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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 (FEE REQUIRED)
For the fiscal year ended December 31, 1996 or
| | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________________ to _______________
Commission file number 1-6352
John H. Harland Company
(Exact name of registrant as specified in its charter)
Georgia 58-0278260
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2939 Miller Road, Decatur, Georgia 30035
(Address of principal executive offices) (Zip Code)
(770) 981-9460
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------------- -----------------------------------------
Common Stock $1 par value New York Stock Exchange
Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of the close of business on March 12, 1997 was $959,434,230.
The number of shares of the Registrant's Common Stock outstanding on March 12,
1997 was 30,944,066.
A portion of the Registrant's Definitive Proxy Statement dated March 20, 1997
is incorporated by reference in Part III hereof.
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John H. Harland Company and Subsidiaries
Index to Annual Report on Form 10-K
Page
Part I
Item 1: Business 3
Item 2: Properties 6
Item 3: Legal Proceedings 6
Item 4: Submission of Matters to a Vote of Security Holders 6
Executive Officers of the Registrant 6
Part II
Item 5: Market for the Registrant's Common Equity and
Related Stockholder Matters 7
Item 6: Selected Financial Data 7
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 8: Financial Statements and Supplementary Data 8
Item 9: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 8
PART III
Item 10: Directors and Executive Officers of the Registrant 8
Item 11: Executive Compensation 8
Item 12: Security Ownership of Certain Beneficial Owners
and Management 8
Item 13: Certain Relationships and Related Transactions 8
PART IV
Item 14: Exhibits, Financial Statement Schedules and
Reports on Form 8-K 9
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PART I
ITEM 1. BUSINESS
General
John H. Harland Company (the "Company" or the "Registrant") was founded
in 1923 as a general printer and lithographer. The Registrant is incorporated
under the laws of Georgia, and is headquartered in Atlanta. The Company
provides value-added products and services to financial institutions,
consumers, brokerage firms and financial software companies. These products
and services include checks, forms and business documents, database marketing
systems, direct marketing campaign management and loan origination software.
The Company's subsidiary, Scantron Corporation ("Scantron"), sells products
and services primarily to the educational market.
The Company serves its major markets through two primary business
segments, each of which is described below. Reference is made to Note 14 of
the Notes to Consolidated Financial Statements on page F19 of this Annual
Report on Form 10-K with respect to information concerning the Company's
business segments.
Recent Developments
In April 1996, the Company announced plans to consolidate its 40 check
imprint plants into a network of regional facilities and to incorporate
advanced manufacturing technology and systems into this network. Consolidation
of all but eight of the facilities scheduled for closure is anticipated by
December 31, 1997, with the balance to be completed by the middle of 1998.
During 1996, the Company recognized restructuring charges of $94.1 million
related to the consolidation of manufacturing operations, including severance
and associated revaluation of assets, and valuation adjustments related to
discontinuing certain subsidiary product lines.
The Company believes that by rebuilding the infrastructure of its
printing operations, and by developing complementary products and services, it
will be better positioned to serve the financial services market and
strengthen relationships with its customers. The Company also believes that
reducing the number of production facilities will result in significant
savings in operating costs which will provide additional financial resources
to enable it to grow through acquisitions and/or product development efforts.
In May 1996, the Company acquired OKRA Marketing Corporation ("OKRA").
OKRA designs, develops, markets and supports database marketing software
systems, and provides data processing services utilizing such systems. OKRA
operates within the Financial Services ("FS") segment, and its products and
services are sold under FS's Decision Support product line. The Company
believes that the addition of OKRA's products and services to its Decision
Support product line has significantly strengthened its competitive position
within the rapidly growing market for providing database marketing services,
and also believes it is now the leading provider of database marketing
services to the financial services market.
Financial Services
The FS segment is focused on providing value-added products and services
to financial institutions, consumers, brokerage firms and financial software
companies. These products and services include database marketing systems,
direct marketing campaign management, MICR-encoded (magnetic ink character
recognition) documents and related forms and loan origination software.
The Decision Support products and services help financial institutions
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identify profitable customers, develop sound marketing strategies and execute
information-driven plans aimed at building and retaining profitable
relationships. These products and services include database management,
customer/prospect analysis and marketing program management. Through
utilization of a Marketing Customer Information File ("MCIF"), financial
institutions are able to quickly and accurately gauge profitability potential
and target potential customers with similar profiles. Analysis efforts can be
enhanced through the utilization of external as well as internal data, such as
demographic and geographic information. The MCIF analysis is then merged into
multi-contact direct marketing programs. Additional services include tracking
marketing program effectiveness, and identifying marketing messages that
garner the most favorable response.
The market for providing database marketing and direct marketing campaign
management is growing rapidly within the financial services industry. Decision
Support products and services sold by FS provide database marketing solutions
to more than 1,200 financial institutions nationwide, representing nearly 60
percent of this emerging market.
FS provides checks, forms and related MICR-encoded documents to financial
institutions and their customers. These product line includes personal,
business and computer checks in a wide variety of styles and formats. FS also
produces a variety of financial documents used by individuals in conjunction
with personal and/or small business financial software applications. These
documents include checks, invoices, statements and other forms and financial
documents. Additionally, through a strategic alliance with Bottomline
Technologies, Inc., FS offers point-of-service capability for the production
of MICR readable documents.
FS's primary competitors in the sale of MICR-encoded documents and
related forms to financial institutions are two other large national printers
specializing in check printing, one of which possesses substantially greater
sales and financial resources than FS. While accurate statistics with respect
to the aggregate level of check production are not readily available, the
Company believes that FS is the second largest producer of MICR-encoded
documents and related forms in the United States.
FS also markets and supports lending and platform automation software
applications for the financial industry. Competition within the market for
supplying automated loan origination and compliance solutions varies by size
of financial institution, and FS competes with many other companies to provide
loan origination software solutions for small as well as large financial
institutions.
The Company believes that the primary competitive factor influencing
buying decisions within the FS segment is the ability to provide a broad array
of value-added products and services which assist customers in building and
retaining profitable relationships with their customers. The Company believes
that FS compares favorably with its competitors in this respect.
FS markets products and services in domestic and international markets,
including the United States, Canada, Mexico, Europe, South Africa, Australia,
Latin America and the Caribbean. Financial customers include community-based,
regional and national financial institutions. Non-financial customers consist
of selected retail markets such as superstores, software companies, direct
mail check suppliers, catalog merchandisers and affinity groups. International
customers include financial and non-financial customers in selected
international markets.
FS's principal raw materials are safety paper, form paper and MICR
-4-
bond paper. The Company has entered into a three-year fixed-price agreement
with a certain domestic supplier of these raw materials. Other printing
materials, such as vinyl, inks, checkboards, packaging materials and
miscellaneous supplies, are purchased from a number of suppliers. The Company
believes that adequate raw materials will be available to support FS's
operations.
The Company believes that the loss of any one FS customer would not have
a materially adverse effect on the Company's consolidated results of
operations.
Scantron
Scantron's products and services include data management solutions for
educational institutions, including optical mark reading ("OMR") equipment,
scannable forms, mail order software and maintenance services. Scantron serves
its primary educational market with forms and equipment used to capture,
tabulate and analyze data for test scoring and grade reporting and provides
educational technology solutions through a proprietary line of software
products and peripheral equipment. Scantron is also an authorized distributor
of educational software products from a number of leaders in the educational
software industry. Scantron's products are supported through its field service
division, which offers maintenance services for the scanning machines and
software products related to data collection and analysis activities.
The data collection market is a highly fragmented industry, with many
competitors. The Company believes that Scantron is the second largest provider
of OMR stand-alone equipment to the educational market in the United States,
and also believes its scanning technologies have an advantage over other
methods of data capture and tabulation. Scantron's forms printing operation
competes with commercial and specialized forms printers, principally on the
basis of product quality, customer service, availability of a complete product
line and price to the end user. Scantron's field service operation competes
with various organizations which provide maintenance services, including
manufacturers and other national and local field service and maintenance
companies. The market for educational software is also highly fragmented, with
many large and small competitors. The Company believes that the primary
factors influencing the purchase of educational software include availability
of a broad product line, customer service and price to the end user. The
Company believes that Scantron compares favorably with its competitors with
respect to the factors mentioned above.
Scantron markets its products primarily through sales and service
representatives throughout the United States and also in Canada.
Representatives sell systems, distribute new equipment and provide ongoing
assistance, such as machine servicing and forms development. Scantron's
products are also marketed internationally through distributorships and via
direct mail channels.
Scantron purchases a majority of its paper from one supplier, and
purchases the components used in the assembly and manufacturing of OMR
equipment from equipment manufacturers, supply firms and others, and purchases
software for resale from a number of leaders in the educational software
industry. The Company has no reason to believe that Scantron cannot continue
to obtain such materials or suitable substitutes for its operation and
software in acceptable quantities and at acceptable prices for its operation.
There is a seasonal nature to Scantron's business in the educational
market, but it does not significantly affect the Company's consolidated
results.
The Company believes that the loss of any one Scantron customer would not
have a materially adverse effect on the Company's consolidated results of
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operations.
Patents and Trademarks
The Company has patents on several products and processes and trademarks
on names of several of its products and services. While the Company believes
these patents and trademarks to be of value, it does not consider any of them
to be critical to its operations.
Employees
As of December 31, 1996, the Company and its subsidiaries employed 5,599
people.
ITEM 2. PROPERTIES
As of December 31, 1996, the Company and its subsidiaries owned 43
facilities located in 28 states and in Puerto Rico, all but 5 of which were
primarily production and service facilities. The Company leases 16 facilities
for printing and/or warehouse activities. The Company also leases office space
for sales and service activities where there are no production facilities, as
well as space for 4 of its subsidiaries. These leases have expiration dates
ranging from 1997 to 2006. The Company owns its executive offices in Atlanta,
Georgia. As part of the Company's strategy to consolidate 40 of its check
imprint plants into regional facilities, certain owned facilities to be closed
are being held for sale.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, the Company is subject to various
legal proceedings and claims. The Company believes that the ultimate outcome
of these matters will not have a material effect on its financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to all executive
officers of the Company.
Name Age Office Held
Robert R. Woodson 64 Chairman
Robert J. Amman 58 President and Chief Executive Officer
Joseph M. O'Connell 41 Senior Vice President and Chief Information
Officer
S. David Passman III 44 Senior Vice President and Chief Financial Officer
Mark C. Perlberg 40 Senior Vice President and President, Financial
Markets Division
Earl W. Rogers Jr. 48 Senior Vice President and President, Printed
Products Division
John C. Walters 56 Senior Vice President and General Counsel
Messrs. Woodson and Rogers have been employed as executive officers of
the Company for more than the past five years.
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Mr. Amman joined the Company in October 1995. Previously, he served as
Vice Chairman of First Financial Management Corporation, a diversified
information and financial services company, from November 1994 through October
1995. Prior to such time he served as President and Chief Executive Officer of
New Valley Corporation, a financial services company, and its Western Union
Financial Services subsidiary ("Western Union"), since 1988. A petition under
Chapter 11 of the Federal Bankruptcy Code was entered against New Valley
Corporation in March 1993, and it emerged from bankruptcy in January 1995.
Mr. O'Connell joined the Company in February 1996. He previously served
as Chief Operating Officer of National Bancard Corporation (NaBANCO), the
world's largest merchant credit card processor, from August 1995 until
February 1996. He was employed by Western Union for more than the prior five
years, last serving as a corporate Vice President.
Mr. Passman joined the Company in October 1996. He was previously
employed by Deloitte & Touche, LLP for 20 years, last serving as Managing
Partner of its Atlanta office.
Mr. Perlberg joined the Company in February 1996. He was previously
employed by Western Union since 1989, last serving as an area Vice President
in its international operations.
Mr. Walters joined the Company in January 1996. He previously served as
Executive Vice President of First Financial Management Corporation from
November 1994 until December 1995. From 1988 until November 1994 he served as
Senior Vice President and General Counsel of New Valley Corporation.
Messrs. Woodson and Amman are also members of the Board of Directors.
Officers are elected annually and serve at the pleasure of the Board of
Directors.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
See the information with respect to the market for and number of holders
of the Company's common stock, quarterly market information and dividend
information which is set forth on page F20 of this Annual Report on Form 10-K.
The Company has an established policy of making quarterly dividend payments to
shareholders. On January 31, 1997, the Board of Directors approved the
reduction of the annual dividend from $1.02 to $0.30 per share. 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.
ITEM 6. SELECTED FINANCIAL DATA
See the information with respect to selected financial data on page F20
of this Annual Report on Form 10-K.
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 F21 through
F23 of this Annual Report on Form 10-K.
-7-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the information with respect to Financial Statements and
Supplementary Data on pages F2 through F19 and page F20, respectively, of this
Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding Directors required herein is incorporated by
reference to the information under the caption "Election of Directors" in the
Registrant's Definitive Proxy Statement for the Annual Shareholders' Meeting
dated March 20, 1997 (the "Proxy Statement").
The information regarding Executive Officers required herein is included
in Part I of this report and incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive compensation is incorporated by
reference to the information under the caption "Executive Compensation and
Other Information" in the Registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference to the
information under the caption "Election of Directors -- Beneficial Ownership"
in the Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
-8-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
Page in this
Annual Report
on Form 10-K
-------------
(a)1. Financial Statements:
Management Responsibility for Financial Statements F2
Independent Auditors' Report F3
Consolidated Balance Sheets F4
Consolidated Statements of Income F6
Consolidated Statements of Cash Flows F7
Consolidated Statements of Shareholders' Equity F8
Notes to Consolidated Financial Statements F9
Quarterly Financial Information (unaudited) F20
(a)2. Financial Statement Schedules:
Schedule II. Valuation and Qualifying Accounts S1
(a)3. Exhibits
(Asterisk indicates exhibit previously filed with the Securities and
Exchange Commission as indicated in parentheses and incorporated herein by
reference.)
3.1 * Amended and Restated Articles of Incorporation (Exhibit 3.1 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1993 (the "1993 10-K")).
3.2 By-Laws, as amended.
4.1 Indenture, as supplemented and amended, relating to 6.75% Convertible
Subordinated Debentures due 2011 of Scantron Corporation (omitted
pursuant to Item 601(b)(4)(iii) of Regulation S-K; will be furnished to
the Commission upon request).
4.2 * Form of Rights Agreement dated as of June 9, 1989, between the
Registrant and Citizens and Southern Trust Company (Exhibit 1 to the
Registrant's Current Report on Form 8-K dated June 9, 1989).
4.3 * First Amendment dated June 12, 1992 to Rights Agreement dated June 9,
1989 between the Registrant and NationsBank of Georgia Inc., N.A.,
successor to Citizens and Southern Trust Company (Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992).
4.4 * Second Amendment dated July 24, 1992 to Rights Agreement dated June 9,
1989 between the Registrant and Trust Company Bank, successor to
NationsBank of Georgia Inc., N.A., and to Citizens and Southern Trust
Company (Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1992).
4.5 * Note Agreement dated as of December 1, 1993 relating to the
Registrant's 6.60% Series A Senior Notes Due December 30, 2008 (Exhibit
4.5 to the 1993 10-K).
4.6 See Articles IV, V and VIII of the Registrant's Amended and Restated
Articles of Incorporation, filed as Exhibit 3.1, and Articles I, V, and
VIII of the Registrant's By-Laws, as amended, filed as Exhibit 3.2.
10.1 * Form of Deferred Compensation Agreement between the Registrant and
Robert R. Woodson (Exhibit 10.1 to the 1993 10-K).
10.2 * Form of Monthly Benefit Amendment to Deferred Compensation Agreement
between the Registrant and Mr. Woodson (Exhibit 10(H) to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1990).
-9-
10.3 * Form of Deferred Compensation Agreement between the Registrant and
Earl W. Rogers Jr. (Exhibit 10.3 to the 1993 10-K).
10.4 * Form of Amendment to Deferred Compensation Agreement between the
Registrant and Messrs. Woodson and Rogers (Exhibit 10.6 to the 1993 10-
K).
10.5 * Form of Non-Compete and Termination Agreement between the Registrant
and Messrs. Woodson, Rogers and William M. Dollar (Exhibit 10.7 to the
1993 10-K).
10.6 * Form of Non-Compete and Termination Agreement between the Registrant
and Joseph M. O'Connell, S. David Passman III, Mark C. Perlberg and
John C. Walters (Exhibit 10.6 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995 (the "1995 10-K")).
10.7 * Form of Executive Life Insurance Plan between the Registrant and
Messrs. Woodson and Rogers (Exhibit 10.8 to the 1993 10-K).
10.8 * John H. Harland Company 1981 Incentive Stock Option Plan, as Extended,
as amended (Exhibit 10.9 to the 1995 10-K).
10.9 * John H. Harland Company Employee Stock Purchase Plan, as amended
(Exhibit 10.10 to the 1995 10-K).
10.10 John H. Harland Company Deferred Compensation Plan for Outside
Directors.
21 Subsidiaries of the Registrant.
23 Independent Auditors' Consent.
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the last
quarter of the period covered by this report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
JOHN H. HARLAND COMPANY
William M. Dollar
____________________
William M. Dollar
Vice President, Finance and Treasurer
(Principal Accounting Officer)
Date: 3/28/97
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.
Robert J. Amman 3/28/97 Robert R. Woodson 3/21/97
______________________ ________ ______________________ ________
Robert J. Amman Date Robert R. Woodson Date
President and Director Chairman and Director
(Principal Executive Officer)
S. David Passman III 3/28/97
______________________ ________ ______________________ ________
S. David Passman III Date G. Harold Northrop Date
Senior Vice President and Director
Chief Financial Officer
(Principal Financial Officer)
Juanita Powell Baranco 3/26/97
______________________ ________ ______________________ ________
Juanita Powell Baranco Date H.G. Pattillo Date
Director Director
Lawrence L.
Gellerstedt Jr. 3/21/97
______________________ ________ ______________________ ________
Lawrence L. Date Larry L. Prince Date
Gellerstedt Jr. Director
Director
Edward J. Hawie 3/21/97 John H. Weitnauer, Jr. 3/21/97
______________________ ________ ______________________ ________
Edward J. Hawie Date John H. Weitnauer, Jr. Date
Director Director
______________________ ________ ______________________ ________
John J. McMahon, Jr. Date Robert A. Yellowlees Date
Director Director
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JOHN H. HARLAND COMPANY AND SUBSIDIARIES
Index to Information For Inclusion
in the Annual Report on Form 10-K
for the year ended December 31, 1996
Management Responsibility For Financial Statements F2
Independent Auditors' Report F3
Consolidated Financial Statements
and Notes to Consolidated Financial Statements F4
Supplemental Financial Information F20
Management's Discussion and Analysis of
of Operations and Financial Condition F21
Supplemental Financial Statement Schedule S1
- F1 -
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS
The financial statements included in this report were prepared by the
Company in conformity with generally accepted accounting principles
consistently applied. Management's best estimates and judgments were used,
where appropriate. Management is responsible for the integrity of the
financial statements and for other financial information included in this
report. The financial statements have been audited by the Company's
independent auditors, Deloitte & Touche LLP. As set forth in their report,
their audits were conducted in accordance with generally accepted auditing
standards and formed the basis for their opinion on the accompanying financial
statements. They consider the Company's control structure and perform such
tests and other procedures as they deem necessary to express an opinion on the
fairness of the financial statements.
The Company maintains a control structure which is designed to provide
reasonable assurance that assets are safeguarded and that the financial
records reflect the authorized transactions of the Company. As a part of this
process, the Company has an internal audit function which assists management
in evaluating the adequacy and effectiveness of the control structure.
The Audit Committee of the Board of Directors is composed of directors
who are neither officers nor employees of the Company. The Committee meets
periodically with management, Internal Audit and the independent auditors to
discuss auditing, the Company's control structure and financial reporting
matters. Internal Audit and the independent auditors have full and free access
to the Audit Committee.
S. David Passman III
S. David Passman III
Senior Vice President and Chief Financial Officer
William M. Dollar
William M. Dollar
Vice President, Finance and Treasurer
- F2 -
INDEPENDENT AUDITORS' REPORT
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 its subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, cash flows and shareholders' equity
for each of the three years in the period ended December 31, 1996. Our audits
also included the financial statement schedule listed in Item 14(a)2. These
financial statements and financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of John H. Harland Company and
its subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. 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.
DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Atlanta, Georgia
January 31, 1997
- F3 -
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)
December 31
1996 1995
-----------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 22,667 $ 12,862
Short-term investments 152 400
Accounts receivable from customers, less
allowance for doubtful accounts of $2,886
and $2,251 69,596 67,660
Inventories:
Raw materials and semi-finished goods 28,190 34,349
Hardware component parts 2,770 4,710
Finished goods 2,504 3,237
Deferred income taxes 8,347 6,523
Other 14,177 16,001
-----------------------------------------------------------------------
Total current assets 148,403 145,742
-----------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS:
Assets held for disposal 30,656
Investments 6,178 8,188
Goodwill and other intangibles - net 127,491 133,092
Deferred income taxes 20,012
Other 25,596 22,519
-----------------------------------------------------------------------
Total investments and other assets 209,933 163,799
-----------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 3,439 9,852
Buildings and improvements 31,285 80,867
Machinery and equipment 151,800 234,284
Furniture and fixtures 14,161 19,884
Leasehold improvements 3,386 2,954
Additions in progress 11,069 16,159
-----------------------------------------------------------------------
Total 215,140 364,000
Less accumulated depreciation and amortization 118,745 198,891
-----------------------------------------------------------------------
Property, plant and equipment - net 96,395 165,109
-----------------------------------------------------------------------
Total $ 454,731 $ 474,650
=======================================================================
See Notes to Consolidated Financial Statements.
- F4 -
CONSOLIDATED BALANCE SHEETS (continued)
December 31
1996 1995
-----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 43,089 $ 35,000
Accounts payable - trade 27,057 26,311
Deferred revenues 25,069 25,141
Accrued liabilities:
Salaries, wages and employee benefits 21,560 18,217
Restructuring costs 12,694
Taxes 6,031 4,698
Other 9,211 11,703
-----------------------------------------------------------------------
Total current liabilities 144,711 121,070
-----------------------------------------------------------------------
LONG-TERM LIABILITIES:
Long-term debt 114,075 114,574
Deferred income taxes 4,504
Other 13,542 12,355
-----------------------------------------------------------------------
Total long-term liabilities 127,617 131,433
-----------------------------------------------------------------------
Total liabilities 272,328 252,503
-----------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (see Note 13)
SHAREHOLDERS' EQUITY:
Series preferred stock, authorized 500,000
shares of $1.00 par value, none issued
Common stock, authorized 144,000,000 shares of
$1.00 par value, 37,907,497 shares issued 37,907 37,907
Additional paid-in capital 2,032 2,375
Foreign currency translation adjustment 54 54
Retained earnings 316,315 361,554
-----------------------------------------------------------------------
Total shareholders' equity 356,308 401,890
Less 6,983,520 and 7,252,740 shares in
treasury, at cost 173,905 179,743
-----------------------------------------------------------------------
Shareholders' equity - net 182,403 222,147
-----------------------------------------------------------------------
TOTAL $ 454,731 $ 474,650
=======================================================================
See Notes to Consolidated Financial Statements.
- F5 -
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
Year ended December 31
1996 1995 1994
-------------------------------------------------------------------------
NET SALES $ 609,384 $ 561,617 $ 521,266
-------------------------------------------------------------------------
COST AND EXPENSES:
Cost of sales 327,162 302,660 272,272
Selling, general and administrative
expenses 171,839 160,897 145,392
Amortization of intangibles 16,432 14,840 11,590
Restructuring charge 94,054
Acquired in-process research and
development costs 7,973
-------------------------------------------------------------------------
Total 617,460 478,397 429,254
-------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (8,076) 83,220 92,012
-------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (10,330) (8,714) (7,747)
Other-net 2,929 2,397 861
-------------------------------------------------------------------------
Total (7,401) (6,317) (6,886)
-------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (15,477) 76,903 85,126
INCOME TAXES (1,623) 30,886 33,886
-------------------------------------------------------------------------
NET INCOME (LOSS) $ (13,854) $ 46,017 $ 51,240
=========================================================================
NET INCOME PER COMMON SHARE $ (.45) $ 1.51 $ 1.68
=========================================================================
See Notes to Consolidated Financial Statements.
- F6 -
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31
1996 1995 1994
-----------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net Income (Loss) $ (13,854) $ 46,017 $ 51,240
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 42,714 48,317 41,539
Provision for restructuring charge 87,631
Acquired in-process research and development costs 7,973
Loss (gain) on sale of assets (214) (239) 472
Other 1,068 2,426 2,365
Change in assets and liabilities net of
effects of businesses acquired:
Deferred income taxes (34,205) (355) (2,951)
Accounts receivable (848) (9,575) 7,586
Inventories and other current assets 11,131 (22,038) 987
Accounts payable and accrued expenses (3,105) 10,989 7,628
Other - net (27) 114 (1,031)
-----------------------------------------------------------------------------------
Net cash provided by operating activities 98,264 75,656 107,835
-----------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (28,920) (33,391) (37,474)
Proceeds from sale of property, plant and equipment 5,699 1,748 3,902
Payment for acquisition of businesses -
net of cash acquired (35,023) (36,464) (60,571)
Change in short-term investments - net 248 2,850 (601)
Investment in equity securities (4,300)
Other - net (11,397) 1,440 (5,762)
-----------------------------------------------------------------------------------
Net cash used in investing activities (69,393) (63,817) (104,806)
-----------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 4,000
Short-term borrowings-net 8,000 9,000 10,000
Purchases of treasury stock (739) (52) (5,484)
Issuance of treasury stock 6,167 3,879 3,826
Dividends paid (31,385) (31,123) (29,903)
Other - net (1,109) (640) (255)
-----------------------------------------------------------------------------------
Net cash used in financing activities (19,066) (18,936) (17,816)
-----------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 9,805 (7,097) (14,787)
Cash and cash equivalents at beginning of year 12,862 19,959 34,746
-----------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 22,667 $ 12,862 $ 19,959
===================================================================================
Cash paid during the year for:
Interest $ 10,425 $ 8,483 $ 8,061
===================================================================================
Income taxes $ 32,205 $ 31,708 $ 32,263
===================================================================================
See Notes to Consolidated Financial Statements.
- F7 -
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands except share and per share amounts)
--- Years Ended December 31, 1996, 1995 and 1994 ---
Foreign
Additional Currency
Common Paid-In Retained Treasury Translation
Stock Capital Earnings Stock Adjustment
- ------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 $ 37,907 $ 4,225 $ 325,323 $ (183,853) $ 72
Net income 51,240
Cash dividends, $.98 per share (29,903)
Purchase of 258,847 shares of treasury
stock (5,484)
Issuance of 212,159 shares of treasury
stock under employee stock plans (915) 4,741
Foreign currency translation adjustment (18)
Other 79
- ------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 37,907 3,389 346,660 (184,596) 54
Net income 46,017
Cash dividends, $1.02 per share (31,123)
Purchase of 2,337 shares of treasury
stock (52)
Issuance of 218,188 shares of treasury
stock under employee stock plans (1,026) 4,905
Other 12
- ------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 37,907 2,375 361,554 (179,743) 54
Net loss (13,854)
Cash dividends, $1.02 per share (31,385)
Purchase of 28,916 shares of treasury
stock (739)
Issuance of 298,136 shares of treasury
stock under employee stock plans and
conversion of debentures (343) 6,577
- ------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $ 37,907 $ 2,032 $ 316,315 $ (173,905) $ 54
================================================================================================
See Notes to Consolidated Financial Statements.
-F8-
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 generally accepted accounting principles 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 purchased with a maturity 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 - Effective January 1, 1996, the Company
adopted Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" ("SFAS 121"). Assets held for disposal are carried at the lower of
carrying amount or fair value, less estimated cost to sell such assets. The
Company reviews long-lived assets and certain intangibles for impairment when
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable, and any impairment losses are reported in the
period in which the recognition criteria are first applied based on the fair
value of the asset. There was no impact on the financial statements upon
adoption of SFAS 121, other than the portion of the restructuring charges
related to disposition of assets.
Investments - Short-term investments are carried at cost plus accrued
interest, which approximates market, and consist primarily of certificates of
deposit and demand notes with original maturities in excess of three months.
Marketable equity securities included in long-term investments are not
significant and are carried at cost, which approximates market. Other long-
term investments are carried principally at cost. The Company classifies
substantially all of its investments as available-for-sale securities.
Goodwill and Other Intangibles - Goodwill represents the excess of
acquisition costs over the fair value of net assets of businesses acquired and
is amortized on a straight-line basis over periods from 12 to 40 years. Other
intangible assets consist primarily of purchased customer lists and non-
compete covenants which are amortized on a straight-line basis over periods
ranging from two to eight years. Carrying values of goodwill and other
intangibles are periodically reviewed to assess recoverability based on
expectations of undiscounted cash flows and operating income for each related
business unit. Impairments would be recognized in operating results if a
permanent diminution in value were expected. Amortization periods of
intangible assets are also reviewed to determine whether events or
circumstances warrant revision to estimated useful lives.
Other Assets - Other assets consist primarily of capitalized software
development costs, which are amortized over three years, and prepaid customer
incentive payments, which are amortized as a reduction of sales over the life
of the related contract.
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 methods. 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.
-F9-
Revenue Recognition - Sales of products and services are recorded based
on shipment of products or performance of services. Revenue from maintenance
contracts is deferred and recognized over the period of the agreements.
Net Income (Loss) Per Share - Net income (loss) per common share is based
on the weighted average number of shares of common stock and common share
equivalents outstanding during each year, which was 30,951,128 for 1996;
30,557,594 for 1995 and 30,516,799 for 1994. Common share equivalents include
the number of shares issuable upon exercise of the Company's stock options and
conversion of convertible securities, if dilutive. The difference between
primary and fully diluted common share equivalents is not significant.
Income Taxes - Deferred tax liabilities and assets are determined based
on the difference between financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which
differences are expected to reverse.
Reclassifications - Certain reclassifications have been made in the 1994
and 1995 financial statements to conform to the 1996 classifications.
2. RESTRUCTURING CHARGE
In 1996, the Company announced plans to consolidate its 40 check imprint
plants into a network of regional facilities (the "Restructuring"). As part of
the Restructuring, the Company recorded pre-tax charges as follows (in
thousands):
- ------------------------------------------------------------------------
Write down of equipment
and facilities $ 45,132
Write down of intangible assets 23,198
Employee severance 17,943
Other 7,781
- ------------------------------------------------------------------------
Total $ 94,054
- ------------------------------------------------------------------------
The Restructuring related to consolidation of manufacturing operations,
including severance and associated revaluation of assets, and valuation
adjustments related to discontinuing certain subsidiary product lines.
In 1996, the Company made payments totaling $6.4 million related to the
Restructuring. Further charges, predominantly related to employee severance,
are anticipated. These are expected to total $10 million and will be paid
primarily in 1997. Certain assets at the facilities scheduled to close are
being held for sale as a result of this Restructuring. The Company expects to
sell these assets within one year of the related facility being closed.
Accrued restructuring costs consist primarily of severance and other related
costs associated with plant consolidation strategies and are expected to be
paid primarily in 1997.
3. ACQUISITIONS
During 1996, 1995 and 1994, the Company acquired the businesses described
below, which were accounted for using the purchase method of accounting. The
results of operations of each acquisition are included in the consolidated
financial statements from the date of acquisition. Certain of these purchase
agreements provide for subsequent contingent payments which, if paid, will be
recorded as an increase in goodwill and will be amortized over the remaining
life of the associated goodwill.
On May 31, 1996, the Company's wholly owned subsidiary, Marketing
Profiles, Inc., acquired the common stock of Florida-based OKRA Marketing
Corporation ("OKRA") for cash paid at closing. The acquisition price was
funded with proceeds from short-term borrowings. OKRA designs, develops,
markets and supports proprietary application software products and systems,
and provides data processing services utilizing such products and systems.
Cash paid for this acquisition totaled $24.6 million, net of related
acquisition costs of $0.4 million. As part of this acquisition, the Company
acquired in-process research and development costs of $8.0 million, which was
-F10-
expensed at acquisition. Of the total acquisition costs, approximately $19.4
million was preliminarily allocated to intangible assets, of which $11.5
million represented goodwill, and is being amortized on a straight-line basis
over 15 years.
On May 15, 1996, the Company acquired with cash an additional one percent
of the common stock of G.H. Grupo Industrial, S.A. de C.V. and its wholly
owned subsidiary Galas Harland, S.A. de C.V.
On July 3, 1995, the Company's wholly owned subsidiary, Scantron
Corporation, acquired the net assets of Quality Computers & Applications Inc.
("QCA") for cash paid at closing and a contingent purchase payment payable in
1999. The contingent purchase payment is based upon a multiple of QCA's 1998
operating results as defined in the acquisition agreement. The acquisition
price was funded with proceeds from short-term borrowings. QCA is based in
Detroit, Michigan, and is a mail-order retailer of software and hardware to
the educational technology market. The new entity operates under the name
Scantron Quality Computers, Inc.
On August 31, 1995, the Company acquired the net assets of dataPRINT, a
division of Data Print, Inc., for cash and a note payable. The cash paid at
closing was funded with proceeds from short-term borrowings. dataPRINT is
based in Seattle, Washington, and produces computer-compatible forms,
particularly forms utilized by personal finance software packages.
Assets acquired through acquisitions in 1995 totaled $23.1 million, net
of liabilities assumed of $1.8 million. Cash paid for these acquisitions
totaled $11.1 million along with a note payable made by the Company for $12.0
million that was paid in January 1996. Of the total acquisition costs, $20.3
million was allocated to intangible assets, of which $10.6 million represented
goodwill which is being amortized over 15 to 20 year periods.
On January 7, 1994, the Company acquired Marketing Profiles, Inc. ("MPI")
for cash paid at closing and contingent purchase payments payable to the
former MPI shareholders based upon a multiple of MPI's 1996 operating results
as defined in the acquisition agreement. In October 1995, the acquisition
agreement related to the MPI acquisition was amended to redefine the
calculation of the contingent purchase payment and the related terms of
payment. Accordingly, the Company paid $10 million in April 1996 and $22.7
million in October 1995 to former MPI shareholders, which together represented
the final contingent purchase payments. The payments were recorded as an
increase in goodwill and are being amortized over the remaining estimated
life. MPI is a database marketing and consulting company that provides
software products and related marketing services to the financial industry.
On March 31, 1994, the Company acquired the net assets of FormAtion
Technologies, Inc. ("FormAtion") for cash paid at closing and a contingent
purchase payment payable in 1997 to the former FormAtion shareholders. In
1995, the Company paid $2.7 million for early settlement and termination of
the contingent purchase agreement. FormAtion develops, markets and supports
lending and platform automation software for the financial industry.
On September 30, 1994, the Company's wholly owned subsidiary, Scantron
Corporation, acquired the net assets of Financial Products Corporation ("FPC")
for cash paid at closing. FPC is a provider of maintenance and repair services
for a broad variety of computers, peripherals, networks and operating systems.
Assets acquired through acquisitions in 1994 totaled $65.4 million, net
of liabilities assumed of $18.9 million. The cash paid for these acquisitions
totaled $65.0 million and estimated acquisition-related costs totaled $0.4
million. The purchases were funded with a portion of the proceeds received in
the December 1993 issuance of long-term debt, proceeds from short-term
borrowings and from internally generated funds. Contingent purchase payments
of $25.4 million in 1995 and $10 million in 1996 were made related to these
acquisitions. Of the total acquisition costs (including contingent purchase
price payments), $94.7 million was allocated to intangible assets, of which
$88 million represented goodwill, which is being amortized over 10 to 25 year
periods.
-F11-
Goodwill and other intangible assets acquired in acquisitions consist of
the following as of December 31 (in thousands):
1996 1995
- ------------------------------------------------------------------------
Goodwill $ 119,125 $ 116,267
Non-compete covenants 30,350 30,650
Customer lists 22,014 25,843
- ------------------------------------------------------------------------
Total 171,489 172,760
Less accumulated amortization 43,998 39,668
- ------------------------------------------------------------------------
Total $ 127,491 $ 133,092
========================================================================
The following represents the unaudited pro forma results of operations
which assume the acquisitions occurred at the beginning of the respective year
in which the assets were acquired as well as the beginning of the immediately
preceding year. These results include certain adjustments, primarily increased
amortization of intangible assets, increased interest expense, reduced
interest income and depreciation expense, offset by in-process research and
development costs expensed in 1996 (in thousands, except per share amounts):
1996 1995 1994
- ------------------------------------------------------------------------
Net sales $ 615,063 $ 591,468 $ 561,406
Net income (loss) (7,762) 41,448 51,617
Net income (loss)
per common share (.25) 1.36 1.69
The pro forma financial information presented does not purport to be
indicative of either the results of operations that would have occurred had
the acquisitions taken place at the beginning of the periods presented or of
future results.
4. ASSETS HELD FOR DISPOSAL
Effective January 1, 1996, the Company adopted SFAS 121. As part of the
Company's strategy to consolidate 40 of its check imprint plants into regional
facilities, certain assets, predominantly land, buildings and equipment at the
facilities to be closed with a carrying value of approximately $30.7 million,
are now being held for sale. The Company expects to sell these assets within
one year of the related facility being closed. Fair value of land and
buildings was determined by independent valuation. Fair value of equipment and
other assets was determined by management valuation based on recent disposals
of similar equipment. The impairment loss totaling approximately $45.1 million
is included within the restructuring charge as discussed in Note 2.
5. SHORT-TERM DEBT
As of December 31, 1996, the Company had available unsecured lines of
credit under which it could borrow up to $111 million in the form of short-
term notes, for which no compensating balances or commitment fees are
required. As of December 31, 1996 and 1995, $43 million and $23 million,
respectively, were outstanding under these unsecured lines of credit, bearing
average variable interest rates of 5.85% and 6.16%, respectively.
On August 31, 1995, the Company issued a note payable in the amount of
$12 million in conjunction with its acquisition of the net assets of dataPRINT
(see Note 3). This note payable carried a fixed interest rate of 4% and was
paid in January 1996.
6. LONG-TERM DEBT
Long-term debt consisted of the following as of December 31 (in
thousands):
-F12-
1996 1995
- ------------------------------------------------------------------------
Series A Senior Notes $ 85,000 $ 85,000
Term Loan 15,000 15,000
Convertible Subordinated
Debentures 9,847 10,157
Industrial Development
Refunding Revenue Bonds 4,000 4,000
Other 1,329 867
- -------------------------------------------------------------------------
Total 115,176 115,024
Less current portion 1,101 450
- -------------------------------------------------------------------------
Long-term debt $ 114,075 $ 114,574
=========================================================================
The Company has outstanding $85 million of Series A Senior Notes ("Senior
Notes") and a $15 million Term Loan ("Term Loan"), which bear interest at
fixed interest rates of 6.60% and 6.63%, respectively. The Senior Notes mature
from 2004 to 2008 and the Term Loan is due 2003.
The Company's 6.75% convertible subordinated debentures are convertible
into common stock of the Company at any time prior to maturity, at a
conversion price of $25.17 per share, subject to adjustment in certain events.
As of December 31, 1996, 314,751 shares of common stock were reserved for
conversion of the debentures. The debentures are entitled to an annual
mandatory sinking fund, which commenced June 1, 1996, calculated to retire 75%
of the debentures prior to maturity in 2011. The debentures are redeemable, in
whole or in part, at any time at the option of the Company at par plus accrued
interest. The debentures are subordinated to all senior debt.
On July 1, 1994, the Company executed certain agreements under which $4
million face value of Industrial Development Refunding Revenue Bonds - Series
1994 ("the Bonds") were issued with interest at variable rates, which averaged
3.55% in 1996 and are due in 2004. Proceeds from the issuance were used to
repay in full the Company's existing Industrial Development Revenue Bond,
which matured on July 1, 1994.
The debt agreements relating to the Senior Notes, the Term Loan and the
Bonds contain certain covenants, the most restrictive of which limit the
amount of funded indebtedness of the Company and require the Company to
maintain a minimum fixed charge coverage ratio. At December 31, 1996, the
Company was in compliance with the covenants associated with these debt
instruments. Other long-term debt relates principally to capitalized lease
obligations.
Annual maturities of long-term debt including sinking fund requirements
(less subordinated debentures re-acquired) during the next five years are:
1997-$1.7 million; 1998-$0.8 million; 1999-$0.6 million; 2000-$0.6 million and
2001-$0.6 million.
7. INCOME TAXES
The provision (benefit) for the years ended December 31, 1996, 1995 and
1994 includes the following (in thousands):
1996 1995 1994
- ------------------------------------------------------------------------
Current: Federal $ 22,218 $ 25,542 $ 28,754
State 4,794 5,697 6,289
- ------------------------------------------------------------------------
Total 27,012 31,239 35,043
========================================================================
Deferred: Federal (24,107) (310) (963)
State (4,528) (43) (194)
- ------------------------------------------------------------------------
Total (28,635) (353) (1,157)
- ------------------------------------------------------------------------
Total $ (1,623) $ 30,886 $ 33,886
========================================================================
-F13-
The tax effects of significant items comprising the Company's net
deferred tax asset and liability as of December 31 are as follows (in
thousands):
1996 1995
- ------------------------------------------------------------------------
Current deferred tax asset:
Accrued vacation $ 1,704 $ 2,124
Deferred revenue 1,464 1,911
Accrued liabilities 1,701 2,103
Other 3,478 385
- ------------------------------------------------------------------------
Total 8,347 6,523
- ------------------------------------------------------------------------
Non-current deferred tax asset (liability):
Difference between book and tax basis
of property 5,895 (14,767)
Deferred revenue 1,974 2,148
Deferred compensation 1,685 1,701
Acquisition reserves 933 1,952
Postretirement benefit obligation 2,936 2,806
Other 6,589 1,656
- ------------------------------------------------------------------------
Total 20,012 (4,504)
Valuation allowance 0 0
- ------------------------------------------------------------------------
Net deferred tax asset $ 28,359 $ 2,019
========================================================================
A reconciliation between the Federal income tax statutory rate and the
Company's effective income tax rate is as follows:
1996 1995 1994
- ------------------------------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
State and local income taxes, net of
Federal income tax benefit (1.1) 4.8 4.7
Income from Puerto Rico 8.9 (1.7) (1.6)
In-process research
and development costs (18.0)
Non-deductible goodwill (14.7) 0.7 0.4
Other - net 0.4 1.4 1.3
- ------------------------------------------------------------------------
Effective income tax rate 10.5% 40.2% 39.8%
========================================================================
8. SHAREHOLDERS' EQUITY
Each share of common stock includes a stock purchase right, which is not
currently exercisable but would become exercisable upon occurrence of certain
events as provided for in the Rights Agreement. The rights expire on July 5,
1999.
On January 31, 1997, the board of directors approved the reduction of the
annual dividend from $1.02 to $0.30 per share.
-F14-
9. STOCK COMPENSATION PLANS
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock-based compensation plans.
Effective January 1, 1996, the Company adopted the disclosure-only provisions
of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"). Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates consistent with the method of SFAS 123, the Company's net income
(loss) and net income (loss) per share would have changed to the pro forma
amounts listed below (in thousands, except per share amounts):
1996 1995
- ------------------------------------------------------------------------
Net income (loss)
As reported $ (13,854) $ 46,017
Pro forma (15,007) 45,260
Net income (loss) per common share
As reported $ (.45) $ 1.51
Pro forma (.48) 1.48
Under the John H. Harland Company Employee Stock Purchase Plan ("ESPP"),
the Company is authorized to issue up to 4,350,000 shares of common stock to
its employees, most of whom are eligible to participate. Under the ESPP,
eligible employees may choose to exercise an option to purchase shares of
Company stock with earnings which have been withheld during each quarter. The
option price is 85% of the lower of the beginning-of-quarter or end-of-quarter
market price. During 1996, 1995 and 1994, employees exercised options to
purchase 196,458 shares, 202,494 shares and 218,125 shares, respectively, from
the ESPP. Options granted under the ESPP were at prices ranging from $17.80 to
$25.87 in 1996, $16.89 to $19.23 in 1995 and $17.16 to $18.70 in 1994. Pro
forma compensation cost associated with options granted under the ESPP is
estimated based on the discount from market value. As of December 31,1996,
there were 815,632 shares of common stock reserved for purchase under the
ESPP.
Under the John H. Harland Company 1981 Incentive Stock Option Plan, As
Extended ("ISOP"), the Company may grant incentive and non-qualified stock
options to certain 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. The
Company is authorized to issue up to 2,685,955 shares of common stock under
the ISOP. Options granted under the ISOP through July 1995 became fully
exercisable one year from the date of the grant, with a maximum life of five
years. Options granted under the ISOP after July 1995 vest ratably over a
five-year period beginning on the first anniversary of the date of the grant,
and have a maximum life of 10 years, with the exception of one grant made in
1995 that has a maximum life of seven years.
The fair value of options granted under the ISOP during 1996 was
estimated as $7.40, using the Black-Scholes option pricing model and the
following weighted average assumptions: dividend yield 3.9%, expected
volatility of 25.4%, risk-free interest rate of 6.4%, assumed forfeiture rate
of 3% and an expected life of eight years. The fair value of options granted
under the ISOP during 1995 was estimated as $3.32, using the following
weighted average assumptions: dividend yield 5.0%, expected volatility of
23.4%, risk-free interest rate of 6.1%, assumed forfeiture rate of 3% and an
expected life of 6.8 years. A summary of transactions under the ISOP during
the three years ended December 31, 1996, follows:
-F15-
Weighted Average
Shares Exercise Price
- --------------------------------------------------------------------------
Outstanding - December 31, 1993 375,668 $ 22.89
Options granted 114,250 21.75
Options exercised (4,034) 19.70
Options canceled (100,051) 22.09
- ------------------------------------------------------------------------
Outstanding - December 31, 1994 385,853 $ 22.79
Options granted 1,123,250 24.61
Options exercised (15,652) 14.02
Options canceled (82,443) 23.53
- ------------------------------------------------------------------------
Outstanding - December 31, 1995 1,411,008 $ 24.30
Options granted 1,090,000 26.52
Options exercised (85,579) 21.05
Options canceled (60,143) 23.08
- ------------------------------------------------------------------------
Outstanding - December 31, 1996 2,355,286 $ 25.47
========================================================================
As of December 31, 1996, there were 2,627,807 shares of common stock
reserved for issue under the ISOP. The following table summarizes information
pertaining to options outstanding and exercisable under the ISOP as of
December 31, 1996:
Options Outstanding
- ------------------------------------------------------------------------
Weighted Weighted
Average Remaining Average
Range of Number Contractual Life Exercise
Exercise Prices Outstanding (Years) Price
- ------------------------------------------------------------------------
$10 to $15 3,567 0.92 $ 11.59
$15 to $20 89,785 2.90 19.15
$20 to $25 1,462,917 7.05 23.12
$25 to $30 379,017 5.25 29.55
$30 to $35 420,000 9.80 31.47
- ------------------------------------------------------------------------
Total 2,355,286
========================================================================
Options Exercisable
- ------------------------------------------------------------------------
Range of Weighted Average Exercise
Exercise Prices Number Exercisable Price
========================================================================
$10 to $15 3,567 $ 11.59
$15 to $20 89,785 19.15
$20 to $25 259,584 23.12
$25 to $30 112,351 29.55
- ------------------------------------------------------------------------
Total 465,287
========================================================================
10. EMPLOYEE RETIREMENT AND SAVINGS PLANS
Effective April 1, 1996, the Company merged substantially all of the
Company's profit sharing plan assets with the Company's Master 401(k) Plan and
Trust ("401(k) plan"). John H. Harland Company of Puerto Rico ("Harland PR")
assumed sponsorship of the profit sharing plan since remaining assets relate
only to Harland PR employees.
-F16-
Harland PR's profit sharing plan is a non-contributory plan to provide
retirement income for Harland PR employees. In years prior to 1996, the profit
sharing plan provided retirement income for most of the Company's employees
and the Company was required to contribute to the profit sharing plan an
amount equal to 7.5% of its income before income taxes and profit sharing
contribution plus such additional amount as the board of directors determined,
up to a maximum of 15% of the aggregate compensation of participating
employees. Contributions to the profit sharing plan were $0.4 million in 1996,
$7.9 million in 1995 and $9.9 million in 1994.
The 401(k) plan is a defined contribution 401(k) plan with an employer
match covering any employee of the Company or a participating affiliate of the
Company who is not a non-resident alien. Participants may contribute on a pre-
tax and after-tax basis, subject to maximum IRS limits and not exceeding 17%
of annual compensation. Effective January 1, 1996, the Company matches
employee contributions $0.50 for every dollar up to a maximum Company matching
contribution of 3% of annual compensation. Additional contributions may be
made from accumulated or current net profits at the board of directors'
discretion. Contributions to the 401(k) plan were $3.5 million in 1996, $0.6
million in 1995 and $0.4 million in 1994.
The Company has unfunded deferred compensation agreements with certain
officers. The present value of cash benefits payable under the agreements is
being provided over the periods of active employment and totaled $3.9 million
at December 31, 1996. The charge to expense for these agreements is not
significant.
11. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company sponsors two defined postretirement benefit plans that cover
qualifying salaried and non-salaried employees. One plan provides health care
benefits and the other provides life insurance benefits. The medical plan is
contributory and contributions are adjusted annually based on actual claims
experience. The life insurance plan is non-contributory. The Company's intent
is that the retiree provide approximately 50% of the actual cost of providing
the medical plan. Neither plan is funded.
As of December 31, 1996, the accumulated postretirement benefit
obligation ("APBO") under such plans was $9.3 million. The following table
reconciles the plans' status to the accrued postretirement health care and
life insurance liability reflected on the balance sheet as of December 31 (in
thousands):
1996 1995
- ------------------------------------------------------------------------
APBO:
Retirees $ 3,201 $ 2,469
Fully eligible participants 2,054 1,954
Other participants 4,094 4,234
9,349 8,657
Unrecognized net loss (977) (877)
- ------------------------------------------------------------------------
APBO - included in Other
Liabilities $ 8,372 $ 7,780
========================================================================
Net periodic postretirement costs ("NPPC") are summarized as follows (in
thousands):
1996 1995 1994
- ------------------------------------------------------------------------
Service costs $ 313 $ 280 $ 303
Interest on APBO 661 543 564
Net amortization 1 33
- ------------------------------------------------------------------------
Total $ 975 $ 823 $ 900
========================================================================
-F17-
The cost of providing medical benefits was assumed to increase by 9% in
1996, 8% in 1997, reduced by 0.5% each year until a 5.5% rate is reached in
2002. The medical cost trend rate assumption could have a significant effect
on amounts reported. An increase of 1.0% in the assumed rate of increase would
have had the effect of increasing the APBO by $1.1 million and the NPPC by
$119,000. The weighted average discount rate used in determining the APBO was
7.75% in 1996 and 1995, and 8.0% in 1994 and employee earnings were estimated
to increase 3.5% annually until age 65.
12. Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Short-term investments - The carrying value approximates fair value
because of the short maturity of those instruments.
Long-term investments - The fair values of certain investments are
estimated based on quoted market prices. The fair values of the Company's
investments in limited partnerships are based on estimates by general partners
in the absence of readily ascertainable market values. The Company's other
investments, which are not actively traded and are immaterial, fair value is
based on an estimate of the net realizable value of those investments.
Short-term debt - The carrying value approximates fair value.
Long-term debt - The fair value of the Company's convertible debentures
is based on recent market quotes. The carrying value of the Company's
Industrial Development Refunding Revenue Bonds approximates fair value. The
fair value of other long-term debt is based on estimated rates currently
available to the Company for debt with similar terms and maturities.
The carrying value and estimated fair values of the Company's financial
instruments at December 31 are as follows (in thousands):
Carrying Value Fair Value
- ------------------------------------------------------------------------
1996 1995 1996 1995
- ------------------------------------------------------------------------
Investments:
Short-term $ 152 $ 400 $ 152 $ 400
Long-term 6,178 8,188 6,499 9,441
Debt:
Short-term 43,089 35,000 43,089 35,000
Long-term 114,075 114,574 112,740 114,315
13. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is subject to various
legal proceedings and claims. The Company believes that the ultimate outcome
of these matters will not have a material effect on its financial statements.
Total rental expense was $9.4 million in 1996, $8.0 million in 1995 and
$9.1 million in 1994. Minimum annual rentals under non-cancellable operating
leases at December 31, 1996 are as follows (in thousands):
1997 $ 5,668
1998 5,136
1999 4,202
2000 3,138
2001 1,719
- ------------------------------------------------------------------------
Total $ 19,863
========================================================================
The Company has signed agreements relating to leases commencing in 1997.
Lease payments totaling $26.9 million are anticipated over a fifteen-year
period.
-F18-
The Company has signed a letter of understanding with a vendor who will
perform certain customer-related functions through 2001. Annual costs under
this relationship are estimated to be approximately $15.1 million in 1997 and
approximately $18.0 million in 1998 through 2001.
14. BUSINESS SEGMENTS
The Company operates its business in two segments. The Financial Services
segment ("FS") includes checks, forms and other printed products, database
marketing, direct marketing campaign management and loan origination software
sold primarily to financial institutions.
The Scantron segment represents products and services sold by its
Scantron subsidiary including optical mark reading equipment, scannable forms,
mail order software and maintenance services. Scantron sells these products
and services primarily to the education market.
The Company's operations are primarily in the United States and Puerto
Rico. There were no significant inter-segment sales and no material amounts of
the Company's sales are dependent upon a single customer. Equity investments
as well as foreign assets are not significant to the consolidated results of
the Company. Operating income or loss includes restructuring charges and in-
process research and development costs written off but excludes interest
income, interest expense and other non-operating gains and losses. Corporate
assets consist primarily of cash and cash equivalents, investments and other
assets not employed in production.
Summarized financial information by business segment for 1996, 1995 and
1994 is as follows (in thousands):
Consol-
FS Scantron Corporate idated
- ------------------------------------------------------------------------
1996
Sales $ 527,168 $ 82,216 $ 609,384
Operating
income (loss) 13,427 (184) $ (21,319) (8,076)
Identifiable assets 349,105 57,217 48,409 454,731
Depreciation and
amortization 36,297 6,417 42,714
Capital
expenditures 26,309 2,611 28,920
1995
Sales $ 484,342 $ 77,275 $ 561,617
Operating income 92,192 8,065 $ (17,037) 83,220
Identifiable assets 380,747 65,863 28,040 474,650
Depreciation and
amortization 41,321 6,996 48,317
Capital
expenditures 29,516 3,875 33,391
1994
Sales $ 462,809 $ 58,457 $ 521,266
Operating income 100,918 7,863 $ (16,769) 92,012
Identifiable assets 325,128 58,367 38,788 422,283
Depreciation and
amortization 36,859 4,680 41,539
Capital
expenditures 34,165 3,309 37,474
-F19-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
Supplemental Financial Information
SELECTED QUARTERLY FINANCIAL DATA, DIVIDENDS PAID AND STOCK PRICE RANGE
(In thousands except per share amounts)
--------- Quarter ended ----------
March 31 June 30 September 30 December 31
-----------------------------------------------------------------------
1996:
Net sales $ 152,247 $ 149,645 $ 155,912 $ 151,580
Gross profit 67,255 69,736 72,857 72,374
Net income 8,446 (51,063) 14,038 14,725
Per common share:
Net income .28 (1.66) .45 .47
Dividends paid .255 .255 .255 .255
Market price:
High 27 1/4 29 7/8 32 3/8 33
Low 21 1/4 20 3/4 23 1/2 29 7/8
1995:
Net sales $ 138,291 $ 136,068 $ 141,348 $ 145,910
Gross profit 67,522 64,047 64,129 63,259
Net income 12,763 12,468 10,958 9,828
Per common share:
Net income .42 .41 .36 .32
Dividends paid .255 .255 .255 .255
Market price:
High 22 7/8 23 5/8 23 22 1/8
Low 19 1/8 21 5/8 21 5/8 19 3/4
SELECTED FINANCIAL DATA
(In thousands except per share amounts)
--------- Year ended December 31 ---------
1996 1995 1994 1993 1992
----------------------------------------------------------------------
Net sales $ 609,384 $ 561,617 $ 521,266 $ 519,486 $ 444,980
Net income (13,854) 46,017 51,240 52,522 56,638
Total assets 454,731 474,650 422,283 364,973 339,880
Long-term debt 114,075 114,574 115,226 111,542 12,622
Per common share:
Net income (.45) 1.51 1.68 1.62 1.59
Dividends paid 1.02 1.02 .98 .94 .90
Average number of
shares outstanding 30,951 30,558 30,517 32,460 35,689
Earnings per share are calculated based on the weighted average number of
shares outstanding during the quarter. For 1996, that total differs from the
earnings per share shown on the consolidated statements of income, which is
based on the weighted average number of shares for the entire year.
The Company's common stock (symbol:JH) is listed on the New York Stock
Exchange. At December 31, 1996 there were 8,187 shareholders of record.
Refer to Note 2 of the Notes to regarding the impact of restructuring
charges in 1996.
Refer to Note 3 of the Notes to regarding the impact of acquisitions in
1996, 1995 and 1994.
-F20-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company operates its business in two segments. The Financial Services
segment ("FS") includes checks, forms and other printed products, database
marketing, direct marketing campaign management and loan origination software
sold primarily to financial institutions.
The Scantron segment represents products and services sold by its
Scantron subsidiary including optical mark reading equipment, scannable forms,
mail order software and maintenance services. Scantron sells these products
and services primarily to the education market.
Results of Operations
1996 versus 1995
Consolidated net sales increased $47.8 million or 8.5% and represented
the Company's 47th consecutive year of sales increases. FS sales totaled
$527.2 million, an increase of 8.8% over 1995. FS check order volumes,
excluding computer checks, increased by 4.8% over 1995, offset by a price and
product mix decrease of 2.9%. The volume increase is attributable to one-time
conversion sales in 1996, resulting from financial institution mergers and the
commencement in August 1996 of a five-year agreement with a direct mail check
supplier. The price and product mix decrease is attributable in part to that
contract. Although the average revenue per unit is lower under this contract
than for sales to financial institutions, the cost of producing these units is
substantially less since order entry and customer service are provided by the
direct mail check supplier. Computer check and other printed product revenues
increased by 23.1% as a result of the dataPRINT acquisition in August 1995.
Revenue from marketing services, including database marketing, decision
support and loan compliance services, was $53 million in 1996, an increase of
28% over 1995. Scantron's sales increased $4.9 million or 6.4% over 1995
principally due to the acquisition of Quality Computers & Applications Inc.
("QCA") in July 1995.
Consolidated gross profit increased by 9.0% and gross margin increased
from 46.1% in 1995 to 46.3% in 1996. FS gross margins increased from 45.9% in
1995 to 46.5% in 1996 due to lower operating costs, partially offset by the
impact of the loss of highly profitable bank business, primarily through
mergers, in late 1995 and in 1996. Scantron's gross margins decreased from
47.6% in 1995 to 45.3% in 1996 reflecting the acquisitions of lower margin
businesses. Consolidated gross margins increased as a result of a reduction of
$10.4 million in depreciation and amortization related to revaluation
adjustments to certain assets included in the 1996 restructuring charge.
Consolidated selling, general and administrative expenses increased by
$10.9 million due primarily to the additional expenses from acquired
operations, including QCA, dataPRINT and OKRAMarketing Corporation ("OKRA") in
May 1996, and increased corporate expenses related to the Company's
restructuring. These increases were partially offset by reduced employee
benefit costs of $4.6 million related to the merger of the Company's profit
sharing plan into its 401(k) plan and reduced depreciation and amortization
expense of $0.9 million related to the restructuring charge. Selling, general
and administrative expenses decreased as a percentage of sales from 28.6% in
1995 to 28.2% in 1996.
During 1996, the Company recognized charges of $94.1 million and $8.0
million related to restructuring and acquired in-process research and
development, respectively. These charges reflect the Company's plans for
consolidation of operations and other strategic decisions related to products.
Amortization of intangibles increased by $1.6 million as a result of
increased goodwill related to acquisitions and contingent acquisition
payments, offset by a reduction in amortization of $2.8 million related to the
intangibles written down as part of the restructuring.
Other income (expense) increased from a $6.3 million expense in 1995 to a
$7.4 million expense in 1996 primarily due to increased interest resulting
-F21-
from higher average levels of short-term debt in 1996 related to the OKRA
acquisition and final settlement payments associated with the 1994 acquisition
of Marketing Profiles, Inc. ("MPI").
The Company's consolidated effective income tax rate for 1996 was 10.5%
compared to 40.2% for 1995. The decrease in the effective tax rate and the
associated tax benefit were primarily due to the effects of permanent tax
differences in the restructuring charge, non-deductible acquired in-process
research and development charge and non-deductible amortization of
intangibles.
The Company reported a net loss for 1996 of $13.9 million, or $0.45 per
share, compared to net income of $46.0 million or $1.51 per share for 1995.
The restructuring charges in 1996 reduced consolidated earnings by
approximately $1.83 per share and the charge for acquired in-process research
and development costs reduced consolidated earnings by approximately $0.26 per
share.
1995 versus 1994
Consolidated net sales increased $40.4 million or 7.7%. FS sales totaled
$484.3 million, an increase of $21.5 million over 1994. This increase is due
in part to the acquisition of dataPRINT in August 1995 and the growth of The
Check Store revenues. Sales for check products increased $3.8 million or 0.9%
in 1995. This change consisted of a 5.0% decrease in units and a price and
product mix increase of 5.9%. The positive price and product mix is
attributable in part to price increases implemented in December 1994 and 1995
and revenues from expedited delivery programs. The unit decrease is partially
due to the loss of two large customers during 1994 and 1995. Scantron's sales
increased $18.8 million or 32.2% compared to 1994, principally due to the
acquisitions of QCA in July 1995 and Financial Products Corporation ("FPC") in
September 1994.
Consolidated gross profit increased $10.0 million but decreased as a
percentage of sales from 47.8% in 1994 to 46.1% in 1995. FS gross margin
decreased from 47.5% in 1994 to 45.9% in 1995, largely due to paper price
increases during 1995, competitive pricing pressures in the business and
increased sales activity in non-traditional printing activities. FS gross
margin decrease was mitigated by gains in production efficiencies and by
margin improvements attributable to general price increases. Scantron's gross
margin decreased from 50.0% in 1994 to 47.6% in 1995 primarily due to product
mix changes and increases in paper costs.
Consolidated selling, general and administrative expenses increased by
$15.5 million or 10.7%, and increased as a percentage of sales from 27.9% in
1994 to 28.6% in 1995. This increase is primarily due to marketing
expenditures associated with The Check Store and expenses attributable to
acquired operations. These increases were partially offset by a decrease in FS
administrative expenses due primarily to plant consolidations in 1994. Profit
sharing costs decreased $2.0 million or 20.6% from 1994.
Amortization of intangibles increased by $3.3 million or 28.0%, and
increased as a percentage of sales from 2.2% in 1994 to 2.6% in 1995. This
increase is primarily attributable to the acquisitions during 1994 and 1995 of
FormAtion Technologies, Inc., FPC, QCA and dataPRINT, and partial payment of
an earnout with the former owners of MPI. Of the total 1995 amortization of
intangibles, $8.7 million relates to assets that are being amortized over five
years or less.
Other income (expense) decreased from an expense of $6.9 million in 1994
to an expense of $6.3 million in 1995. Gains on sales of certain investments
offset an increase in interest expense in 1995. Interest expense increased
$1.0 million due to higher average levels of short-term debt in 1995.
Income before income taxes decreased $8.2 million or 9.7% and decreased
as a percentage of sales from 16.3% in 1994 to 13.7% in 1995. The Company's
consolidated effective 1995 income tax rate was 40.2% compared to 39.8% in
1994. Net income decreased $5.2 million or 10.2% and decreased as a percentage
of sales from 9.8% in 1994 to 8.2% in 1995. Net income per share in 1995 was
$1.51, a 10.1% decrease from $1.68 in 1994.
-F22-
Financial Condition, Capital Resources and Liquidity
Cash flows provided by operating activities in 1996 were $98.3 million
compared to $75.7 million for 1995. The primary uses of funds in 1996 were for
acquisition-related expenditures, dividends paid to the Company's shareholders
and capital expenditures. Payments made for acquisition of businesses and for
settlements of earnout provisions in previous acquisitions totaled $35.0
million in 1996, compared to $36.5 million in 1995. Purchases of property,
plant and equipment totaled $28.9 million in 1996, compared to $33.4 million
in 1995.
The Company has unsecured lines of credit that provide for borrowings up
to $111.0 million. As of December 31, 1996, $43.0 million was outstanding
under these lines of credit. In January 1996, the Company paid a $12 million
note related to the acquisition of dataPRINT.
On December 31, 1996, the Company had $22.7 million in cash and cash
equivalents. The Company believes that its current cash position, funds from
operations and the availability of funds under its lines of credit will be
sufficient to meet anticipated requirements for working capital, dividends,
capital expenditures and other corporate needs. The Company also believes that
it possesses sufficient unused debt capacity and access to debt and equity
capital markets to pursue additional acquisition opportunities.
Outlook
To improve service quality, reduce costs and increase the profitability
of its check printing business, the Company is standardizing products and
pricing and consolidating and restructuring its manufacturing operations. This
strategy includes creating an enterprise-wide communications platform linking
the check printing business with marketing services. The strategy also
requires the development of additional marketing services which will enhance
the Company's database management capabilities.
In April 1996, the Company announced plans to consolidate its 40 check
imprint plants into a network of regional facilities and to incorporate
advanced manufacturing technology and systems into this network. All but eight
of the plants scheduled for consolidation are anticipated to close by December
31, 1997, with the balance to close by the middle of 1998.
In the third quarter of 1996, the Company announced an agreement with
APAC TeleServices, Inc., to develop and staff two state-of-the-art call
centers for centralized order entry and customer service. The Company has also
combined various sales and marketing functions into a multi-product
organization, focused on serving the financial institution market. This
organization offers an integrated product line of marketing services and
printed products under the Harland brand. Plans include developing and
acquiring new technology and businesses to enhance this product line.
To support its new business strategies, the Company recorded a pre-tax
restructuring charge of $94.1 million in 1996. Management expects to incur
charges in 1997 and in early 1998, predominantly related to employee
severance, totaling approximately $10 million.
In January 1997, the Company's board of directors approved a reduction in
the Company's annual dividend on its common stock from $1.02 to $0.30 per
share to support long-term growth through a more strategic use of cash.
Newly Issued Accounting Pronouncements
In February 1997, Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share" was issued. This Statement simplifies the
standard for computing earnings per share ("EPS") previously found in APB
Opinion No. 15, "Earnings per Share", by replacing the presentation of primary
EPS with basic EPS. It also requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted EPS
computation. Basic EPS is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS is computed similarly to fully diluted EPS under
Opinion No. 15. The Company intends to adopt this Statement in 1997.
-F23-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In thousands of dollars)
____________________________________________________________________________________________
COLUMN A COLUMN B ---- COLUMN C ---- COLUMN D COLUMN E
ADDITIONS
BALANCE CHARGED TO CHARGED TO BALANCE
AT BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
(1) (2)
____________________________________________________________________________________________
Year Ended December 31, 1996
Allowance for doubtful accounts $ 2,251 $ 737 $ 1,266 $ 1,368 $ 2,886
======= ======= ======= ======= =======
Year Ended December 31, 1995
Allowance for doubtful accounts $ 1,970 $ 1,757 $ 274 $ 1,750 $ 2,251
======= ======= ======= ======= =======
Year Ended December 31, 1994
Allowance for doubtful accounts $ 1,753 $ 818 $ 191 $ 792 $ 1,970
======= ======= ======= ======= =======
Notes:
(1) Represents recovery of previously written-off and credit balance accounts receivable.
(2) Represents write-offs of uncollectible accounts receivable.
-S1-
EXHIBIT INDEX
(* indicates document is incorporated by reference)
Exhibit
Desig-
nation Description
______ ___________
3.1 * Amended and Restated Articles of Incorporation.
3.2 By-Laws, as amended.
4.1 Indenture, as supplemented and amended, relating to 6.75%
Convertible Subordinated Debentures due 2011 of Scantron
Corporation (omitted pursuant to Item 601(b)(4)(iii) of
Regulation S-K; will be furnished to the Commission upon
request).
4.2 * Form of Rights Agreement dated as of June 9, 1989, between the
Registrant and Citizens and Southern Trust Company.
4.3 * First Amendment dated June 12, 1992 to Rights Agreement dated
June 9, 1989 between the Company and NationsBank of Georgia
Inc., N.A., successor to Citizens and Southern Trust Company.
4.4 * Second Amendment dated July 24, 1992 to Rights Agreement dated
June 9, 1989 between the Company and Trust Company Bank,
successor to NationsBank of Georgia Inc., N.A., and to Citizens
and Southern Trust Company.
4.5 * Note Agreement dated as of December 1, 1993 between the
Company and the purchasers listed on Schedule I of the
agreement, for the issuance and sale of $85,000,000 aggregate
principal amount of 6.60% Series A Senior Notes Due December
30, 2008.
4.6 See Articles IV, V and VIII of the Registrant's Amended and
Restated Articles of Incorporation, filed as Exhibit 3.1, and
Articles I, V, and VIII of the Registrant's By-Laws, as
amended, filed as Exhibit 3.2.
10.1 * Form of Deferred Compensation Agreement between the Registrant
and Robert R. Woodson.
10.2 * Form of Monthly Benefit Amendment to Deferred Compensation
Agreement between the Registrant and Mr. Woodson.
10.3 * Form of Deferred Compensation Agreement between the Registrant
and Earl W. Rogers Jr.
10.4 * Form of Amendment to Deferred Compensation Agreement between
the Registrant and Messrs. Woodson and Rogers.
10.5 * Form of Non-Compete and Termination Agreement between the
Registrant and Messrs. Woodson, Rogers and William M. Dollar.
10.6 * Form of Noncompete and Termination Agreement between the
Registrant and Joseph M. O'Connell, S. David Passman, Mark C.
Perlberg and John C. Walters.
10.7 * Form of Executive Life Insurance Plan between the Registrant
and Messrs. Woodson and Rogers.
10.8 * John H. Harland Company 1981 Incentive Stock Option Plan, as
Extended, as amended.
10.9 * John H. Harland Company Employee Stock Purchase Plan, as
amended.
10.10 John H. Harland Company Deferred Compensation Plan for Outside
Directors.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors
27 Financial Data Schedule
-X1-