 and $1.73, respectively, for 2002.
Net income for 2003 included pre-tax charges totaling $6.9 million related to
the Printed Products reorganization, equivalent to $0.15 per share on a diluted
basis, and a $3.0 million pre-tax gain on the sale of investments equivalent to
$0.11 per share on a diluted basis. Net income for 2002 included pre-tax charges
totaling $13.0 million, equivalent to $0.30 per share on a diluted basis related
to accelerated vesting of certain restricted stock grants, 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.
Lower weighted average shares outstanding in 2003 compared to 2002 also had a
favorable impact on basic and diluted earnings per share in 2003. The lower
shares outstanding were primarily the result of the Company's share repurchase
program (see Note 9 to the Consolidated Financial Statements).
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Sources and Uses of Cash
- -------------------------------------------------------------------------------
Years Ended December 31,
(In thousands) 2004 2003 2002
- -------------------------------------------------------------------------------
Net cash provided by
operating activities $ 120,371 $ 74,729 $ 140,346
Net cash used for
investing activities (51,043) (30,515) (124,533)
Net cash used for
financing activities (68,639) (54,907) (6,691)
===============================================================================
The Company has historically generated positive cash flows from its
operations and continually evaluates uses of such cash flows to strengthen
shareholder value through a combination of internal development, acquisitions,
repurchases of stock, dividend payments and repayment of debt. Cash flows
provided from operations in 2004 increased $45.6 million, or 61.1%, to $120.4
million from $74.7 million in 2003 due primarily to $27.1 million of upfront
contract payments made in 2004 compared with $44.0 million of such payments in
2003, non-cash asset impairment charges of $10.3 million in 2004, a $7.7 million
increase in net income adjusted for depreciation and amortization, a $2.8
million increase in stock-based compensation and associated tax benefits and
changes in deferred income taxes. The primary uses of cash in 2004 were for
repurchases of treasury stock ($45.3 million), acquisitions ($30.2 million),
capital expenditures ($28.9 million), net reduction of borrowed amounts ($25.8
million) and dividend payments to shareholders ($12.5 million).
-F13-
Purchases of property, plant and equipment totaled $28.9 million in
2004, an increase of $0.8 million, compared to $28.1 million in 2003 and were
primarily for customer care infrastructure initiatives. The Company's customer
care infrastructure initiatives for the Printed Products segment focused on
improving systems that support sales, marketing and customer service to ensure
exceptional service and added functionality for the Company's call centers. In
September 2004, the Company concluded that upgrading certain existing customer
care systems would be more economical than continued development of portions of
certain new customer care systems. The decision to terminate development efforts
required a non-cash, pre-tax impairment charge of $7.9 million. The Company will
continue with development and implementation of the remaining portions of the
customer care infrastructure project for its Printed Products segment. Total
expenditures for the project over the four-year period ended in 2004 were $57.8
million including the $7.9 million impairment charge, a decrease from the
previously disclosed range of $65 to $70 million for the same period.
Additionally, the Company anticipates it will spend approximately $4 million,
primarily in 2005, to complete the remaining new systems, and it will spend
approximately $14 to $18 million over the 2005-2007 period to enhance certain
existing systems and infrastructure to replace the portions of the project being
discontinued.
In January 2003, the Board authorized the repurchase of 3,000,000
shares. 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. In 2004, the Company purchased a total of
1,399,300 shares under this program at a cost of $45.3 million or an average
cost of $32.37 per share. At December 31, 2004, a total of 1,821,278 shares had
been purchased at an average cost of $31.21 per share and 1,178,722 shares were
available for repurchase under the program authorized in January 2003.
In February 2004, the Company amended its credit facility (the "Credit
Facility") with a syndicate of banks increasing the amount from $325.0 million
to $425.0 million. The Credit Facility is comprised of a $100.0 million term
loan and a $325.0 million revolving loan, both of which mature in 2009. The term
loan requires annual repayments of $5.0 million. As a result, the Credit
Facility will decrease by $5.0 million per annum to $400.0 million at the 2009
maturity date. The Credit Facility 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, based upon one
of the following indices (plus a margin as defined): the Federal Funds Rate, the
SunTrust Bank Base Rate or LIBOR (as defined therein). The Credit Facility has
certain financial covenants including, among other items, leverage, fixed charge
coverage 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, 2004, the Credit Facility consisted of $101.3 million
in outstanding cash borrowings and $5.5 million in outstanding letters of
credit. At December 31, 2004, the Company had $313.2 million of availability
under its Credit Facility. The average interest rate in effect on outstanding
cash borrowings at December 31, 2004 and 2003 was 3.30% and 2.94%, respectively.
At December 31, 2004, the Company had $9.2 million in cash and cash
equivalents. The Company believes that its current cash position, funds from
operations and the availability of funds under its 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 if funding beyond that available under the Credit Facility were
required.
-F14-
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, 2004 (in
millions):
Payments Due by Period
---------------------------------------------------------
Contractual Less than More than
Obligations Total 1 year 1-3 years 3-5 years 5 years
- ---------------------------------------------------------------------------
Long-term debt $101.3 $ 5.0 $ 10.0 $ 86.3 $ -
Interest on long-
term debt(a) 14.5 3.7 7.7 3.1 -
Customer agreements 71.9 22.3 32.8 16.8 -
Operating leases 76.5 14.3 22.6 20.3 19.3
Purchase obligations 3.9 3.9 - - -
Postretirement
benefit payments(b) 13.6 1.5 2.9 2.9 6.3
Other long-term
liabilities 10.2 0.5 1.1 1.2 7.4
- ---------------------------------------------------------------------------
Total $291.9 $ 51.2 $ 77.1 $130.6 $ 33.0
===========================================================================
(a)Assumes no additional borrowings under the Company's $325.0 million revolving
loan will occur after December 31, 2004 and the interest rate in effect at
December 31, 2004 will remain constant at 3.30% over the remaining term of the
Credit Facility.
(b)Estimated through 2014.
The Company's long-term debt obligations are described in Note 7 to the
Consolidated Financial Statements. The Company has contracts with certain
customers that contain provisions that call for future payments to the
customers. These payments are amortized as a reduction of sales over the life of
the related contract and are generally refundable from the customer on a
pro-rata basis if the contract is terminated. The Company's operating lease
obligations are described in Note 14 to the Consolidated Financial Statements.
The Company has obligations, under contracts and purchase orders, to purchase
goods or services, which are not recorded as obligations in the Company's
Consolidated Financial Statements until contract terms take effect. The
Company's other long-term liabilities obligations are primarily for unfunded
deferred compensation contracts with certain current and former officers.
The Company has a nonqualified deferred compensation plan for certain
eligible employees, which is accounted for as a rabbi trust (see Note 11 to the
Consolidated Financial Statements). At December 31, 2004, the Company had a
noncurrent liability of $5.5 million related to this plan. This liability has
not been included in the above table because payment schedules are not
determinable until a plan participant leaves the Company. Scheduled payments
under this plan are currently not significant.
The Company has postretirement benefit plans, which are described in
Note 12 to the Consolidated Financial Statements. At December 31, 2004, the
Company's accrued postretirement costs totaled $13.9 million. Because the
determination of this amount is affected by changes in plan demographics and
assumptions, it does not represent expected liquidity needs. Estimated funding
for the plan through 2014 has been included in the above table.
At December 31, 2004, the Company had a net noncurrent deferred tax
liability of $4.7 million. Deferred income tax liabilities are temporary
differences between financial statement and tax bases of assets and liabilities
and do not directly relate to the amount of income taxes to be paid in future
periods. Therefore these liabilities have not been included in the contractual
obligations and commitments table.
-F15-
ACCUMULATED OTHER COMPREHENSIVE LOSS
As of December 31, 2004, the Company's accumulated other comprehensive
loss was $0.2 million and consisted primarily of foreign currency translation
adjustments and unrealized loss on investments.
ACQUISITIONS
All acquisitions in 2004, 2003 and 2002 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 closing dates (see Note 2 to the Consolidated Financial Statements).
On February 1, 2005, the Company announced plans to expand its
outsourcing services with the signing of a definitive agreement to acquire
Cincinnati-based Intrieve, Incorporated ("Intrieve"). The Company expects to
consummate the acquisition in April 2005, subject to approval by Intrieve's
shareholders and certain regulatory agencies. Intrieve is a provider of
technology for financial institutions including service bureau operations that
deliver core processing for thrifts and community banks, comprehensive item
processing, and electronic banking and payments processing. In-house solutions
include software for financial accounting and software that allows financial
institutions to print their own laser checks and other MICR documents. Also
included in the transaction is a datacenter operation providing co-location,
hosting, managed data services and hot-site backup. The acquisition of Intrieve
will represent an expansion of the Company's existing outsourced product and
service offerings. Intrieve's core processing data-center, full service item
processing facility and electronic banking and payment processing service will
support Software & Services' strategy of offering clients integrated end-to-end
solutions.
2005 OUTLOOK
Net income for 2005 is expected to be higher than net income for 2004
with all three segments expected to show growth in sales and income before
income taxes in 2005.
Segment income for Printed Products is expected to improve for the year
as a result of a full year of benefits from cost reductions related to its
reorganization that was completed in the third quarter of 2004. In addition,
unit volume is expected to be higher in 2005 as a result of the implementation
of new business in late 2004.
Software & Services segment income is expected to improve as a result
of the full-year impact of three acquisitions in 2004 as well as the impact of
integrating them with existing products and services. Cost reduction initiatives
implemented during 2004 are also expected to impact segment income favorably.
The Scantron segment is expected to continue its growth of sales in
traditional products and services. Increased sales of existing technology
products and the introduction of new products are also expected to provide
growth in 2005.
The Company believes cash flow will remain strong in all business units
in 2005. The Company currently estimates that capital expenditures will be in
the range of $25 million to $28 million. The Company believes upfront contract
payments in 2005 will be made at a higher level than 2004, but less than 2003
with most of the payments occurring in the first quarter based on commitments in
place at the beginning of the year. The Company currently expects depreciation
and amortization will total approximately $80 million in 2005, an increase of
about $8 million from 2004, primarily due to the amortization of upfront
contract payments. The Company expects its effective tax rate will be
approximately 38% in 2005.
-F16-
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
successful implementation of major new accounts and the continuing upgrade of
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 may continue to be adversely affected
by continued consolidation of financial institutions, competitive check pricing
including 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 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 & Services business, including but not limited
to the retention of employee talent and customers. Revenues may continue to be
adversely affected by continued consolidation of financial institutions. Also,
variables exist in the development of new Software & 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 solutions and testing and assessment methods, which could
negatively impact forms, scanner sales, software and related service revenue.
The Company continues to develop products and services that it believes offer
state-of-the-art electronic data collection and 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 levels,
all of which could have an impact on the Company's business.
-F17-
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, except for assets held in a trust of $5.5
million, are held for purposes other than trading. The Company is exposed
primarily to market risks related to interest rates.
Interest Rate Risk
The Company is exposed to interest rate risk on its variable rate debt.
In order to manage its exposure to fluctuations in interest rates, the Company
from time to time has entered into interest rate swap agreements, which allow it
to raise funds at floating rates and effectively swap them into fixed rates. As
of December 31, 2004, there were no interest rate swap agreements in effect.
These derivative financial instruments are viewed as risk management tools and,
when used, are entered into for hedging purposes only. The Company does not use
derivative financial instruments for trading or speculative purposes. At
December 31, 2004, the Company had outstanding variable rate debt of $101.3
million. The Company believes that its interest rate risk at December 31, 2004
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, 2004
would be approximately $0.6 million.
ACCOUNTING PRONOUNCEMENTS
See Note 1 to the Consolidated Financial Statements regarding the
impact of recent accounting pronouncements on the Company's financial condition
and results of operations.
-F18-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31,
2004 2003
- -------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,214 $ 8,525
Accounts receivable from customers, less
allowance for doubtful accounts of $2,196
and $1,902 70,989 60,338
Inventories:
Raw materials 14,055 13,028
Work in process 956 920
Finished goods 1,973 1,569
Deferred income taxes 8,393 32,517
Income taxes receivable 14,608 37
Property held for sale 3,438 2,626
Prepaid expenses 11,134 11,096
Other 4,693 4,690
- -------------------------------------------------------------------------------
Total current assets 139,453 135,346
- -------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS:
Investments 5,651 208
Goodwill - net 233,987 217,749
Intangible assets - net 17,168 16,835
Upfront contract payments - net 53,650 52,933
Other 21,645 19,473
- -------------------------------------------------------------------------------
Total investments and other assets 332,101 307,198
- -------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 2,245 3,121
Buildings and improvements 36,327 45,654
Machinery and equipment 256,791 271,596
Furniture and fixtures 16,633 17,147
Leasehold improvements 11,995 12,498
Additions in progress 6,534 6,156
- -------------------------------------------------------------------------------
Total property, plant and equipment 330,525 356,172
Less accumulated depreciation and amortization 228,302 231,739
- -------------------------------------------------------------------------------
Property, plant and equipment - net 102,223 124,433
- -------------------------------------------------------------------------------
TOTAL $573,777 $566,977
===============================================================================
-F19-
CONSOLIDATED BALANCE SHEETS (continued)
December 31,
2004 2003
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 28,290 $ 26,030
Deferred revenues 61,648 57,745
Current maturities of long-term debt 5,000 5,099
Accrued liabilities:
Salaries, wages and employee benefits 33,475 30,376
Taxes 15,028 17,669
Customer incentives 9,422 5,854
Other 16,706 18,649
- -------------------------------------------------------------------------------
Total current liabilities 169,569 161,422
- -------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Long-term debt 96,300 122,059
Deferred income taxes 4,692 5,087
Other 28,625 22,966
- -------------------------------------------------------------------------------
Total long-term liabilities 129,617 150,112
- -------------------------------------------------------------------------------
Total liabilities 299,186 311,534
- -------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (see Note 14)
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 11,191 7,788
Retained earnings 486,009 448,688
Accumulated other comprehensive income (loss):
Foreign currency translation adjustments (153) (454)
Unrealized losses on investments - net (31) (8)
Fair value of cash flow hedging
instruments - net - (273)
Unamortized restricted stock awards (13,380) (5,408)
- -------------------------------------------------------------------------------
521,543 488,240
Less 10,629,800 and 10,413,501 shares in
treasury, at cost 246,952 232,797
- -------------------------------------------------------------------------------
Total shareholders' equity 274,591 255,443
- -------------------------------------------------------------------------------
TOTAL $573,777 $566,977
===============================================================================
See Notes to Consolidated Financial Statements.
-F20-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years ended December 31,
2004 2003 2002
- ----------------------------------------------------------------------------------
Sales:
Product sales $ 640,819 $ 640,872 $ 652,543
Service sales 157,668 145,796 115,264
- ------------------------------------------------------------------------------------
Total sales 798,487 786,668 767,807
- ------------------------------------------------------------------------------------
Cost of sales:
Cost of products sold 351,384 355,397 363,557
Cost of services sold 56,120 49,423 39,815
- ------------------------------------------------------------------------------------
Total cost of sales 407,504 404,820 403,372
- ------------------------------------------------------------------------------------
Gross Profit 390,983 381,848 364,435
Selling, general and administrative
expenses 289,016 290,327 265,244
Asset impairment charges 10,329 - -
Gain on disposal of assets - net (3,387) (1,169) (170)
Amortization of other intangible assets 3,773 3,292 2,594
Acquired in-process research and
development charge - - 3,000
- ------------------------------------------------------------------------------------
Income From Operations 91,252 89,398 93,767
- ----------------------------------------------------------------------------------
Other Income (Expense):
Interest expense (4,117) (5,711) (6,608)
Gain (loss) on sale of investments - net 132 2,977 (1,785)
Other - net 635 105 (119)
- ------------------------------------------------------------------------------------
Total (3,350) (2,629) (8,512)
- ------------------------------------------------------------------------------------
Income Before Income Taxes 87,902 86,769 85,255
Income taxes 32,787 30,803 32,823
- ------------------------------------------------------------------------------------
Net Income $ 55,115 $ 55,966 $ 52,432
====================================================================================
Earnings Per Common Share:
Basic $ 2.02 $ 2.02 $ 1.80
Diluted $ 1.96 $ 1.97 $ 1.73
====================================================================================
See Notes to Consolidated Financial Statements.
-F21-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31,
2004 2003 2002
- -----------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 55,115 $ 55,966 $ 52,432
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 36,004 39,534 36,853
Amortization of upfront contract payments 26,392 14,370 11,840
Other amortization 9,383 9,279 7,932
Asset impairment charges 10,329 - -
Gain on disposal of assets - net (3,387) (1,169) (170)
Stock-based compensation 5,633 2,351 9,895
Tax benefits from stock-based compensation 1,356 1,883 3,119
Acquired in-process research and
development charge - - 3,000
(Gain) loss on sale of investments - net (132) (2,977) 1,785
Deferred income taxes 25,585 (2,251) 10,578
Other - net 2,062 (657) (163)
Changes in assets and liabilities net of
effects of businesses acquired:
Accounts receivable (7,358) 229 10,629
Income taxes receivable (15,574) (37) -
Inventories and other current assets (31) (2,470) 7,335
Deferred revenues (3,804) 1,254 5,336
Accounts payable and accrued liabilities 5,907 3,446 (12,496)
Upfront contract payments (27,109) (44,022) (7,559)
- ------------------------------------------------------------------------------------
Net cash provided by operating activities 120,371 74,729 140,346
- ------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (28,943) (28,072) (32,090)
Proceeds from sale of property, plant and equipment 8,300 3,119 1,926
Proceeds from sale of investments 134 4,985 -
Payments for acquisition of businesses -
net of cash acquired (30,160) (11,303) (94,485)
Note receivable - 1,002 93
Other - net (374) (246) 23
- ------------------------------------------------------------------------------------
Net cash (used in) investing activities (51,043) (30,515) (124,533)
- ------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Credit facility borrowings 248,544 278,243 250,112
Credit facility payments (274,302) (295,186) (230,112)
Repayment of long-term debt - (88) (125)
Repurchases of stock (45,295) (39,107) (27,707)
Issuance of treasury stock 15,990 10,714 11,439
Dividends paid (12,506) (9,836) (8,777)
Debt issuance costs paid (1,695) (18) (18)
Other - net 625 371 (1,503)
- ------------------------------------------------------------------------------------
Net cash (used in) financing activities (68,639) (54,907) (6,691)
- ------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 689 (10,693) 9,122
Cash and cash equivalents at beginning of year 8,525 19,218 10,096
- ------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 9,214 $ 8,525 $ 19,218
====================================================================================
Supplemental cash flow information:
Interest paid $ 3,882 $ 5,607 $ 5,767
Income taxes paid 20,974 32,485 19,808
====================================================================================
See Notes to Consolidated Financial Statements.
-F22-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 2004, 2003 and 2002
------------------------------------------------------------------------------
(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, 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 $334 in tax benefits (3,182) (3,182)
Reclassification for investment
gain and write-down included
in net income, net of $8
in tax benefits 158 158
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)
Repurchase of 1,307,300 shares of
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
Net income 55,966 55,966
Other comprehensive income (loss):
Foreign currency
translation adjustments 376 376
Unrealized gain on investments,
net of $22 in tax benefits 980 980
Reclassification for investment
gains included in net income,
net of $155 in tax provisions (2,823) (2,823)
Changes in fair value of cash
flow hedging instruments,
net of $679 in tax provision 1,062 1,062
-------------
Comprehensive income 55,561
-------------
Cash dividends, $0.35 per share (9,836) (9,836)
Repurchase of 1,569,532 shares of
stock (39,107) (39,107)
Issuance of 700,095 shares of
treasury stock under stock
compensation plans (88) (6,512) 18,580 (1,266) 10,714
Other 2,631 (40) (117) 1,643 4,117
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 37,907 7,788 448,688 (735) (232,797) (5,408) 255,443
Net income 55,115 55,115
Other comprehensive income (loss):
Foreign currency
translation adjustments 301 301
Unrealized losses on investments,
net of $14 in tax benefits (23) (23)
Changes in fair value of cash
flow hedging instruments,
net of $175 in tax provision 273 273
-------------
Comprehensive income 55,666
-------------
Cash dividends, $0.45 per share (12,506) (12,506)
Repurchase of 1,399,300 shares of
stock (45,295) (45,295)
Issuance of 1,183,001 shares of
treasury stock under stock
compensation plans 1,100 (5,224) 32,837 (12,723) 15,990
Other 2,303 (64) (1,697) 4,751 5,293
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004 $37,907 $11,191 $486,009 $ (184) $(246,952) $(13,380) $274,591
====================================================================================================================
See Notes to Consolidated Financial Statements.
-F23-
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 intangible assets 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 impairment criteria are met based on the fair value of the asset.
Investments
The Company classifies its investments as either available-for-sale
securities or trading securities. Available-for-sale securities consist 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, 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. 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. In 2004 and 2003, the Company
sold its investments in U.S. corporate securities and recorded a gain before
income taxes of $0.1 million and $3.0 million, respectively.
-F24-
Trading securities consist of investment assets, primarily mutual fund
investments, of a nonqualified deferred compensation plan for eligible
employees. Participants in this plan are able to direct contributions to a
number of diversified assets and settle in cash. This plan is being accounted
for under EITF 97-14, "Accounting for Deferred Compensation Arrangements Where
Amounts Earned Are Held in a Rabbi Trust and Invested." As trading securities,
the changes in the fair value are recognized as a charge or credit in other
income. A related offsetting deferred compensation obligation is classified as a
noncurrent liability and adjusted, with a corresponding charge or credit to
compensation cost, to reflect changes in the fair value of the amount owed to
the participants. As of December 31, 2004, the Company recorded the investments
held by the rabbi trust totaling $5.5 million within noncurrent assets on the
Company's balance sheet with the corresponding liability being reflected as
long-term. Income (dividends and interest) from investments in the plan and
realized and unrealized gains and losses are recorded in Other Income with a
corresponding, offsetting amount recorded in Income from Operations,
representing an adjustment of compensation expense with no impact on net income.
For 2004, the investment income and corresponding compensation cost was $0.5
million.
The following is a summary of security investments at December 31, 2004
and 2003 (in thousands):
Available-for-sale Trading Securities
------------------ ------------------
Cost Market Cost Market
- --------------------------------------------------------------------
2004
Rabbi trust $ - $ - $4,814 $5,482
Other equity 220 169 - -
- --------------------------------------------------------------------
Total 220 169 4,814 5,482
====================================================================
2003
Other equity 222 208 - -
- --------------------------------------------------------------------
Total $ 222 $ 208 $ - $ -
====================================================================
Goodwill and Other Intangible Assets
Goodwill represents the excess of acquisition costs over the fair value
of net assets of businesses acquired. The Company reviews goodwill for
impairment annually in accordance with the provisions of Financial Accounting
Standards Board ("FASB") Statement No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). No impairment of goodwill was identified during the years
ended December 31, 2004, 2003 and 2002.
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 fifteen years. Amortization periods of
other intangible assets are periodically reviewed to determine whether events or
circumstances warrant revision to estimated useful lives. Carrying values of
other intangible assets are periodically reviewed to assess recoverability based
on expectations of undiscounted cash flows and operating income for each related
business unit.
Upfront Contract Payments
Certain contracts with the Company's customers involve upfront payments
to the customer. These payments are capitalized and amortized as a reduction of
sales over the life of the related contract and are generally refundable from
the customer if the contract is canceled prior to the contract termination date.
At December 31, 2004, $45.8 million of these unamortized payments were
refundable and $7.9 million were nonrefundable.
-F25-
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 $21.9 million, $22.6
million and $14.5 million in 2004, 2003 and 2002, respectively.
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 and prior to its availability for sale 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 their estimated net
realizable value.
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.
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. Accelerated methods are used for income tax purposes for
all property where allowed. 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 seven
years.
Depreciation expense was $36.0 million, $39.5 million and $36.9 million
in 2004, 2003 and 2002, respectively.
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. As of
December 31, 2004 and 2003, the combined liabilities for workers compensation
and group medical liability were $9.1 million and $9.6 million, respectively.
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.
-F26-
The Company has used 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 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. If an existing
derivative were to become not highly effective as a hedge, the Company would
discontinue hedge accounting prospectively.
During 2004, 2003 and 2002, the Company recorded the changes in values
related to cash flow hedges in other comprehensive income and such changes were
not material. In 2004, 2003 and 2002, the Company did not have any hedging
instruments that were designated as fair value hedges.
Translation of Foreign Currencies
Financial statement accounts that are maintained in foreign currencies
are translated into U.S. dollars. Assets and liabilities denominated in foreign
currencies are translated at end-of-period exchange rates. Results of 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 2004, 2003 and 2002. The Company considers undistributed
earnings of foreign subsidiaries to be permanently invested. As a result, no
income taxes have been provided on these undistributed earnings or on the
foreign currency translation adjustments recorded as a part of other
comprehensive income.
Revenue Recognition
The Company recognizes product and services revenue when persuasive
evidence of a noncancelable 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, training and other service elements, as
determined based on vendor-specific objective evidence, is deferred and the
remaining (residual) arrangement is recognized as 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 limited term license agreements is
recognized ratably over the term of the agreement.
For software that is installed and integrated by the Company or
customer, revenue is recognized upon shipment assuming functionality has already
been proven and there are no significant customizations that would cause a
substantial acceptance risk. For software that is installed, integrated and
customized 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.
-F27-
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.
Service revenues are comprised of revenues derived from software
maintenance agreements, field maintenance services, core processing service
bureau deliverables, analytical services, consulting services and training
services.
Accrued Customer Incentives
The Printed Products segment has contractual agreements with many of
its customers that provide incentives for rebates or discounts on certain
products. Such rebates and discounts are recorded as reductions to revenue and
as accrued liabilities. Some agreements may provide for the purchase of certain
products not covered by that agreement to be purchased at a discount by the
customer and the cost of such products is recorded as cost of goods sold over
the term of the agreement and as an accrued liability.
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.
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. The Company uses the straight-line method to amortize
unearned compensation expense over the maximum vesting period for restricted
stock awards that vest at a single point in time or vest over time.
-F28-
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):
2004 2003 2002
- ---------------------------------------------------------------------------
Net income:
As reported $ 55,115 $ 55,966 $ 52,432
Add: stock-based compensation
expense included in reported
net income, net of tax 3,436 1,434 6,036
Deduct: stock-based compensation
expense determined under the
fair value based method for
all awards, net of tax (7,405) (5,809) (11,117)
- ---------------------------------------------------------------------------
Pro forma net income $ 51,146 $ 51,591 $ 47,351
===========================================================================
Earnings per common share:
As reported
Basic $ 2.02 $ 2.02 $ 1.80
Diluted $ 1.96 $ 1.97 $ 1.73
Pro forma
Basic $ 1.88 $ 1.86 $ 1.63
Diluted $ 1.83 $ 1.82 $ 1.57
See Note 10 for more information regarding the Company's stock
compensation plans and the assumptions used to prepare the pro forma information
presented above.
-F29-
Earnings Per Common Share
Earnings per common share for the years ended December 31, 2004, 2003
and 2002 have been computed under the provisions of FASB Statement No. 128,
"Earnings Per Share." The computation of basic and diluted earnings per share
was as follows (in thousands, except per share amounts):
2004 2003 2002
- ----------------------------------------------------------------------------
Computation of basic earnings per common share:
- ----------------------------------------------------------------------------
Numerator
Net income $ 55,115 $ 55,966 $ 52,432
- ----------------------------------------------------------------------------
Denominator
Weighted average shares outstanding 27,129 27,624 29,026
Weighted average deferred shares
outstanding under non-employee
directors compensation plan 140 116 95
- ----------------------------------------------------------------------------
Weighted average shares outstanding - basic 27,269 27,740 29,121
- ----------------------------------------------------------------------------
Earnings per share - basic $ 2.02 $ 2.02 $ 1.80
============================================================================
Computation of diluted earnings per common share:
- ----------------------------------------------------------------------------
Numerator
Net income $ 55,115 $ 55,966 $ 52,432
- ----------------------------------------------------------------------------
Denominator
Weighted average shares outstanding - basic 27,269 27,740 29,121
Dilutive effect of stock options and
restricted stock 815 671 1,123
- ----------------------------------------------------------------------------
Weighted average shares outstanding - diluted 28,084 28,411 30,244
- ----------------------------------------------------------------------------
Earnings per share - diluted $ 1.96 $ 1.97 $ 1.73
============================================================================
The potentially dilutive common shares relate to options and restricted
stock granted under stock compensation plans. Potentially dilutive common shares
that were not included in the calculation of diluted earnings per share for
2004, 2003 and 2002 because they were anti-dilutive were 10,457, 77,530, and
57,000, respectively.
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.
New Accounting Standards
In May 2004, the FASB issued FASB Staff Position ("FSP") regarding SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." FSP 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003" discusses
the effect of the Medicare Prescription Drug, Improvement and Modernization Act
("the Medicare Act") enacted on December 8, 2003. FSP 106-2 considers the effect
of the two new features introduced in the Medicare Act in determining
accumulated postretirement benefit obligation and net periodic postretirement
benefit cost, which may serve to reduce a company's postretirement benefit
costs.
-F30-
The accumulated postretirement benefit obligations and net periodic
postretirement benefit cost included in the accompanying consolidated financial
statements and notes to consolidated financial statements do not reflect the
effects of the Medicare Act on the postretirement health care benefit plan
because the Company has not completed its determination whether plan benefits
are at least actuarially equivalent to portions of the Medicare Act. Management
does not believe that the effects of the Medicare Act will materially affect the
Company's postretirement obligations or its future postretirement benefit
expense.
In November 2004, the FASB issued FASB Statement No. 151, "Inventory
Costs - An Amendment of ARB No. 43, Chapter 4" ("SFAS 151") to clarify that
abnormal amounts of idle facility expense, freight, handling costs and wasted
materials should be recognized as current-period charges and also requires that
allocation of fixed production overheads to costs of conversion be based on the
normal capacity of the production facilities. The Company will adopt the
provisions of SFAS 151 on January 1, 2006 and does not believe that the adoption
will have a material effect on its financial position and results of operations.
In December 2004, the FASB issued FASB Statement No. 153, "Exchanges of
Nonmonetary Assets, an amendment of APB No. 29, Accounting for Nonmonetary
Transactions" ("SFAS 153"). SFAS 153 amends APB Opinion No. 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS 153 is effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. The Company does not expect the
adoption of this standard will have a material effect on its financial position
and results of operations.
In December 2004, the FASB released its revised standard, FASB
Statement No. 123R, "Share-Based Payment" ("SFAS 123R"). SFAS 123R supersedes
APB 25, "Accounting for Stock Issued to Employees" and its related
implementation guidance. SFAS 123R requires that a public entity measure the
cost of equity based service awards based on the grant-date fair value of the
award. Such cost will be recognized over the period during which an employee is
required to provide service in exchange for the award. No compensation cost is
recognized for equity instruments for which employees do not render the
requisite service. A public entity will initially measure the cost of liability
based service awards based on its current fair value; the fair value of that
award will be remeasured subsequently at each reporting date through the
settlement date. Changes in fair value during the requisite service period will
be recognized as compensation cost over that period. Adoption of SFAS 123R is
required for the first interim or annual reporting period beginning after June
15, 2005. The Company is evaluating SFAS 123R to determine whether to adopt the
statement using the modified prospective application or the modified
retrospective application and believes that the pro forma information provided
under the caption "Stock-Based Compensation" within this Note 1 approximates the
impact the adoption will have on its results of operations for the periods
presented. The effects in future years will depend on the level of awards
granted.
In December 2004, the FASB issued FSP 109-1, "Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004". FSP 109-1 considers the effect of the new tax deduction for qualified
production activities and requires it to be accounted for as a special deduction
and not as a tax rate reduction under SFAS 109. Accounting for this as a special
deduction requires the Company to consider it in measuring deferred income taxes
and assessing whether a valuation allowance is necessary. The Company adopted
the provisions of FSP 109-1 in December 2004. Adoption of FSP 109-1 did not have
a material effect on the Company's financial position and results of operations.
-F31-
In December 2004, the FASB issued FSP 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004". The American Jobs Creation Act of 2004 ("the Act")
provides for a special one-time tax deduction of 85 percent of certain foreign
earnings that are repatriated (as defined in the Act) in either an enterprise's
last tax year that began before the enactment date, or the first tax year that
begins during the one-year period beginning on the date of enactment. Due to
insignificant earnings from foreign subsidiaries that are not regularly
repatriated as well as the Company's foreign tax credit position, the Company
believes the adoption of FSP 109-2 will not have a material effect on its
financial position and results of operations.
Reclassifications
During 2004, the Company reclassified certain items in its consolidated
income statements. The reclassifications affected the categories of Selling,
General and Administrative expenses, Asset Impairment Charges and Gain on
Disposal of Assets - net. The change primarily reflects the reclassification of
Asset Impairment Charges and Gain on Disposal of Assets - net from Selling,
General and Administrative expenses to separate line items. Financial data for
all periods presented have been reclassified for comparability. The
reclassifications and transfers had no impact on net income or shareholders'
equity as previously reported. Certain other reclassifications have been made in
the 2003 and 2002 financial statements and notes to financial statements to
conform to the 2004 classifications.
2. Acquisitions
All acquisitions in 2004, 2003 and 2002 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.
2004 Acquisitions
On November 12, 2004, Harland Financial Solutions, Inc. ("HFS"), a
wholly owned subsidiary of the Company, acquired London Bridge Phoenix Software
Inc. ("Phoenix System"). Phoenix System, an integrated core banking solution
that operates in both the Windows(R) NT and Unix environments, features open
relational database choices and leverages the latest Internet and network
technology to optimize delivery channel integration. Phoenix System is delivered
in both in-house and service bureau configurations. Also included in the
acquisition were the Phoenix Internet Banking System, also known as IBANK, and
the TradeWind international trade finance management system. The acquisition
provides HFS with a proven service bureau delivery option for banks and thrifts,
which is a significant expansion to the breadth of current offerings.
On July 7, 2004, HFS acquired certain assets and operations including
exclusive distribution and licensing rights related to the CheckQuest(R) item
processing and CaptureQuest(R) electronic document management solutions from
Mitek Systems, Inc. Mitek Systems is a provider of recognition software-based
fraud protection and document processing solutions to banks and other
businesses, and licenses its recognition engine toolkits to major software and
hardware providers in the imaging and document processing industry. CheckQuest
provides financial institutions with a check imaging and item processing
solution that enables them to take advantage of the efficiencies offered by the
Federal Check Clearing for the 21st Century Act. CaptureQuest is an electronic
document management system that allows financial institutions to file,
distribute, archive, retrieve and automatically process documents and forms of
all types and quantities. As part of the agreement, HFS has also licensed from
Mitek Systems the QuickStrokes(R) family of recognition toolkits and the
QuickFX(R) Pro form identification toolkit for use with CheckQuest and a variety
of other applications.
-F32-
On April 30, 2004, HFS acquired certain assets and operations related
to the electronic mortgage document business of GreatlandTM Corporation.
GreatlandTM Corporation is a provider of forms technology, compliance expertise
and software compatible products used to meet the needs of businesses to convey
regulatory information. The Greatland mortgage document set is employed by many
of the industry's leading mortgage lenders and mortgage loan origination system
technology providers. Greatland's electronic mortgage document products allow
HFS to build on its leadership position in compliance and mortgage solutions.
The combined purchase price of net assets acquired through acquisitions
in 2004 totaled approximately $30.2 million, net of cash acquired. The fair
value of assets and liabilities at the acquisition dates consisted of goodwill
of $21.5 million, of which $5.4 million is expected to be deductible for tax
purposes, other intangible assets of $10.2 million (estimated weighted average
useful life of eight years), which included $6.3 million in developed technology
(estimated weighted average useful life of nine years) and $3.9 million in
customer lists (estimated weighted average useful life of 13 years), other
assets of $8.9 million and assumed liabilities of $10.4 million. The allocations
of purchase price are subject to refinement as the Company finalizes the
valuation of certain assets and liabilities. The pro forma effects of the 2004
acquisitions were not material to the Company's results of operations.
2003 Acquisition
On June 3, 2003, HFS extended its core systems offering with the
acquisition of 100% of the equity of Premier Systems, Inc. ("PSI") for
approximately $11.3 million, net of cash acquired. The fair value of assets and
liabilities at the date of acquisition consisted of non-deductible goodwill of
$9.7 million, customer list of $6.0 million (estimated useful life of ten
years), other assets of $4.3 million and assumed liabilities of $8.7 million.
The pro forma effects on the results of operations for the acquisition were not
material. PSI was a provider of core processing service bureau deliverables that
were based on HFS' widely used ULTRADATA(R) System. With the addition of PSI,
HFS now provides core processing applications and services to more than 1,000
financial institutions.
2002 Acquisitions
On October 15, 2002, HFS 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 included a contingent purchase payment not to exceed
$2.0 million to be made in the event certain growth targets were achieved as
defined in the agreement. As of December 31, 2003, the end of the measurement
period, those growth targets were not achieved and as a result, no contingent
payments were 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.
-F33-
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 included contingent payments to be made in the
event certain growth targets are achieved. In June 2004, the incentive agreement
was replaced by a grant of 28,000 shares of restricted stock that vest ratably
in January 2005, July 2005 and January 2006. The market value of the grant is
being amortized ratably to expense over the vesting period (see Note 10).
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 net 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 along with adjustments made (in
thousands):
Weighted Average
Useful Life
Value in Years
- ---------------------------------------------------------------
Current assets $ 8,724
Property, plant and equipment 1,653
Goodwill 78,513
Intangible assets:
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 intangible assets 28,820
Other assets 7,614
- ---------------------------------------------------------------
Total assets acquired 125,324
- ---------------------------------------------------------------
Current liabilities 24,872
Other liabilities 5,967
- ---------------------------------------------------------------
Total liabilities assumed 30,839
- ---------------------------------------------------------------
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 allocations of the purchase price to the assets and liabilities
acquired in 2002 resulted in $78.5 million allocated to goodwill of which $26.4
million is expected to be deductible for tax purposes. Goodwill of $53.7 million
and $24.8 million was assigned to the Company's Software & Services and Scantron
business segments, respectively.
-F34-
The following unaudited pro forma summary presents information as if
the acquisitions of the businesses acquired in 2002 occurred at the beginning of
that year (in thousands, except per share amounts):
(Unaudited) 2002
- -------------------------------------------------------------------
Sales $ 798,663
Net income $ 48,805
Earnings per common share:
Basic $ 1.68
Diluted $ 1.61
The unaudited pro forma summary 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.
3. Goodwill and Intangible Assets
Goodwill and intangible assets with indefinite lives are not amortized
but are tested at least annually for impairment. Separable intangible assets
with definitive lives are amortized over their useful lives.
The changes in the carrying amounts of goodwill by business segment for
the years ended December 31, 2004 and 2003 are as follows (in thousands):
Printed Software & Consoli-
Products Services Scantron dated
- -------------------------------------------------------------------------
Balances as of
December 31, 2002 $ 24,709 $142,099 $ 43,654 $210,462
Goodwill acquired
during 2003 - 9,537 - 9,537
Purchase price
allocation
adjustments - net - (2,162) (88) (2,250)
- -------------------------------------------------------------------------
Balances as of
December 31, 2003 24,709 149,474 43,566 217,749
Goodwill acquired
during 2004 - 21,452 - 21,452
Purchase price
allocation
adjustments - net - (5,202) (12) (5,214)
- -------------------------------------------------------------------------
Balances as of
December 31, 2004 $ 24,709 $165,724 $ 43,554 $233,987
=========================================================================
-F35-
Intangible assets with definitive lives at December 31, 2004 and 2003
were comprised of the following (in thousands):
December 31, 2004 December 31, 2003
------------------------------ -----------------------------
Gross Net Gross Net
Carrying Accum. Carrying Carrying Accum. Carrying
Amount Amort. Amount Amount Amort. Amount
- -------------------------------------------------------------------------
Developed
technology $31,547 $(16,828) $14,719 $24,787 $(11,851) $12,936
Customer
lists 30,005 (15,758) 14,247 25,900 (12,366) 13,534
Trademarks 3,800 (879) 2,921 3,800 (499) 3,301
Content 2,300 (557) 1,743 2,300 (327) 1,973
- ------------------------------------------------------------------------
Total $67,652 $(34,022) $33,630 $56,787 $(25,043) $31,744
=========================================================================
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 $8.9
million, $8.8 million and $7.5 million for the years ended December 31, 2004,
2003 and 2002, respectively. The estimated intangible amortization expense for
each of the next five years beginning January 1, 2005 is as follows (in
thousands):
Year Amount
- --------------------------------------------------------------------
2005 $ 7,454
2006 6,862
2007 5,916
2008 4,269
2009 2,511
Thereafter 6,618
- --------------------------------------------------------------------
Total $33,630
====================================================================
4. Asset Impairment Charges
In September 2004, the Company concluded that upgrading certain
existing customer care systems in its Printed Products segment would be more
economical than continued development of portions of certain new customer care
systems for the segment. The decision to terminate development efforts required
a non-cash pre-tax impairment charge of $7.9 million which was based on
previously capitalized development costs, less accumulated depreciation thereon,
for the portions of the system where development was discontinued. The Company
will continue with development and implementation of the remaining portions of
the customer care infrastructure project for the Printed Products segment.
During the second quarter of 2004, a Printed Products facility was
closed pursuant to the plant consolidation plan (see Note 5). A $2.4 million
charge, which is included in asset impairment charges on the statements of
income, was recorded to adjust the basis of the facility to its estimated fair
value based on a recent offer and the fair value was reclassified as held for
sale (see Note 6).
-F36-
5. Reorganization
In September 2003, the Company announced a reorganization of its
Printed Products operations including the consolidation of its domestic
manufacturing operations from 14 plants to 9 plants, which was completed during
the third quarter of 2004. Two of the facilities that were closed were leased.
One of these facilities is under lease through late 2005 and the other is under
lease through mid-2010. During the third quarter of 2004, the Company sublet the
latter facility to a third party for the remaining term of the lease.
In addition to the plant consolidation, Printed Products implemented
other staffing reductions beginning in the fourth quarter of 2003 which were
completed during the third quarter of 2004. These actions were primarily due to
excess capacity in production facilities resulting from efficiencies realized
from digital printing technology and lower volumes attributable to the losses of
certain large customers, including a direct check marketer, and general market
volume decline. The Company undertook these actions to bring its production and
support structures in line with its business levels.
The following table presents the cumulative net costs of these actions
incurred through December 31, 2004 (in thousands):
Staffing
Plant Reduction
Consolidation Actions
- -------------------------------------------------------------------------
Employee severance $ 2,845 $ 4,545
Revision of depreciable lives and
salvage values 3,459 -
Asset impairment charge and
disposal (gains) and losses (1,168) -
Relocation and other costs 2,117 -
Contract termination costs related
to leaseholds 876 -
- -------------------------------------------------------------------------
Total $ 8,129 $ 4,545
=========================================================================
The following table presents net expenses by income statement caption
for plant consolidation and other staffing reduction actions for the years ended
December 31, 2004 and 2003 (in thousands):
2004 2003
- -------------------------------------------------------------------------
Plant consolidation expenses:
Cost of products sold $5,347 $3,950
Asset impairment charges 2,444 -
Gain on disposal of assets - net (3,612) -
- -------------------------------------------------------------------------
Total $4,179 $3,950
=========================================================================
Other staffing reduction actions:
Cost of products sold $ - $ 30
Selling, general and administrative expenses 1,644 2,871
=========================================================================
-F37-
The following table reconciles the beginning and ending liability
balances for 2004 and 2003 related to these actions and are included in the
other accrued liabilities caption on the balance sheet (in thousands):
Charged to Utilized
Beginning Costs and -------------------- Ending
Balance Expenses Cash Non-Cash Balance
- ------------------------------------------------------------------------------------
2003
Plant consolidation:
Employee severance $ - $ 1,730 $ (71) $ - $ 1,659
Revision of
depreciable lives
and salvage values - 2,138 - (2,138) -
Relocation and other
costs - 82 (82) - -
Staffing reduction
actions:
Employee severance - 2,901 (1,776) - 1,125
- ------------------------------------------------------------------------------------
Total - 6,851 (1,929) (2,138) 2,784
====================================================================================
2004
Plant consolidation:
Employee severance 1,659 1,115 (2,563) - 211
Revision of
depreciable lives
and salvage values - 1,321 - (1,321) -
Asset impairment charge
and disposal (gains)
and losses - (1,168) 5,301 (4,133) -
Relocation and other
costs - 2,035 (2,035) - -
Contract termination
costs related to
leaseholds - 876 (362) 167 681
Staffing reduction
actions:
Employee severance 1,125 1,644 (2,708) - 61
- ------------------------------------------------------------------------------------
Total $ 2,784 $ 5,823 $ (2,367) $ (5,287) $ 953
====================================================================================
6. Property Held for Sale
Property held for sale at December 31, 2004 and 2003 consists of the
following (in thousands):
2004 2003
- ---------------------------------------------------------------------
Land $ 736 $ 190
Buildings and improvements 2,645 2,362
Machinery and equipment 6 50
Furniture and fixtures 51 24
- ---------------------------------------------------------------------
Property held for sale $3,438 $2,626
=====================================================================
At December 31, 2004, property held for sale was $3.4 million, which
consisted of the Company's Printed Products facility in Denver, Colorado. At
December 31, 2003, property held for sale consisted of the Company's Printed
Products facility in St. Louis, Missouri. During the fourth quarter of 2004, the
Company sold the St. Louis facility and realized a pre-tax gain of $0.1 million
from the sale.
-F38-
During the second quarter of 2004, the Denver facility was closed
pursuant to the plant consolidation plan. A $2.4 million charge, which is
included in asset impairment charges on the statements of income, was recorded
to adjust the basis of the facility to its estimated fair value and was
reclassified as held for sale. Management is actively marketing the sale of the
Denver facility and believes it will be sold within the next 12 months.
During the first quarter of 2004, the Company sold its Printed Products
facility in San Diego, California, which became available pursuant to the plant
consolidation plan, and realized a pre-tax gain of $3.7 million on the sale of
the facility.
In 2003, the Company sold its Printed Products facility in Portland,
Oregon and realized a pre-tax gain of $0.8 million.
7. Long-Term Debt
In February 2004, the Company amended its credit facility (the "Credit
Facility") with a syndicate of banks increasing the amount from $325.0 million
to $425.0 million. The Credit Facility is comprised of a $100.0 million term
loan and a $325.0 million revolving loan, both of which mature in 2009. The term
loan requires annual repayments of $5.0 million. As a result, the Credit
Facility will decrease by $5.0 million per annum to $400.0 million at the 2009
maturity date. The Credit Facility 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, based upon one
of the following indices (plus a margin as defined): the Federal Funds Rate, the
SunTrust Bank Base Rate or LIBOR (as defined therein). The Credit Facility has
certain financial covenants including, among other items, leverage, fixed charge
coverage 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.
Long-term debt consisted of the following as of December 31, 2004 and
2003 (in thousands):
2004 2003
- -------------------------------------------------------------------------
Credit Facility $ 101,300 $ 127,057
Other - 101
- -------------------------------------------------------------------------
Total 101,300 127,158
Less current portion 5,000 5,099
- -------------------------------------------------------------------------
Long-term debt $ 96,300 $ 122,059
=========================================================================
At December 31, 2004, the Credit Facility consisted of $101.3 million
in outstanding cash borrowings and $5.5 million in outstanding letters of
credit. At December 31, 2004, the Company had $313.2 million of availability.
The average interest rate in effect on outstanding cash borrowings at December
31, 2004 and 2003, including the effect of the Company's interest rate hedging
program (see Note 13), was 3.30% and 2.94%, respectively.
Other long-term debt relates to other miscellaneous obligations. At
December 31, 2004, the Company believes it was in compliance with the covenants
associated with all debt instruments. Annual maturities of long-term debt during
the next five years are $5.0 million annually in 2005 through 2008 and $81.3
million in 2009.
-F39-
8. Income Taxes
The income tax provision (benefit) for the years ended December 31,
2004, 2003 and 2002 consisted of the following (in thousands):
2004 2003 2002
- -----------------------------------------------------------------------
Current:
Federal $ 5,187 $ 28,366 $ 18,969
State 1,820 4,597 2,439
Foreign 195 91 837
- -------------------------------------------------------------------------
Total 7,202 33,054 22,245
- -------------------------------------------------------------------------
Deferred:
Federal 23,407 (1,994) 9,001
State 2,178 (257) 1,577
- -------------------------------------------------------------------------
Total 25,585 (2,251) 10,578
- -------------------------------------------------------------------------
Total income taxes $ 32,787 $ 30,803 $ 32,823
=========================================================================
The Company utilized net operating losses, capital losses and tax
credits of $29.1 million, $2.6 million and $3.3 million in the calculation of
current tax expense for the years ended December 31, 2004, 2003 and 2002,
respectively. The substantial increase in net operating loss utilization in 2004
is primarily a result of an agreement reached with the Internal Revenue Service.
The agreement allowed the cumulative net operating losses of a subsidiary not
consolidated for tax purposes to be deducted in the consolidated Company federal
tax returns. For the years ended December 31, 2004, 2003 and 2002, the income
tax provision included expense of $1.2 million, $0.2 million and $0.1 million,
respectively, for tax benefits which were recorded as a reduction of goodwill
and included expense of $1.4 million, $1.9 million and $3.1 million,
respectively, for tax benefits from stock-based compensation that were included
in shareholders' equity.
The tax effects of significant items comprising the Company's net
deferred tax assets as of December 31, 2004 and 2003 were as follows (in
thousands):
2004 2003
- --------------------------------------------------------------------------
Current deferred tax asset:
Accrued vacation $ 2,169 $ 3,067
Deferred revenues 2,165 1,732
Accrued liabilities 2,640 3,757
Benefit of net operating loss carryforwards 1,668 20,162
Allowance for doubtful accounts 849 733
Other (1,098) 3,066
- -------------------------------------------------------------------------
Total 8,393 32,517
- -------------------------------------------------------------------------
Noncurrent deferred tax asset (liability):
Difference between book and tax basis
of long-term assets (23,711) (28,175)
Deferred revenues 3,965 2,627
Deferred compensation 3,182 2,516
Postretirement benefits obligation 5,481 5,419
Capital loss carryforwards 279 25,753
Benefit of net operating loss carryforwards 8,815 12,514
Other 1,588 2,476
- -------------------------------------------------------------------------
Total (401) 23,130
Valuation allowance (4,291) (28,217)
- -------------------------------------------------------------------------
Noncurrent deferred tax liability (4,692) (5,087)
- -------------------------------------------------------------------------
Net deferred tax asset $ 3,701 $ 27,430
=========================================================================
-F40-
At December 31, 2004 and 2003, the total of all deferred tax assets was
$69.2 million and $135.2 million, respectively, and the total of all deferred
tax liabilities was $61.3 million and $79.5 million, respectively. The $23.9
million reduction in valuation allowance was primarily attributable to the
utilization of capital loss carryforwards due to an agreement reached with the
Internal Revenue Service regarding the elimination of the majority of a capital
loss generated in prior years.
At December 31, 2004, undistributed earnings of foreign subsidiaries
totaled $7.0 million. No provision has been made for U.S. federal and state
income taxes or foreign taxes that may result from future remittances of such
undistributed earnings because it is expected that such earnings will be
reinvested indefinitely. Upon distribution of those earnings in the form of
dividends or otherwise, the Company would be subject to both U.S. income taxes
(subject to an adjustment for foreign tax credits) and withholding taxes payable
to the various foreign countries. Determination of the amount of unrecognized
deferred U.S. income tax liability is not practicable because of the
complexities associated with its hypothetical calculation; however, unrecognized
foreign tax credits would be available to reduce a portion of the U.S.
liability.
At December 31, 2004, the Company had net operating and capital loss
carryforwards and other tax credits available for federal and state income tax
purposes, which expire as indicated below (in thousands):
Net Operating Loss
Year of Carryforwards Capital Loss
Expiration Federal State Carryforwards Other
Gross After Tax Gross After Tax
- -------------------------------------------------------------------------
2005 - 2007 $ - $ - $ 3,612 $ 47
2008 - 2019 - 2,416 - 157
2020 - 2023 14,252 - - 1,039
No expiration - - - 571
- -------------------------------------------------------------------------
Total $ 14,252 $ 2,416 $ 3,612 $ 1,814
=========================================================================
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 carryforwards is subject to an annual limitation under the Internal
Revenue Code and Regulations.
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 utilization of these carryforwards.
At December 31, 2004, there was a $1.6 million valuation allowance for
federal credits and state net operating losses, which will be recorded as a
reduction to goodwill if utilized.
-F41-
The following reconciles the income tax provision at the U.S. federal
income tax statutory rate of 35% to that in the financial statements for the
years ended December 31, 2004, 2003 and 2002 (in thousands):
2004 2003 2002
- -------------------------------------------------------------------------
Statutory rate $ 30,766 $ 30,369 $ 29,839
State and local income taxes, net
of federal income tax benefit 3,200 2,804 2,396
Change in valuation allowance (45) (2,600) 65
In-process research and development
charge - - 1,050
Benefits from tax credits (1,228) (1,117) (593)
Other - net 94 1,347 66
- --------------------------------------------------------------------------
Income tax provision $ 32,787 $ 30,803 $ 32,823
==========================================================================
The reduction in the valuation allowance in 2003 and 2004 was a result
of the utilization of capital loss carryforwards for which a valuation allowance
had been recorded in 2001.
9. Shareholders' Equity
In January 2003, the Board authorized the purchase of 3,000,000 shares.
Shares purchased may be held in treasury, used for acquisitions, used to fund
the Company's stock benefit and compensation plans or for other corporate
purposes. In 2004, the Company purchased a total of 1,399,300 shares at a cost
of $45.3 million or an average cost of $32.37 per share. At December 31, 2004, a
total of 1,821,278 shares had been purchased at an average cost of $31.21 per
share and 1,178,722 shares were available for repurchase under the January 2003
authorized program.
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 $0.001 per
right. The rights expire on July 5, 2009.
10. 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 2004, 2003 and 2002, employees exercised
options to purchase 140,574, 154,953, and 111,883 shares, respectively. Options
granted under the ESPP were at prices ranging from $23.38 to $26.90 in 2004,
$18.99 to $22.67 in 2003 and $18.30 to $24.51 in 2002. At December 31, 2004,
there were 343,908 shares of common stock reserved for issuance 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
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.
-F42-
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, 2004, there were 3,808,230 shares of common stock
reserved for issuance under these stock option plans.
Restricted stock grants prior to 2004 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. The certificates covering the
restricted stock are not issued until the restrictions lapse, but the shares
have all the rights of other shares of common stock, including the right to
receive cash dividends, but are not transferable. 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. Commencing in April 2004,
restricted stock grants do not contain the accelerated performance-related
vesting described above and generally vest ratably over five years or, in the
case of certain officers, vest on the third, fourth and fifth anniversary dates
at the rate of one third on each such date.
On December 31, 2004, the conditions for early vesting were met on
136,500 shares after the Company's common stock outperformed the S&P 500 in 2004
and 2002. On December 31, 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 expired on 12,500 shares in December 2002,
12,500 shares in December 2003 and 25,000 shares in December 2004. 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, on 12,500 shares in
October 2002 and on the remaining 12,500 shares in October 2003.
-F43-
A summary of option transactions during the three years ended December
31, 2004, follows:
Weighted
Average
Exercise
Shares Price
- -------------------------------------------------------------------------
Outstanding - December 31, 2001 3,436,599 $ 16.36
Options granted 1,656,675 24.84
Options forfeited (438,300) 18.25
Options exercised (566,749) 16.11
- -------------------------------------------------------------------------
Outstanding - December 31, 2002 4,088,225 19.63
Options granted 712,675 21.73
Options forfeited (460,525) 20.07
Options exercised (484,450) 15.38
- -------------------------------------------------------------------------
Outstanding - December 31, 2003 3,855,925 20.50
Options granted 21,700 28.55
Options forfeited (197,595) 20.92
Options exercised (694,790) 17.96
- -------------------------------------------------------------------------
Outstanding - December 31, 2004 2,985,240 $ 21.12
=========================================================================
The following table summarizes information pertaining to options
outstanding and exercisable as of December 31, 2004:
Options Outstanding
- -------------------------------------------------------------------------
Weighted
Average Weighted
Remaining Average
Range of Contractual Exercise
Exercise Prices Options Life(Years) Price
- -------------------------------------------------------------------------
$12.75 to $13.94 531,200 4.82 $ 13.35
$14.31 to $15.44 287,700 5.15 15.19
$16.38 to $20.00 288,290 3.99 19.82
$20.21 to $24.03 1,197,110 7.42 21.75
$24.24 to $31.88 680,940 7.49 29.14
- -------------------------------------------------------------------------
Total 2,985,240 6.42 $ 21.12
=========================================================================
Options Exercisable
- -------------------------------------------------------------------------
Weighted
Average
Range of Exercise
Exercise Prices Options Price
- -------------------------------------------------------------------------
$12.75 to $13.94 439,550 $ 13.28
$14.31 to $15.44 173,800 15.22
$16.38 to $20.00 282,190 19.89
$20.21 to $24.03 321,290 22.11
$24.24 to $31.88 488,340 30.28
- -------------------------------------------------------------------------
Total 1,705,170 $ 21.10
=========================================================================
-F44-
A summary of restricted stock transactions during the three years ended
December 31, 2004, follows:
Weighted
Average
Shares Fair Value
- -------------------------------------------------------------------------
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
Restricted stock issued 124,200 21.77
Restrictions lifted (25,000) 21.84
Restricted stock forfeited (63,400) 22.68
- -------------------------------------------------------------------------
Outstanding - December 31, 2003 333,700 23.04
Restricted stock issued 448,582 31.60
Restrictions lifted (149,975) 24.31
Restricted stock forfeited (55,545) 26.17
- -------------------------------------------------------------------------
Outstanding - December 31, 2004 576,762 $ 29.07
=========================================================================
(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 income 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 400,000 shares. At December 31, 2004 and 2003,
there were 374,443, and 176,757 shares, respectively, reserved for issuance of
which 159,237 and 129,845 shares, respectively, were allocated but unissued. The
remaining 215,206 and 46,912 shares, respectively, were reserved and unallocated
under the directors' compensation plan.
For the years ended December 31, 2004, 2003 and 2002, 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 $5.6 million, $2.4 million and $9.9 million, 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, 2004, 2003 and 2002:
2004 2003 2002
- --------------------------------------------------------------------
Fair value per option $ 9.60 $ 8.07 $10.33
Weighted average assumptions:
Dividend yield 1.4% 1.4% 1.2%
Expected volatility 36.1% 40.8% 41.0%
Risk-free interest rate 4.1% 4.0% 4.8%
Expected life (years) 5.0 5.2 5.8
-F45-
11. 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 pre-tax
and after-tax basis, subject to maximum IRS limits. 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 $5.0 million in
2004, $4.8 million in 2003 and $4.2 million in 2002. Additional contributions
may be made from accumulated and/or current net profits. In 2004, 2003 and 2002,
additional contributions to the 401(k) plan of $1.7 million, $1.8 million and
$1.4 million, respectively, were recognized by the Company.
The Company has a nonqualified 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 were not significant. As of December 31, 2004 the Company has
recognized a noncurrent liability of $5.5 million related to this plan which
represents the market value of investments held under the plan. Such investments
are held by a rabbi trust and are classified as trading securities in the
Investments caption on the Consolidated Balance Sheet (see Note 1).
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 accrued over the periods of active employment and
totaled $5.0 million at December 31, 2004 and $3.2 million at December 31, 2003.
In 2004, 2003 and 2002 the Company recognized expense of $1.5 million, $0.1
million and $0.2 million, respectively, related to these agreements. Expense for
2004 included $1.2 million due to a change in life expectancy assumptions.
12. Postretirement Benefits
The Company sponsors two unfunded 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. For retirees who retired prior to December 31, 2002 with twenty or
more years of service at December 31, 2000, the Company contributes
approximately 50% of the cost of providing the medical plan. For all other
retirees, 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 for those employees that retired by December 31, 2002.
As previously mentioned in Note 1, the Company's accumulated
postretirement benefit obligations and net periodic postretirement benefit cost
do not reflect the effects of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 on the health care benefit plan because the Company
has not completed its determination whether plan benefits are at least
actuarially equivalent to portions of the Act. Management does not believe that
the effects of the Act will materially affect the Company's postretirement
obligations or its future postretirement benefit expense.
-F46-
As of December 31, 2004 and 2003, the accumulated postretirement
benefit obligation ("APBO") under such plans was $21.2 million and $23.4
million, respectively. Measurement dates of December 31, 2004 and December 31,
2003 were used for these plans. 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, 2004 and 2003 (in thousands):
2004 2003
- ----------------------------------------------------------------------
APBO as of January 1:
Retirees $ 23,354 $ 19,514
Fully eligible participants - -
- ----------------------------------------------------------------------
23,354 19,514
Net change in APBO:
Interest costs 1,208 1,397
Benefits paid (2,417) (2,454)
Retiree contributions 1,147 970
Actuarial loss (gain) (2,102) 3,927
- ----------------------------------------------------------------------
Total net change in APBO (2,164) 3,840
- ----------------------------------------------------------------------
APBO as of December 31:
Retirees 21,190 23,354
Unrecognized net actuarial loss (7,322) (9,645)
- ----------------------------------------------------------------------
Accrued postretirement cost -
included in other liabilities $ 13,868 $ 13,709
======================================================================
Net periodic postretirement costs ("NPPC") are summarized as follows (in
thousands):
2004 2003 2002
- -----------------------------------------------------------------------
Interest on APBO $ 1,208 $ 1,397 $ 1,419
Net amortization 221 281 251
- -----------------------------------------------------------------------
Total $ 1,429 $ 1,678 $ 1,670
=======================================================================
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.
The weighted average assumptions used to determine benefit obligations
as of December 31 were as follows:
2004 2003
- ----------------------------------------------------------------------
Discount rate 5.75% 6.0%
The weighted average assumptions used to determine NPPC for years
ended December 31 were as follows:
2004 2003 2002
- -----------------------------------------------------------------------
Discount rate 6.0% 6.5% 7.0%
-F47-
The following trend rate assumptions were used as of December 31:
2004 2003
- ----------------------------------------------------------------------
Health care cost trend rate:
Assumed for next year 7.0% 9.0%
Rate to which the cost trend rate is
assumed to decline (the ultimate
trend rate) 5.0% 5.0%
Year that the rate reaches the ultimate
trend rate 2009 2009
Participant contributions trend rates:
Assumed for next year 7.0% 12.0%
Rate to which the contribution trend rate
is assumed to decline (the ultimate
trend rate) 5.0% 5.0%
Year that the rate reaches the ultimate
trend rate 2009 2009
The medical cost and participant contributions trend rate assumptions
could have a significant effect on amounts reported. A change in the assumed
trend rate of 1 percentage point would have the following effects (in
thousands):
1 Percentage Point 1 Percentage Point
Increase Decrease
- ----------------------------------------------------------------------
Effect on total interest cost $ 95 $ (81)
Effect on postretirement benefit
obligation 1,760 (1,489)
The Company expects to contribute $1.5 million to the plans in 2005.
The following reflects the estimated future benefit payments net of estimated
participant contributions that are expected to be paid:
Year(s) Amount
- ----------------------------------------------------------------------
2005 $ 1,500
2006 1,471
2007 1,459
2008 1,445
2009 1,427
2010 - 2014 6,347
13. 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, 2004 and 2003, 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 and long-term debt approximate their fair value.
There were no interest rate swaps outstanding at December 31, 2004. At December
31, 2003, the fair value of interest rate swaps was a liability of $0.4 million.
-F48-
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 were directly matched
against U.S. dollar LIBOR contracts outstanding under the Company's Credit
Facility and were reset quarterly. The differential between fixed and variable
rates to be paid or received was accrued as interest rates changed in accordance
with the agreements and was recognized over the life of the agreements as an
adjustment to interest expense. The interest rate swaps matured in 2004. The
amended Credit Facility matures in 2009. The Company will continue to evaluate
the need to manage its exposure to interest rate movements and may enter into
additional interest rate swap agreements from time to time.
At December 31, 2003, the notional principal amount of interest rate
swaps outstanding was $59.0 million. The fair value of the swaps is reported on
the balance sheet in other liabilities. The net change in fair value of the
swaps at December 31, 2004 and 2003 is reported in other comprehensive income.
The swaps are highly effective and no significant amounts for hedge
ineffectiveness were reported in net income during 2004 and 2003.
14. 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 $16.9 million in 2004, $17.4 million in 2003
and $15.9 million in 2002. Minimum annual rental payments under noncancelable
leases at December 31, 2004 are as follows (in thousands):
Operating
Year Leases
- -------------------------------------------------------------------
2005 $ 14,345
2006 11,780
2007 10,798
2008 10,595
2009 9,706
Thereafter 19,331
- -------------------------------------------------------------------
Total $ 76,555
===================================================================
Minimum annual rental payments in the above table have not been reduced
by minimum sublease rentals of $2.7 million.
The Company has contracts with certain customers that contain
provisions that call for future payments to the customer. These payments are
amortized as a reduction of sales over the life of the related contract and are
generally refundable from the customer on a pro-rata basis if the contract is
terminated. As of December 31, 2004, the Company's future cash obligations for
these contracts are as follows (in thousands):
Future
Year Payments
- -------------------------------------------------------------------
2005 $ 22,326
2006 16,663
2007 16,103
2008 8,800
2009 8,000
- -------------------------------------------------------------------
Total $ 71,892
===================================================================
-F49-
The Company accrues for environmental remediation costs for work at
locations where an assessment has indicated that cleanup costs are probable and
reasonably estimable. Such accruals are undiscounted and are based on currently
available information. At December 31, 2004 and 2003, the Company had $0.8
million and $0.4 million, respectively, included in other current liabilities
for estimated environmental remediation costs. For the years ended December 2004
and 2003, results of operations included environmental remediation costs of $0.7
million and $0.2 million, respectively. No remediation costs were included in
the results of operations in 2002. The Company currently shares remediation
costs for a property it formerly owned in Tennessee and for a superfund cleanup
site in New Jersey and, based on currently available information, does not
believe additional accruals, if any, will be significant.
15. Business Segments
The Company operates its business in three segments. The Company has
organized its business segments based on products, services and markets served.
Each business segment has a division president who reports to the Company's
Chief Executive Officer, the chief operating decision maker. The Printed
Products segment ("Printed Products") includes checks, direct marketing
activities and analytical services marketed primarily to financial institutions.
The Software and Services segment ("Software & Services") is focused on the
financial institution market and includes core processing applications and
services for credit unions and community banks, lending and mortgage origination
applications, mortgage servicing applications, branch automation applications
and customer relationship management applications. The Scantron segment
represents products and services sold by the Company's Scantron subsidiary
including scanning equipment and software, scannable forms, survey solutions,
curriculum planning software, testing and assessment tools, training 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 and revenues, 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 and certain other non-operating gains and losses, all of which
are considered Corporate items. The Company also considers stock-based
compensation costs to be a Corporate item except for a grant made in 2004 to
replace an incentive agreement (see Note 2). Certain incentive compensation
costs in 2002 were reclassified from Corporate to the Printed Products and
Software & Services segments to conform to the 2004 and 2003 classifications.
Corporate assets consist primarily of cash and cash equivalents, deferred income
taxes, investments and other assets not employed in production.
-F50-
Summarized financial information for 2004, 2003 and 2002 is as follows
(in thousands):
Business Segment
------------------------------
Printed Software & Corporate & Consoli-
Products Services Scantron Eliminations dated
- ------------------------------------------------------------------------------------
2004
Sales $ 488,688 $ 193,843 $ 116,643 $ (687) $ 798,487
Income (loss) 66,016(a) 25,364 32,841 (36,319) 87,902
Identifiable assets 220,325 239,450 74,048 39,954 573,777
Depreciation and other
amortization 55,084 11,679 4,288 728 71,779
Capital expenditures 23,634 2,070 3,205 34 28,943
2003
Sales $ 498,257 $ 176,833 $ 113,236 $ (1,658) $ 786,668
Income (loss) 69,282(a) 17,741 25,644 (25,898) 86,769
Identifiable assets 236,328 216,026 74,309 40,314 566,977
Depreciation and other
amortization 46,250 11,789 4,050 1,094 63,183
Capital expenditures 20,802 3,758 3,353 159 28,072
2002
Sales $ 526,201 $ 135,568 $ 107,822 $ (1,784) $ 767,807
Income (loss) 85,097 11,341 29,232 (40,415) 85,255
Identifiable assets 221,892 202,674 77,169 48,952 550,687
Depreciation and other
amortization 41,671 9,522 2,844 2,588 56,625
Acquired in-process
research and
development charge - 3,000 - - 3,000
Capital expenditures 26,214 2,073 3,702 101 32,090
(a) Includes impairment charges of $10.3 million in 2004 (see Note 4),
reorganization costs of $5.8 million (includes $2.4 million of impairment
charges) and $6.9 million in 2004 and 2003, respectively, (see Note 5) and
a $2.9 million favorable adjustment in the fourth quarter of 2004 as a
result of a policy change for employees' paid time off.
16. Subsequent Event
On February 1, 2005, the Company announced plans to expand its
outsourcing services with the signing of a definitive agreement to acquire
Cincinnati-based Intrieve, Incorporated ("Intrieve"). The Company expects to
consummate the acquisition in April 2005, subject to approval by Intrieve's
shareholders and certain regulatory agencies. Intrieve is a provider of
technology for financial institutions including service bureau operations that
deliver core processing for thrifts and community banks, comprehensive item
processing, and electronic banking and payments processing. In-house solutions
include software for financial accounting and software that allows financial
institutions to print their own laser checks and other MICR documents. Also
included in the transaction is a data-center operation providing co-location,
hosting, managed data services and hot-site backup. The acquisition of Intrieve
will represent an expansion of the Company's existing outsourced product and
service offerings. Intrieve's core processing data-center, full service item
processing facility and electronic banking and payment processing service will
support Software & Services' strategy of offering clients integrated end-to-end
solutions.
-F51-
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 registered
public accounting firm, 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 Audit Committee meets
periodically with management, internal audit and the independent registered
public accounting firm to discuss audit matters, the Company's control structure
and financial reporting matters. Internal audit and the independent registered
public accountants 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
March 10, 2005
-F52-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
John H. Harland Company:
We have audited the accompanying consolidated balance sheets of John H.
Harland Company and subsidiaries (the "Company") as of December 31, 2004 and
2003, and the related consolidated statements of income, cash flows, and
shareholders' equity for each of the three years in the period ended December
31, 2004. Our audits also included the financial statement schedule listed in
the Index at 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 the financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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
subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, 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.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on the criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 10, 2005 expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Atlanta, Georgia
March 10, 2005
-F53-
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rules
13a-15(f) of the Securities Exchange Act of 1934. Under the supervision and with
the participation of management, including the principal executive officer and
principal financial officer, the Company conducted an evaluation of the
effectiveness of its internal control over financial reporting based on the
framework in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on its evaluation
under the framework in Internal Control- Integrated Framework, management
concluded that the Company's internal control over financial reporting was
effective as of December 31, 2004.
The Company excluded the internal controls of London Bridge Phoenix
Software Inc. ("Phoenix System") from its assessment of internal controls.
Phoenix System was acquired by the Company in November 2004 and constituted 5.6%
of the Company's consolidated assets at December 31, 2004 and less than 1% of
the Company's consolidated sales for the year then ended.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 has been audited by
Deloitte & Touche LLP, an independent registered public accounting firm, as
stated in their report which is included herein.
/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
March 10, 2005
-F54-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
John H. Harland Company:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting that John H.
Harland Company and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. As described in
Management's Report on Internal Control Over Financial Reporting, management
excluded from their assessment the internal control over financial reporting at
London Bridge Phoenix Software Inc. ("Phoenix System"), which was acquired in
November 2004 and whose financial statements reflect total assets and sales
constituting 5.6 percent and less than 1 percent, respectively, of the related
consolidated financial statement amounts as of and for the year ended December
31, 2004. Accordingly, our audit did not include the internal control over
financial reporting at Phoenix System. The Company's management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process
designed by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
-F55-
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedule as of and for the year ended
December 31, 2004 of the Company and our report dated March 10, 2005 expressed
an unqualified opinion on those financial statements and financial statement
schedule.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Atlanta, Georgia
March 10, 2005
-F56-
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 26 June 25 September 24 December 31
- -------------------------------------------------------------------------------
2004(a)(b):
Sales $ 190,576 $ 192,979 $ 195,975 $ 218,957
Gross profit 88,450 92,209 97,581 112,743
Net income 13,053 8,863 12,093(c) 21,106(d)
Per common share:
Basic earnings 0.48 0.32 0.44 0.78
Diluted earnings 0.46 0.31 0.43 0.75
Dividends paid 0.10 0.10 0.125 0.125
Stock market price:
High 31.85 32.50 30.52 36.41
Low 27.31 28.00 26.91 29.34
------------Quarter ended --------
March 28 June 27 September 26 December 31
- -------------------------------------------------------------------------------
2003(a):
Sales $ 193,425 $ 192,428 $ 192,494 $ 208,321
Gross profit 93,832 93,501 94,317 100,198
Net income 13,179 11,250 14,695 16,842(b)(e)
Per common share:
Basic earnings 0.47 0.41 0.53 0.61
Diluted earnings 0.46 0.40 0.52 0.59
Dividends paid 0.075 0.075 0.10 0.10
Stock market price:
High 24.65 26.59 27.92 29.04
Low 20.25 23.00 24.45 25.79
(a) In 2004 and 2003, the Company acquired certain businesses (see Note 2 to the
Consolidated Financial Statements).
(b) At the end of the third quarter of 2003, the Printed Products segment
initiated a reorganization that was completed in 2004 and incurred certain
expenses, gains and charges during the fourth quarter of 2003 and during
2004 related to the reorganization (see Notes 4, 5 and 6 to the
Consolidated Financial Statements).
(c) The third quarter of 2004 includes an impairment charge of $4.9 million
after income taxes to write-off a portion of certain new customer care
systems.
(d) The fourth quarter of 2004 includes a favorable adjustment of $1.8 million
after income taxes as a result of a policy change for employees paid time
off.
(e) The fourth quarter of 2003 includes a gain on the sale of investments of
$2.7 million after income taxes (see Note 1 to the Consolidated Financial
Statements).
SELECTED FINANCIAL DATA
---------- Year ended December 31 ---------
2004 2003 2002 2001 2000
- -------------------------------------------------------------------------------
Sales $798,487 $786,668 $767,807 $743,203 $720,677
Net income 55,115 55,966 52,432 38,974 28,697
Total assets 573,777 566,977 550,687 472,246 528,548
Long-term debt 101,300 127,059 144,106 124,118 191,617
Per common share:
Basic earnings 2.02 2.02 1.80 1.34 1.01
Diluted earnings 1.96 1.97 1.73 1.31 1.00
Cash dividends 0.45 0.35 0.30 0.30 0.30
Average number of
shares outstanding:
Basic 27,269 27,740 29,121 29,073 28,469
Diluted 28,084 28,411 30,244 29,984 28,832
See Note 1 to the Consolidated Financial Statements regarding an investment
write-down in 2002, Note 2 to the Consolidated Financial Statements regarding
acquisitions in 2004, 2003 and 2002 and Note 5 to the Consolidated Financial
Statements regarding reorganization charges in 2004 and 2003.
Earnings 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, 2004 there were
3,223 shareholders of record.
-F57-
John H. Harland Company and Subsidiaries Schedule II - Valuation and Qualifying
Accounts For the years ended December 31, 2004, 2003 and 2002 (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 Results of Other Of
Description Of Period Operations Accounts(1) Deductions(2) Period
- ---------------------------------------------------------------------------------------------
Year Ended December 31, 2004
Allowance for doubtful accounts $ 1,902 $ 321 $ 160 $ 187 $ 2,196
======= ======== ======= ======= =======
Year Ended December 31, 2003
Allowance for doubtful accounts $ 2,814 $ (27) $ 46 $ 931 $ 1,902
======= ======== ======= ======= =======
Year Ended December 31, 2002
Allowance for doubtful accounts $ 4,819 $ (915) $ 710 $ 1,800 $ 2,814
======= ======== ======= ======= =======
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-
EXHIBIT LIST
Exhibit Description
3.1 * Amended and Restated Articles of Incorporation (Exhibit 3.1
to Registrant's Quarterly Report on Form 10-Q for the three
months ended March 26, 2004).
3.2 * Bylaws, as amended through December 19, 2002 (Exhibit 3.2 to
the Registrant's Annual Report on Form 10-K ("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 the 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.
10.1 * + Form of Noncompete and Termination Agreement between
Registrant and Arlene S. Bates, Charles B. Carden and
John C. Walters (Exhibit 10.1 to the 2002 10-K).
10.2 * + Employment Agreement, dated December 2, 2002, between
Registrant and John T. Heald, Jr. (Exhibit 10.2 to the 2002
10-K).
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 * + Form of Restricted Stock Agreement between Registrant and
Ms. Bates, Messrs. Carden, Heald and Walters (Exhibit 10.4 to
the 2000 10-K).
10.5 + Restricted Stock Agreements dated April 1, 2004 between
Registrant and Ms. Bates and Messrs. Carden, Heald and
Walters.
10.6 * + Supplemental Retirement Agreement, dated as of January 1,
2002, between Registrant and Mr. Tuff (Exhibit 10.7 to the
2001 10-K).
10.7 * 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).
10.8 * 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).
10.9 * John H. Harland Company 2002 Stock Option Plan (Exhibit A to
the Registrant's Proxy Statement dated March 20, 2002).
10.10 * John H. Harland Company Employee Stock Purchase Plan, as
amended through July 24, 2003 (Exhibit 10.10 to the 2003
10-K).
10.11 * John H. Harland Company Compensation Plan for Non-Employee
Directors, as amended (Exhibit 10.12 to the 2001 10-K).
10.12 2005 Compensation Plan for Non-Employee Directors.
Exhibit Description
10.13 * Amended and Restated Credit Agreement dated as of February 4,
2004 among Registrant and the Lenders named therein (Exhibit
10.12 to the 2003 10-K).
11.1 Computation of Per Share Earnings.(1)
14 Code of Business Conduct and Ethics, as amended.
21 Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche, LLP.
31.1 Certification Pursuant to Rule 13a-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Rule 13a-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 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
+ Indicates management contracts and compensatory arrangements required to be
filed pursuant to Item 15(b) of this annual report
(1) Data required by SFAS No. 128, "Earnings Per Share," is provided in Note 1
to the Consolidated Financial Statements included in this report.
-X2-