Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-K
(Mark One)
|x| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 or
| | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission file number 1-6352
John H. Harland Company
(Exact name of registrant as specified in its charter)
Georgia 58-0278260
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2939 Miller Road, Decatur, Georgia 30035
(Address of principal executive offices) (Zip Code)
(770) 981-9460
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
------------------------- ------------------------------
Common Stock $1 par value New York Stock Exchange
Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X
No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.|x|
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of the close of business on March 12, 1999 was
$409,356,547.
The number of shares of the Registrant's Common Stock outstanding on
March 12, 1999, was 31,103,263.
A portion of the Registrant's Definitive Proxy Statement dated March
12, 1999, is incorporated by reference in Part III hereof.
-1-
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 8
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 7A: Quantitative And Qualitative Disclosures About
Market Risk 8
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 Schedule and
Reports on Form 8-K 9
-2-
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 works with banks, credit unions, brokerage houses and
financial software companies, providing these institutions with products and
services that help strengthen relationships with their customers. These
offerings range from financial printing (checks, forms and business products)
to database marketing software, direct marketing, and loan and deposit
origination software. The Company's subsidiary, Scantron Corporation
("Scantron"), sells information management products and services, including
optical mark reading equipment, scannable forms, survey services and field
maintenance services. Scantron sells these products and services primarily to
the commercial and education markets.
The Company serves its major markets through two primary business
segments, each of which is described below. Reference is made to Note 13 of
the Notes to Consolidated Financial Statements on page F25 of this Annual
Report on Form 10-K with respect to information concerning the Company's
business segments.
Recent Developments
Timothy C. Tuff was elected president, chief executive officer and
director of the Company on October 6, 1998.
In December 1998, the Company announced a restructuring of the
organization that is designed to strengthen relationships with customers and
increase bottom-line accountability. The reorganization involved separating
corporate and line functions, and creating individual business units focused
on either product lines or distinct customer groups. The Company believes that
the business unit structure will help strengthen the role each unit plays in
enhancing shareholder value.
The Company took steps to align the interests of the board of directors
with those of shareholders, including a new committee structure for the board
and new ownership guidelines for directors. There are now three committees:
Audit, Executive and Governance. The Governance Committee, which incorporates
the compensation and nominating functions, will also address broader
governance issues. The ownership guidlines require directors to own five times
the amount of their annual retainer in company stock. This threshold must be
achieved within five years. Annual retainers for directors are paid in Company
stock.
The Company plans to release a WindowsRM version of its MAX$ELL database
management system later in 1999. Recent development efforts had focused on the
Harland Relationship ManagerTM system, a next-generation database management
system. These development efforts were discontinued in late 1998 due to
product performance issues.
Scantron purchased Equitrac Computer Services (ECS) in 1998 to strengthen
its service capabilities in several of the 42 states in which it does
business. The Company anticipates that growth of the service business will
come through internal development and additional acquisitions. Scantron also
introduced eListen,TM a universal electronic survey and data collection
software system that enables organizations to conduct surveys through popular
electronic media, including Intranet, World Wide Web, e-mail and corporate
network. In addition to expanding the functionality of a core offering,
eListen increases the Company's capabilities for surveying large
constituencies.
-3-
Financial Services
The Financial Services ("FS") segment focuses on providing
products and services to financial institutions, including banks,
credit unions, brokerage houses and financial software companies. These
offerings range from financial printing (checks, forms and business
documents) to database marketing systems, direct marketing campaign
management, and loan and deposit origination and compliance software.
FS core printed products are checks, forms and related magnetic
ink character recognition ("MICR") documents sold to financial
institutions and their customers. These documents include personal,
business and computer checks and forms. FS also produces a variety of
financial documents, including checks, invoices, statements and other
forms, used by individuals in conjunction with personal and/or small
business financial software applications. Through a strategic alliance
with Bottomline Technologies, Inc.("Bottomline"), FS offers point-of-
service capability to produce MICR-readable documents. (The Company has
an equity investment in Bottomline totaling 5.9% of Bottomline's
outstanding common stock.)
FS primary competitors in the sale of MICR-encoded documents and
related forms to financial institutions are two national financial
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.
Recognizing that growth in financial printing is slowing and that
its customers have a growing need to improve profitability and increase
operational efficiencies, the Company began expanding its offerings
several years ago. The Company now also offers financial institutions
database marketing systems, direct marketing campaign management, and
loan and deposit origination and compliance software.
Product expansion has benefited from a number of acquisitions,
including two companies that offer marketing customer information file
("MCIF") software and related services. The Company markets these
products and services under the term "Decision Support." Financial
institutions use this software to identify profitable customers and
prospects, develop sound marketing strategies and execute information-
driven plans aimed at building and retaining profitable relationships.
MCIF software enables financial institutions to quickly and
accurately gauge profitability potential and target potential
customers. Utilization of external and internal data, such as
demographic and geographic information, can enhance analysis, which is
then merged into multi-contact direct marketing programs. Additional
services include consulting, creative services, printing and
fulfillment, and campaign management, all of which are designed to
deliver a strong return on investment for financial institutions.
The market for the Company's Decision Support products and
services is growing within the financial services industry. More than
1,300 financial institutions utilize one of the Company's database
marketing products, giving the Company a leadership position in this
emerging market.
FS also markets and supports loan and deposit origination and
compliance software for the financial institution market. Competition
within this market varies by financial institution size.
The Company believes that the primary competitive factor
influencing buying decisions within the FS segment is the ability to
-4-
help financial institutions improve profitability and increase
operational efficiencies. The Company believes that FS compares
favorably with its competitors in this respect.
FS markets its products and services primarily in the United
States, although there is varying market penetration in the Caribbean,
Mexico, Canada and other limited markets. Financial institution
customers include community, regional and national banks, credit unions
and brokerage houses. Non-financial institution customers include
financial software companies, superstores, direct mail check suppliers,
catalog merchandisers and affinity groups.
FS markets its products and services primarily through one sales
force divided into two groups, with one group focused on national
accounts, and the second group servicing the needs of community banks
and credit unions. Database marketing and direct marketing specialists
support this sales force.
FS principal raw materials are safety paper, form paper and MICR
bond paper. Other related products, such as vinyl, inks, checkboards,
packaging material and miscellaneous supplies, are purchased from a
number of suppliers. The Company believes that adequate raw materials
will be available to support FS operations.
The Company believes that the loss of any one FS customer would
not have a materially adverse effect on its consolidated results of
operations.
Scantron Corporation
Scantron was founded in 1972 and acquired by the Company in 1988.
Scantron provides products and services utilized primarily in the areas of
surveying, assessment and data collection for commercial and educational
institutions. These core offerings include scannable forms, optical mark
readers ("OMRs"), application software and maintenance services.
Scantron's brand awareness is strong in the K-12 and post secondary
education markets, where the name "Scantron" is readily associated with
testing and data collection technology. In addition to test scoring, a
Scantron system, which includes a scanner, forms and software, is used to
collect and analyze data for surveys, grade reporting and balloting.
Related lines of businesses include the Scantron Survey Group, which
offers full-service data collection and survey services; and the Scantron
Service Group, a provider of scanner, personal computer, and network systems
maintenance, support and installation services.
Scantron is developing new products and services that it believes will
help it penetrate emerging high technology markets, including enterprise-wide
survey and assessment solutions.
Scantron's markets are diverse and competitive. The Company believes
Scantron is the second-largest provider of data collection systems to
commercial and educational markets in the United States. The Company also
believes that Scantron's scanning technologies are more accurate than other
methods of capturing and tabulating high volumes of data.
Scantron's forms printing operation competes with commercial and
specialized forms printers, principally on the basis of systems compatibility,
product quality, customer services, and availability of a complete product
line to the end user.
Scantron's field service operation competes with various organizations
that provide installation and maintenance services, including technology
manufacturers, other national and local field service and maintenance
companies.
-5-
The Company believes that Scantron's breadth of products and services,
brand name, and new product and service offerings compare favorably with
competitors.
Scantron markets its products primarily through inside and outside sales
and service representatives throughout the United States and Canada.
Representatives sell new systems, sell reorders for existing installations,
provide scanner servicing, and deliver forms design, development and software
customization services. Scantron's products are also marketed internationally
through distributorships.
Scantron purchases a majority of its paper from one supplier. It
purchases scanner components from equipment manufacturers, supply firms and
others. It purchases software for resale from leaders in the software
industry. The Company believes Scantron can continue to obtain such materials
or suitable substitutes in acceptable quantities and at acceptable prices to
continue all operations.
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
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, 1998, the Company and its subsidiaries employed
5,393 people.
ITEM 2. PROPERTIES
As of December 31, 1998, the Company and its subsidiaries owned 16
facilities located in 13 states and in Puerto Rico, all but five of
which were primarily production and service facilities. The Company
leases 24 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 two of its
subsidiaries. These leases have expiration dates ranging from 1999 to
2012. The Company owns its executive offices in Atlanta, Georgia.
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.
-6-
Name Age Office Held
John H. Weitnauer Jr. 72 Chairman of the Board
Timothy C. Tuff 51 President and Chief Executive Officer
S. David Passman III 46 Vice President and General Manager -
South/International Region
Mark C. Perlberg 42 Vice President and General Manager -
North Region
Earl W. Rogers Jr. 50 Vice President, Manufacturing Services and
Technology
John C. Walters 58 Vice President, Secretary and General Counsel
Mr. Weitnauer served as Chairman and Interim President and Chief
Executive Officer of the Company from January 1998 until Mr. Tuff
joined the Company. He previously served as Chairman and Chief
Executive Officer of Richway Stores, a division of Federated Department
Stores, Inc., an operator of discount department stores, for seven
years until his retirement in 1987.
Mr. Tuff was elected to his present positions with the Company in
October 1998. From 1993 to October 1998, he served as President and
Chief Executive Officer of Boral Industries, Inc., managing the North
American and European operations of Australian-based Boral, Ltd., a
world leader in building and construction materials, since 1993.
Mr. Passman joined the Company in October 1996 as Senior Vice
President and Chief Financial Officer and assumed his present position
in January 1999. 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 and served as
Senior Vice President and President, Financial Markets Division of the
Company until he assumed his present position in January 1999. He was
previously employed by New Valley Corporation, a financial services
company, and its Western Union Financial Services subsidiary, since
1989, last serving as Vice President in its international operations.
Mr. Rogers has been employed as an executive officer of the
Company for more than the past five years.
Mr. Walters joined the Company in January 1996. He previously
served as Executive Vice President of First Financial Management
Corporation, a diversified information and financial services company,
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. Tuff and Weitnauer also serve on 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 F29 of this Annual
Report on Form 10-K. The Company has an established policy of making
quarterly dividend payments to shareholders. The Company expects to pay
future cash dividends depending upon the Company's pattern of growth,
profitability, financial condition and other factors which the Board of
Directors may deem appropriate.
-7-
ITEM 6. SELECTED FINANCIAL DATA
See the information with respect to selected financial data on
page F29 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 F2
through F8 of this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the information with respect to Quantitative And Qualitative
Disclosures About Market Risk on page F5 under the caption of Market
Risk of this Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the information with respect to Financial Statements and
Supplementary Data on pages F10 through F29 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 Meeting of Shareholders' dated March 12, 1999 (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 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 "Stock Ownership of Directors and
Executive Officers and Certain Other Persons" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
-8-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K
Page in this
Annual Report
on Form 10-K
-------------
(a)1. Financial Statements:
Management's Discussion and Analysis of
Operations and Financial Condition F2
Consolidated Balance Sheets F10
Consolidated Statements of Operations F12
Consolidated Statements of Cash Flows F13
Consolidated Statements of Shareholders' Equity F14
Notes to Consolidated Financial Statements F15
Quarterly Financial Information (unaudited) F29
Independent Auditors' Report F27
Management Responsibility for Financial Statements F28
(a)2. Financial Statement Schedule:
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
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993 (the "1993 10-K")).
3.2 Bylaws, as amended through February 1, 1999.
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
Registrant and Citizens and Southern Trust Company (Exhibit 1 to
Registrant's Current Report on Form 8-K dated June 9, 1989).
4.3 * First Amendment dated June 12, 1992 to Rights Agreement
(Exhibit 4.1 to 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
(Exhibit 4.2 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1992).
4.5 * Rights Agreement, dated as of December 17, 1998, between
Registrant and First Chicago Trust Company of New York (Exhibit 4.1
to Registrant's Current Report on Form 8-K dated December 17, 1998).
4.6 * Note Agreement dated as of December 1, 1993 relating to
Registrant's 6.60% Series A Senior Notes Due December 30, 2008
(Exhibit 4.5 to the 1995 10-K).
4.7 See Articles IV, V and VII of Registrant's Amended and Restated
Articles of Incorporation, filed as Exhibit 3.1, and Articles I, V
and VIII of Registrant's Bylaws, filed as Exhibit 3.2.
10.1 * Form of Deferred Compensation Agreement between 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 Registrant and Mr. Woodson (Exhibit 10(H) to
Registrant's Annual Report on Form 10-K for the year ended December
31, 1990).
10.3 * Form of Deferred Compensation Agreement between the
Registrant and Earl W. Rogers Jr. (Exhibit 10.3 to the 1993 10-K).
-9-
10.4 * Form of Amendment to Deferred Compensation Agreement
between Registrant and Messrs. Woodson and Rogers (Exhibit 10.6 to
the 1993 10-K).
10.5 * Form of Noncompete and Termination Agreement between
Registrant and S. David Passman III, Mark C. Perlberg, Mr. Rogers
and John C. Walters (Exhibit 10.6 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 (the "1995 10-K").
10.6 * Form of Executive Life Insurance Plan between Registrant and
Messrs. Woodson and Rogers (Exhibit 10.8 to the 1993 10-K).
10.7 Noncompete and Termination Agreement, dated as of October 6,
1998, between Registrant and Timothy C. Tuff.
10.8 Restricted Stock Agreement, dated October 6, 1998, between
Registrant and Mr. Tuff.
10.9 Supplemental Retirement Agreement, dated as of January 14,
1999, between Registrant and Mr. Tuff.
10.10 * John H. Harland Company 1981 Incentive Stock Option Plan, as
Extended (Exhibit 10.9 to the 1995 10-K).
10.11 John H. Harland Company 1999 Stock Option Plan.
10.12 * John H. Harland Company Employee Stock Purchase Plan, as
amended (Exhibit 10.10 to the 1995 10-K).
10.13 * John H. Harland Company Deferred Compensation Plan for
Outside Directors (Exhibit 10.10 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996).
21 Subsidiaries of the Registrant.
23 Independent Auditors' Consent.
27 Financial Data Schedule for the year ending December 31, 1998
10-K.
(b) Reports on Form 8-K
The Registrant filed a Form 8-K dated December 17, 1998 with respect to
the adoption of a Rights Agreement. See Exhibit 4.5.
-10-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
JOHN H. HARLAND COMPANY
/s/William M. Dollar 3/30/1999
- - ---------------------- --------
William M. Dollar Date
Vice President
Corporate Controller
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
/s/John H. Weitnauer Jr 3/29/1999 /s/Timothy C. Tuff 3/30/1999
- - ---------------------- -------- ---------------------- --------
John H. Weitnauer Jr. Date Timothy C. Tuff Date
Chairman President and
Chief Executive Officer
(Principal Executive Officer)
/s/Juanita P. Baranco 3/26/1999 /s/Edward J. Hawie 3/26/1999
- - ---------------------- -------- ---------------------- --------
Juanita P. Baranco Date Edward J. Hawie Date
Director Director
- - ---------------------- -------- ---------------------- --------
Richard K. Lochridge Date John J. McMahon Jr. Date
Director Director
/s/H.G. Pattillo 3/26/1999
- - ---------------------- -------- ---------------------- --------
G. Harold Northrop Date H.G. Pattillo Date
Director Director
/s/Larry L. Prince 3/25/1999 /s/Robert R. Woodson 3/29/1999
- - ---------------------- -------- ---------------------- --------
Larry L. Prince Date Robert R. Woodson Date
Director Director
/s/Robert A. Yellowlees 3/28/1999
- - ---------------------- --------
Robert A. Yellowlees Date
Director
-11-
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, 1998
Management's Discussion and Analysis of
of Operations and Financial Condition F2
Consolidated Financial Statements
and Notes to Consolidated Financial Statements F10
Independent Auditors' Report F27
Management Responsibility For Financial Statements F28
Supplemental Financial Information F29
Supplemental Financial Statement Schedule S1
- F1 -
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 and forms, database marketing
software, direct marketing, and loan and deposit origination software
sold primarily to financial institutions.
The Scantron segment represents products and services sold by the
Company's Scantron subsidiary including optical mark reading equipment,
scannable forms, survey services and field maintenance services. Scantron
sells these products and services primarily to the commercial and
education markets.
Results Of Operations 1998 Versus 1997
Consolidated net sales for the year ended December 31, 1998 were
$566.7 million compared to $562.7 million for the year ended December 31,
1997. FS sales were flat in 1998 in relation to 1997 totaling $478.3
million versus the previous year total of $477.5 million. Traditional
check volumes increased 7.4% due to the implementation of large contracts
during 1998, but the impact was offset by a decrease in average check
unit pricing of 10.5%. The decline in pricing reflects a continued trend
in discounting in traditional check markets, along with the impact of
higher volume, lower priced national accounts. Revenue from marketing
services, including database marketing software, direct marketing, and
loan and deposit origination software was $61.6 million in 1998, an
increase of $3.0 million over 1997. The increase resulted from growth in
direct marketing, which was offset partially by a decline in installation
of database marketing software. The decline in database marketing
software revenue was due to a delay in introduction of new products (see
Note 2 to Financial Statements). Scantron's sales increased $3.2 million
or 3.8% over 1997, due to expansion of field maintenance operations.
Consolidated gross profit increased from 42.3% of sales in 1997 to
44.3% in 1998. FS gross profit increased to 43.9% in 1998 from 40.9% in
1997. This increase resulted from lower costs for printed products in
1998 due to improvements in operations from plant consolidations and
process improvements. Scantron's gross profit as a percentage of sales
increased to 50.7% in 1998 from 50.1% in 1997, due primarily to an
improvement in core product margins.
Consolidated selling, general and administrative expenses ("SG&A")
increased $3.4 million in 1998 in comparison to the previous year with
the largest increases related to upgrading technology and management
bonuses. Selling expenses were lower in 1998 as a result of headcount
reductions made early in 1998. SG&A expenses increased as a percentage of
sales from 32.3% in 1997 to 32.7% in 1998.
In 1998, the Company expensed $12.8 million of costs primarily
associated with the development of the Harland Relationship Manager
software system. Development costs for this product had been previously
capitalized. In December 1998, the Company decided to discontinue
development of this product. In 1997, the Company expensed $4.5 million
for research and development related to equipment development.
During 1998, the Company recognized restructuring charges totaling
$51.1 million. Of this total, $4.9 million was incurred during the first
nine months of 1998 and was primarily for severance-related expenses
applicable to the plant network restructuring announced in 1996 and
certain other organizational changes. The Company recognized $46.2
million in the quarter ended December 31, 1998. These costs were related
- F2 -
primarily to organizational changes announced in December and impairment
of assets due to the decision to discontinue development of Harland
Relationship Manager.
Amortization of intangibles decreased by $3.1 million from 1997
compared to 1998 due to certain intangible assets becoming fully
amortized in 1997.
Other income (expense) was a net expense of $5.2 million in 1997
versus a net expense of $3.1 million in 1998. This decrease of $2.1
million in net expense was due primarily to gains from the sale of
production facilities and the Company aircraft as well as lower interest
expense from short-term debt.
The Company had a net tax expense of $9.7 million on a pre-tax loss
of $11.0 million in 1998. The Company incurred tax expense due to the
effects of permanent tax differences associated with certain intangible
assets which made up a large portion of the restructuring charges
incurred in 1998. The consolidated effective income tax rate for 1997 was
41.5%.
The Company's net loss for 1998 was $20.6 million compared to net
income of $17.3 million for 1997. Basic and diluted earnings (loss) per
share for 1998 were ($0.66) in 1998 compared to $0.56 in 1997. Included
in the calculation of earnings per share for 1998 were costs related to
the development of software and restructuring charges, which reduced
earnings per share by approximately $0.23 and $1.41 per share,
respectively, offset partially by a gain on the sale of assets, which
increased earnings per share by approximately $0.07. Net income in 1997
included restructuring charges and other development costs, which reduced
earnings per share by approximately $0.07 and $0.08 per share,
respectively, offset by a gain on the sale of buildings, which increased
earnings per share by approximately $0.05.
Results of Operations 1997 versus 1996
Consolidated net sales for the year ended December 31, 1997 were
$562.7 million compared to $609.4 million for the year ended December 31,
1996. FS sales totaled $477.5 million and $527.2 million for 1997 and
1996, respectively. Traditional check volumes, decreased 3.7% from 1996,
and the average check unit price decreased by 10.0%. The volume decrease
is attributable to the loss of accounts through merger of certain
customers into non-customer banks, partially offset by the addition of a
large direct mail check supplier. The price and product mix decrease is
attributable primarily to lower prices experienced as a result of the
level of discounting occurring in traditional check markets and lower
prices associated with checks sold to a direct mail supplier. Revenue
from marketing services, including database marketing software, direct
marketing and loan and deposit compliance services, was $58.6 million in
1997, an increase of $4.6 million over 1996. Scantron's sales increased
$3.0 million or 3.7% over 1996, due to increases in its core optical mark
reading equipment and forms and expansion of field maintenance
operations.
Consolidated gross profit decreased by 15.7% and gross margin
decreased from 46.3% in 1996 to 42.3% in 1997. The consolidated gross
margin decrease resulted from a decrease in FS gross margin, offset
partially by an increase in Scantron's gross margin. FS gross margin
decreased from 46.5% in 1996 to 40.9% in 1997 due to the decline in check
pricing resulting from discounting and to transition costs related to
plant consolidations and customer service centralization. Scantron's
gross margin increased from 45.3% in 1996 to 50.1% in 1997 principally
due to changes in product mix.
Consolidated SG&A expenses increased by $9.8 million due primarily
to increased costs related to restructuring the sales organization and to
costs of upgrading technology. These increases were offset by a $9.4
million reduction in marketing expense related to the winding down of the
- F3 -
Company's direct check operations. SG&A expenses increased as a
percentage of sales from 28.2% in 1996 to 32.3% in 1997.
In 1997, the Company expensed $4.5 million for research and
development related to equipment development.
Amortization of intangibles decreased by $3.1 million from 1996
compared to 1997 as certain intangible assets were fully amortized, and
certain balances were written down in connection with the Company's
restructuring recorded in 1996.
Other income (expense) decreased from $7.4 million in 1996 to $5.2
million in 1997 due primarily to the reduction in interest expense
associated with the repayment of short-term borrowings during 1997 and
gains on sales of closed imprint facilities.
The Company's consolidated effective income tax rate for 1997 was
41.5% compared to 10.5% for 1996. The effective income tax rate of 10.5%
in 1996 and the associated benefit was lower because of the effects of
permanent tax differences in 1996 related to the restructuring charge,
non-deductible acquired in-process research and development charge and
non-deductible amortization of intangibles.
The Company's net income for 1997 was $17.3 million compared to a
net loss of $13.9 million for 1996. Basic and diluted earnings per share
were $.56 in 1997 compared to a loss per share of $.45 in 1996. Included
in the calculation of earnings per share of $.56 were research and
development and restructuring charges, which reduced earnings per share
by approximately $.08 and $.07 per share, respectively, offset by a gain
on the disposal of assets, which increased earnings per share by
approximately $.05. The net loss in 1996 included restructuring charges
for plant consolidations and other strategic decisions related to product
development and a charge for acquired in-process research and development
costs. The total pre-tax impact of these charges in 1996 was $102.1
million or a reduction in earnings per share of $2.09.
Financial Condition, Capital Resources and Liquidity
Cash flows provided by operations in 1998 were $81.4 million
compared to $66.4 million for 1997. The primary uses of funds in 1998
were for capital expenditures, software development cost, dividends paid
and customer incentive payments.
Purchases of property, plant and equipment totaled $33.5 million in
1998, compared to $45.4 million in 1997. Proceeds from the sale of
property, plant and equipment totaled $10.6 million in 1998 compared to
$27.5 million in 1997.
In April 1997, the Company's board of directors authorized the
repurchase of up to 1.5 million shares of the Company's outstanding
common stock. In May 1997, the Company paid $2.0 million to repurchase
100,000 shares. In August 1998, the Company paid $2.9 million to
repurchase 200,000 shares. The Company also had other transactions
related to treasury stock for its employee stock plans.
The Company has unsecured lines of credit which provide for
borrowings up to $61.0 million. As of December 31, 1998, the Company had
no outstanding balances under these lines of credit.
On December 31, 1998, the Company had $42.5 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 for the 1999
- F4 -
operating period. Management is not aware of any condition that would
materially alter this trend. The Company also believes that it possesses
sufficient unused debt capacity and access to equity capital markets to
pursue additional acquisition opportunities.
Outlook
The Company's operating results have been positively impacted by a
number of factors, including continued cost reductions in labor,
materials and overhead in the Company's check printing operations. SG&A
costs were reduced in the latter portion of 1998 due primarily to the
Company's efforts to reduce SG&A, both as a percentage of sales and in
aggregate dollars.
To improve service and quality, further reduce costs and increase
the profitability of its check printing operations, the Company will
continue to consolidate printing facilities, install new equipment and
develop systems and processes for its production facilities.
Six printing facilities remain to be closed as part of the Company's
plant consolidation program. The final phase of this program began in the
fourth quarter of 1998, and is expected to be completed during 2000. The
Company expects to incur duplicate costs as part of plant consolidation.
The Company anticipates revenue to soften slightly as a result of
overall pricing erosion and a continued shift to a higher percentage of
large national accounts during 1999 as new contracts acquired during 1998
are in effect a full year. In an effort to increase volume and pricing,
the Company is strengthening its marketing efforts with regional and
community accounts.
The Company's decision to discontinue development of Harland
Relationship Manager and begin development of a Windows version of its
MAX$ELL system will delay the introduction of a new database marketing
software product and will have a negative impact on revenues for this
product for most of 1999.
To support the current business strategies, the Company expects to
incur additional charges, predominantly related to employee severance, of
approximately $1.0 million in 1999.
Market Risk
All financial instruments held by the Company are held for
purposes other than trading. The fair value of the Company's long-term
debt is affected by changes in interest rates. The following presents
the sensitivity of the fair value of the Company's long-term debt to a
hypothetical 10% decrease in interest rates as of December 31, 1998 (in
thousands):
Carrying Fair Hypothetical
Value Value(a) Fair Value(b)
Long-term debt, including
current portion $107,071 $109,969 $113,576
======== ======== ========
(a) Based on quoted market prices for these or similar items.
(b) Calculated based on the change in discounted cash flow.
Year 2000 Compliance
Background
The Year 2000 issue is the result of potential problems with
computer systems or any equipment with computer chips using just two
- F5 -
digits rather than four to identify years (e.g., 98 for 1998). On January
1, 2000, any clock or date-recording mechanism, including date-sensitive
software using only two digits to represent the year, may recognize a
date using 00 as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruption of
operations, including, among other things, a temporary inability to
process transactions, send invoices, or engage in similar activities.
Therefore, a program was instituted by the Company to assess and fix all
potentially significant Year 2000 problems.
The program consists of three phases: (1) identification and
assessment (including prioritization) in relation to the Company's
business processes of all information technology ("IT") systems and non-
information technology systems, including buildings, plant equipment,
telephone systems, and other infrastructure systems which contain
microcontroller technology (non-IT systems) that may be sensitive to the
Year 2000 issue; (2) remediation (including modification, upgrade and
replacement) of systems that have a Year 2000 problem; and (3) testing
the systems for compliance.
The Company is also reviewing the Year 2000 readiness of third
parties which provide goods or services that are mission critical to the
Company's operations, as well as its relationship with other key
strategic partners (including large customers). The Company's senior
management and Board of Directors receive regular updates on the status
of the Year 2000 program.
State of Readiness
The Company has completed the Phase 1 identification and readiness
assessment of all IT and non-IT systems. A risk assessment was utilized
to assign priorities to all IT components. Phase 3 compliance testing
began in August 1998. All mission-critical applications are in Phase 3
compliance testing and have been 100% remediated. The majority (96%) of
these applications are scheduled to be fully tested during the first
quarter of 1999 with the few exceptions (4%) being scheduled for
completion no later than June 30, 1999. A risk assessment is also
underway for all non-IT systems to include manufacturing and facility
components. Plans to upgrade or replace non-compliant components are
expected to be in place by March 31, 1999. The Company believes that all
significant Year 2000 problems related to IT and non-IT systems will be
resolved with the completion of Phase 3 compliance testing.
The Company estimates that the cost of repairing and testing IT and
non-IT systems will approximate $5.0 to $7.0 million which will be funded
through operating cash flows. Of such costs, approximately $3.0 million
was incurred through December 31, 1998. Costs associated with correcting
and testing existing systems are expensed as incurred. The Company
believes that such costs will not have a material effect on its
liquidity, financial condition or results of operations. The Company is
replacing certain systems in the normal course of business with new
systems, which are expected to improve functionality, usefulness and
efficiency. Approximately $7.0 million will be spent on these activities
in 1999, most of which will be capitalized. The timing of the replacement
of systems was not accelerated as a result of Year 2000 issues.
Third Party Suppliers
The Company has initiated and is reviewing formal communications
with mission-critical third parties which provide goods or services
essential to the Company's operations. These communications are to
determine the extent to which the Company is vulnerable to any failure by
such third parties to remediate their respective Year 2000 problems and
to resolve such problems to the extent practicable.
In July 1998 the Company surveyed key suppliers and utilities
initially identified as potentially mission critical to the Company.
- F6 -
Follow-up communication was sent to vendors and service providers that
did not initially respond or whose initial responses were deemed
unsatisfactory in some respect by the Company. As of December 31, 1998,
the Company had received survey responses from 83% of such third parties,
each of which has provided written assurances that it expects to address
all significant Year 2000 issues on a timely basis. The Company plans to
continue to follow up by telephone with third parties from whom it has
not yet received responses and will update its risk assessment quarterly.
The Company will then develop contingency plans, including a selection of
alternate providers, as and if necessary.
The Company has initiated formal communications with key large
customers to determine the extent to which electronic interfaces with
such entities are vulnerable to the Year 2000 issue and the steps needed
to be Year 2000 compliant.
Risks and Contingency Planning
To the extent practicable, the Company is revising its existing
business interruption contingency plans to address internal and external
issues specific to the Year 2000 problem. These plans, which are intended
to enable the Company to continue to operate effectively, include
performing certain processes manually, repairing or obtaining replacement
systems, changing suppliers, and reducing or suspending operations. The
Company expects to finalize its contingency planning by September 30,
1999.
The Company is conducting a comprehensive analysis and risk
assessment of the operational problems, customer disruption and costs
(including loss of revenues) that would be most likely to result from the
failure by the Company or certain third parties to complete efforts
necessary to achieve Year 2000 compliance on a timely basis. Contingency
plans are being developed for dealing with the most reasonably likely
worst case scenarios for IT systems, non-IT systems, including
manufacturing systems, facilities, vendors and customers. In regard to
the IT systems risk assessment, the most reasonably likely worst case
scenario is that the Company's billing system will fail to function
properly. Should the billing system fail completely, the Company would be
unable to submit invoices to the customers for a period of time. In this
situation the Company would expect to recover all or most of the unbilled
revenue upon resolving the causes of the system failure. The most
reasonably likely worst case scenarios for non-IT systems, vendors and
suppliers will be developed upon completion of the risk assessments.
In April 1998, the Company organized a Program Management Office
("PMO") focusing on developing and implementing a best practice Year 2000
remediation and testing methodology, and retained a third party
consulting group to manage the Year 2000 PMO. In addition, the Company
has engaged another independent party to provide feedback on its approach
and planning activities.
Possible Consequences of Year 2000 Problems
To date, the Company has not identified any IT or non-IT system that
presents a material risk of not being Year 2000 compliant or for which a
suitable alternative cannot be implemented. However, as the initiative
moves through the testing phase, it is possible that the Company may
identify potential risks of Year 2000 disruption. It is also possible
that such a disruption could have a material effect on its financial
condition and results of operations. In addition, if any key third
parties who provide goods or services that are mission critical to the
Company's business activities fail to appropriately address their Year
2000 issues, there could be a material adverse effect on the Company's
financial condition and results of operations.
Risk Factors and Cautionary Statements
- F7 -
When used in this report and in subsequent filings by the Company
with the Securities and Exchange Commission, in the Company's press
releases and in written or oral statements made by authorized
representatives of the Company, the words or phrases "should result",
"are expected to", "will continue", "is anticipated", "estimate",
"project" or similar expressions are intended to identify "forward-
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are necessarily subject
to certain risks and uncertainties, including, but not limited to, those
discussed below that could cause actual results to differ materially from
the Company's historical experience and its present expectations or
projections. Caution should be taken not to place undue reliance on any
such forward-looking statements, which speak only as of the date such
statements are made and which may or may not be based on historical
experiences and/or trends which may or may not continue in the future.
The Company does not undertake and specifically declines any obligation
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances occurring
after the date of such statements or to reflect the occurrence of
unanticipated events.
Various factors may affect the Company's financial performance,
including, but not limited to, those factors discussed below and could
cause the Company's actual results for future periods to differ from any
opinions, statements or projections expressed with respect thereto. Such
differences could be material and adverse.
Regarding the rebuilding of the Company's manufacturing operations,
there can be no assurances that the printing plant consolidation will
occur within a projected time frame and that it, combined with the
centralization of customer service, will result in the anticipated
quality improvements or projected costs savings. Many variables will
impact the ability to improve production efficiencies and reduce
redundant expenses. These include, but are not limited to, the
development and implementation of new manufacturing technology and
information systems used in the Company's data entry and production
operations and the successful development of software to enhance call
center operations. Further, there can be no assurance that the Company
can reproduce or improve upon historic profit margin trends. Many factors
can affect the Company's ability to improve profitability, including,
among other factors, competitive pricing trends, the ability to secure
similar materials prices and labor rates, and the ability to reduce the
cost of manufacturing. Competition among suppliers, restricted supply of
materials, labor and services, and other such factors outside of the
Company's control, may adversely affect prices and may materially impact
the Company's results.
Several factors outside the Company's control, could negatively
impact check revenue. These include the continuing expansion of
alternative payment systems such as credit cards, debit cards and other
forms of electronic commerce or on-line payment systems. Check revenues
could also be adversely affected by continued consolidation of financial
institutions and competitive check pricing, among other factors. There
can be no assurances that the Company will not lose significant customers
or that any such loss could be offset by the addition of new customers.
Also, there can be no assurance that the Company will experience similar
or higher revenue compared to prior years, or that any targets or
projections made relating to check revenues will be achieved.
While the Company believes substantial growth opportunities exist in
FS, specifically marketing services such as database marketing software
and direct marketing, there can be no assurances that the Company will
achieve its growth targets. There are many variables relating to the
development of database marketing software, including the timing and
costs of the development effort, product performance, functionality,
product acceptance and competition. In 1998, the Company expensed $12.8
- F8 -
million of costs primarily associated with the development of the Harland
Relationship Manager system. Also, no assurance can be made as to market
acceptance and to the potential impact of governmental regulations on the
Company's ability to expand its direct marketing business and meet
projected growth targets.
There can also be no assurance that all or some of the anticipated
cost savings expected from rebuilding the manufacturing operation will
not be offset by increased expenses from other areas or be shared with
customers in the form of discounted prices. As a result, the full impact
of the cost savings may not be reflected in operating income.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments and for
hedging activities. It requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position
and measure those instruments at fair value. The Company plans to adopt
SFAS 133 in 2000. The Company has not determined what effect, if any,
adoption of SFAS 133 will have on the Company's financial statements.
- F9 -
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31
1998 1997
-----------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 42,541 $ 13,004
Accounts receivable from customers, less
allowance for doubtful accounts of $6,806
and $3,341 68,925 73,130
Inventories:
Raw materials and semi-finished goods 22,865 21,606
Hardware component parts 422 2,720
Finished goods 1,605 2,116
Deferred income taxes 14,396 10,763
Prepaid Income Taxes 1,892 13,907
Other 6,709 11,140
-----------------------------------------------------------------------
Total current assets 159,355 148,386
-----------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS:
Investments 4,276 5,185
Goodwill and other intangibles - net 68,172 115,538
Deferred income taxes 14,600 9,494
Other 24,472 29,640
-----------------------------------------------------------------------
Total investments and other assets 111,520 159,857
-----------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 3,271 3,271
Buildings and improvements 41,569 38,006
Machinery and equipment 171,736 169,287
Furniture and fixtures 15,716 14,984
Leasehold improvements and other 15,665 16,521
Additions in progress 11,265 7,281
-----------------------------------------------------------------------
Total 259,222 249,350
Less accumulated depreciation and amortization 138,327 131,407
-----------------------------------------------------------------------
Property, plant and equipment - net 120,895 117,943
-----------------------------------------------------------------------
Total $ 391,770 $ 426,186
=======================================================================
See Notes to Consolidated Financial Statements.
- F10 -
CONSOLIDATED BALANCE SHEETS (continued)
December 31
1998 1997
-----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 29,441 $ 33,816
Deferred revenues 23,821 25,799
Accrued liabilities:
Salaries, wages and employee benefits 26,495 21,829
Restructuring costs 9,059 6,634
Taxes 5,353 10,986
Other 12,213 10,703
-----------------------------------------------------------------------
Total current liabilities 106,382 109,767
-----------------------------------------------------------------------
LONG-TERM LIABILITIES:
Long-term debt 107,071 109,358
Other 16,003 14,235
-----------------------------------------------------------------------
Total long-term liabilities 123,074 123,593
-----------------------------------------------------------------------
Total liabilities 229,456 233,360
-----------------------------------------------------------------------
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 1,458
Retained earnings 293,425 324,324
Accumulated other comprehensive loss (400) (186)
Unamortized restricted stock award (470)
-----------------------------------------------------------------------
Total shareholders' equity 330,462 363,503
Less 6,814,638 and 6,849,524 shares in
treasury, at cost 168,148 170,677
-----------------------------------------------------------------------
Shareholders' equity - net 162,314 192,826
-----------------------------------------------------------------------
TOTAL $ 391,770 $ 426,186
=======================================================================
See Notes to Consolidated Financial Statements.
- F11 -
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year ended December 31
1998 1997 1996
-------------------------------------------------------------------------
NET SALES $ 566,722 $ 562,709 $ 609,384
-------------------------------------------------------------------------
COST AND EXPENSES:
Cost of sales 315,462 324,775 327,162
Selling, general and administrative
expenses 185,081 181,660 171,839
Software and other development charges 12,771 4,477
Amortization of intangibles 10,213 13,348 16,432
Restructuring charge 51,087 3,644 94,054
Acquired in-process research and
development costs 7,973
-------------------------------------------------------------------------
Total 574,614 527,904 617,460
-------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (7,892) 34,805 (8,076)
-------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (7,457) (8,421) (10,330)
Other - net 4,388 3,182 2,929
-------------------------------------------------------------------------
Total (3,069) (5,239) (7,401)
-------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (10,961) 29,566 (15,477)
INCOME TAXES 9,686 12,270 (1,623)
-------------------------------------------------------------------------
NET INCOME (LOSS) $ (20,647) $ 17,296 $(13,854)
=========================================================================
EARNINGS (LOSS) PER COMMON SHARE
BASIC $ (.66) $ .56 $ (.45)
DILUTED $ (.66) $ .56 $ (.45)
=========================================================================
See Notes to Consolidated Financial Statements.
- F12 -
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31
1998 1997 1996
-----------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $(20,647) $ 17,296 $(13,854)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 27,463 25,266 24,494
Amortization 14,952 14,008 18,220
Provision for restructuring charge 46,857 (2,341) 87,631
Software development charge 10,927
Acquired in-process research and development costs 7,973
Gain on sale of assets (2,991) (2,746) (214)
Other - net 5,184 3,859 1,041
Change in assets and liabilities net of
effects of businesses acquired:
Deferred income taxes (8,738) 8,102 (34,205)
Accounts receivable (680) (3,534) (848)
Inventories and other current assets 18,495 (2,588) 11,131
Accounts payable and accrued expenses (9,449) 9,032 (3,105)
-----------------------------------------------------------------------------------
Net cash provided by operating activities 81,373 66,354 98,264
-----------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (33,486) (45,394) (28,920)
Proceeds from sale of property, plant and equipment 10,627 27,486 5,699
Payment for acquisition of businesses -
net of cash acquired (2,252) (35,023)
Change in short-term investments - net 139 248
Other - net (15,525) (3,583) (11,397)
-----------------------------------------------------------------------------------
Net cash used in investing activities (40,636) (21,352) (69,393)
-----------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Short-term borrowings - net (43,089) 8,000
Repayment of long-term debt (2,287) (4,717)
Purchases of treasury stock (2,999) (2,221) (739)
Issuance of treasury stock 2,507 4,771 6,234
Dividends paid (9,328) (9,287) (31,385)
Other - net 907 (122) (1,176)
-----------------------------------------------------------------------------------
Net cash used in financing activities (11,200) (54,665) (19,066)
-----------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 29,537 (9,663) 9,805
Cash and cash equivalents at beginning of year 13,004 22,667 12,862
-----------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 42,541 $ 13,004 $ 22,667
===================================================================================
Cash paid during the year for:
Interest $ 7,085 $ 8,270 $ 10,425
===================================================================================
Income taxes $ 13,546 $ 5,529 $ 32,205
===================================================================================
See Notes to Consolidated Financial Statements.
- F13 -
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share and per share amounts)
--- Years Ended December 31, 1998, 1997 and 1996 ---
Accumulated Unamortized
Additional Other Restricted Total
Common Paid-In Retained Comprehensive Treasury Stock Shareholders'
Stock Capital Earnings Income (Loss) Stock Award Equity
- - ------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 $ 37,907 $ 2,375 $ 361,554 $ 54 $(179,743) $ -- $ 222,147
Net loss and comprehensive loss (13,854) (13,854)
Cash dividends, $1.02 per share (31,385) (31,385)
Purchase of 28,916 shares of treasury
stock (739) (739)
Issuance of 298,136 shares of treasury
stock under employee stock plans and
conversion of debentures (343) 6,577 6,234
- - ------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 37,907 2,032 316,315 54 (173,905) -- 182,403
Net income 17,296 17,296
Other comprehensive loss:
Foreign currency
translation adjustments (240) (240)
Comprehensive income 17,056
--------
Cash dividends, $.30 per share (9,287) (9,287)
Purchase of 107,558 shares of treasury
stock (2,221) (2,221)
Issuance of 241,554 shares of treasury
stock under employee stock plans and
conversion of debentures (678) 5,449 4,771
Other 104 104
- - ------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 37,907 1,458 324,324 (186) (170,677) -- 192,826
Net income (20,647) (20,647)
Other comprehensive loss:
Foreign currency
translation adjustments (214) (214)
Comprehensive loss (20,861)
--------
Cash dividends, $.30 per share (9,328) (9,328)
Purchase of 205,543 shares of treasury
stock (2,999) (2,999)
Issuance of 240,429 shares of treasury
stock under employee stock plans and
restricted stock award (1,458) (1,046) 5,528 (505) 2,519
Other 122 35 157
- - ------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ 37,907 $ -- $ 293,425 $(400) $(168,148) $ (470) $ 162,314
========================================================================================================================
See Notes to Consolidated Financial Statements.
-F14-
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 with a
maturity, when purchased, of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost of
inventory for checks and related forms is determined by average costing.
Cost of scannable forms and hardware component parts inventories is
determined by the first-in, first-out method. Cost of data entry
terminals is determined by the specific identification method.
Impairment of Long-Lived Assets
Assets held for disposal are carried at the lower of carrying amount
or fair value, less estimated cost to sell such assets in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". The Company reviews long-lived assets and certain intangibles for
impairment when events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, and any impairment
losses are reported in the period in which the recognition criteria are
first applied based on the fair value of the asset. See Note 2.
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 and other long-term investments are
carried at cost, which approximates market. The Company classifies 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 are recognized in operating results if
a permanent diminution in value is indicated. See Note 2. Amortization
periods of intangible assets are also reviewed to determine whether
events or circumstances warrant revision to estimated useful lives.
Other Assets
-F15-
Other assets consist primarily of 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. The Company
capitalizes the qualifying costs of software developed or obtained for
internal use. Depreciation is computed for internal use software by using
the straight-line method over three to five years.
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.
Earnings Per Common Share
Earnings per common share for all periods have been computed under
the provisions of Statement of Financial Accounting Standards No. 128
"Earnings Per Share". The net income (loss) used in the calculation of
diluted earnings per common share is adjusted for the effect of the
interest on the conversion of the subordinated debt. The net income
(loss) used for the calculation of diluted earnings (loss) per common
share for 1998, 1997 and 1996 was $(20,647,000), $17,702,000 and
$(13,854,000), respectively. The average number of common shares used in
the calculation of basic earnings per common share for 1998, 1997 and
1996 was 31,087,214, 30,970,900 and 31,056,200, respectively. The average
number of common share equivalents used in the calculation of diluted
earnings per common share for 1998, 1997 and 1996 was 31,087,214,
31,445,500 and 31,056,200, respectively. The common share equivalents
relate to options under stock compensation plans and the effect of the
conversion of the subordinated debt.
Software and Other Development
The Company expenses research and development costs, including
expenditures related to development of software that do not qualify for
capitalization.
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 1996 and 1997
financial statements and notes to financial statements to conform to the
1998 classifications.
New Accounting Standards
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"), which establishes new rules for the reporting and display
of comprehensive income and its components. SFAS 130 requires currency
translation adjustments and certain other items, which prior to adoption
were reported separately in shareholders' equity, to be included in other
comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130. The only
component of accumulated other comprehensive income is foreign currency
translation adjustments at December 31, 1998 and 1997.
-F16-
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which changes the
method used by the Company to report information about its operating
segments. SFAS 131 establishes standards to be used by enterprises to
identify and report information about operating segments and for related
disclosures about products and services, geographic areas and major
customers. The adoption of SFAS 131 did not affect results of operations
or financial position, but did affect the disclosure of segment
information contained in Note 13.
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits-an amendment of FASB
Statements No. 87, 88, and 106" ("SFAS 132"). SFAS 132 revised employers'
disclosures about pension and other postretirement benefit plans.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
establishes accounting and reporting standards for derivative instruments
and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company plans
to adopt SFAS 133 in 2000. The Company has not determined the effect, if
any, of adoption of SFAS 133 will have on the Company's financial
statements.
2. RESTRUCTURING CHARGE
In 1998, the Company recorded a pre-tax restructuring charge of
$51.1 million, a result of certain actions taken by the Company in 1998
(the "1998 Restructuring"), and including certain costs related to
actions initiated by the Company in 1996 (the "1996 Restructuring").
The most significant portion of the 1998 Restructuring was the
decision to discontinue development of the Harland Relationship Manager
("HRM") system. The discontinuance of the development of the HRM system
prompted a revision of projected operations for this business and an
assessment of the recoverability of certain long-term assets, including
acquisition-related intangibles. The Company adjusted the carrying value
of assets to the calculated value based on discounted projected cash
flows. The 1998 Restructuring also includes a reorganization which
eliminated approximately 100 positions, consolidation of its database
marketing operations, recognition of the impairment of certain assets and
reductions in selling and marketing personnel. In 1998 and 1997, the
Company also incurred $2.9 million and $3.2 million, respectively, in
severance-related expenses related to the 1996 Restructuring. All of the
1998 and 1997 charges were incurred in the Financial Services segment
with the exception of a write-down of $1.9 million in 1998 of intangible
assets in the Scantron segment (see Note 13).
The 1996 Restructuring related to consolidation of manufacturing
operations, including severance and associated revaluation of assets, and
valuation adjustments related to discontinuing certain subsidiary product
lines. Of the total 1996 charge, $84.7 million was incurred in the
Financial Services segment and $9.4 million in the Scantron segment.
The cash and non-cash elements of the restructuring charge for each
of the years ended December 31, 1998, 1997 and 1996, as well as the
beginning and ending balances of accrued restructuring costs, consisted
of the following components (in thousands):
-F17-
Utilized
Beginning Restructuring ------------------------ Ending
Balance Charge Cash Non-Cash Balance
- - ---------------------------------------------------------------------------------------------
1996
Write down of intangible
and other assets $ 23,198 $(23,198)
Write down of equipment
and facilities 45,132 (45,132)
Employee severance 17,943 $ (5,924) 200 $ 12,21
Other 7,781 (499) (6,601) 68
- - ---------------------------------------------------------------------------------------------
Total -- $ 94,054 (6,423) (74,731) 12,90
=============================================================================================
1997
Employee severance $ 12,219 3,644 (9,566) 6,29
Other 681 (344) 33
- - ---------------------------------------------------------------------------------------------
Total 12,900 3,644 (9,910) -- 6,63
=============================================================================================
1998
Write down of intangible
and other assets -- 38,807 (38,807) -
Write down of equipment
and facilities -- 2,600 (2,600) -
Employee severance 6,297 7,059 (6,687) 6,66
Other 337 2,621 (111) (457) 2,39
- - ---------------------------------------------------------------------------------------------
Total $ 6,634 $ 51,087 $ (6,798) $(41,864) $ 9,05
=============================================================================================
Accrued restructuring costs are expected to be paid primarily in 1999.
3. ACQUISITIONS
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.
In 1998, the Company's subsidiary, Scantron, acquired the Equitrac
Computer Services ("ECS") division of Equitrac Corporation for cash of
$2.3 million. The purchase price was funded from operating cash flows.
ECS provides computer maintenance and integration services. Of the total
acquisition costs, $1.9 million was allocated to goodwill which is being
amortized on a straight line basis over 15 years.
On May 31, 1996, a subsidiary of the Company acquired the common
stock of Florida-based OKRA Marketing Corporation ("OKRA") for cash. 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 and was funded
with proceeds from short-term borrowings. As part of this acquisition,
the Company acquired in-process research and development costs of $8.0
million, which was expensed at acquisition. Of the total acquisition
costs, approximately $19.4 million was allocated to intangible assets, of
which $11.5 million represented goodwill which is being amortized on a
straight-line basis over 15 years.
-F18-
Goodwill and other intangible assets acquired in acquisitions
consist of the following as of December 31 (in thousands):
1998 1997
- - ---------------------------------------------------------
Goodwill $ 122,666 $ 120,766
Non-compete covenants 30,350 30,350
Customer lists 22,014 22,014
- - ---------------------------------------------------------
Total 175,030 173,130
Less accumulated amortization 106,858 57,592
- - ---------------------------------------------------------
Total $ 68,172 $ 115,538
=========================================================
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):
1998 1997 1996
- - ----------------------------------------------------------------------
Net sales $ 572,598 $ 568,116 $615,063
Net income (loss) (20,693) 16,824 (7,762)
Earnings (loss) per common share:
Basic (.66) .54 (.25)
Diluted (.66) .54 (.25)
The unaudited 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. SHORT-TERM DEBT
As of December 31, 1998, the Company had available unsecured lines
of credit under which it could borrow up to $61.0 million in the form of
short-term notes, for which no compensating balances or commitment fees
are required. There were no amounts outstanding under these unsecured
lines of credit at December 31, 1998 or December 31, 1997.
5. LONG-TERM DEBT
Long-term debt consisted of the following as of December 31 (in
thousands):
1998 1997
- - ----------------------------------------------------------------------
Series A Senior Notes $ 85,000 $ 85,000
Term Loan 15,000 15,000
Convertible Subordinated Debentures 6,961 9,288
Other 123 252
- - ----------------------------------------------------------------------
Total 107,084 109,540
Less current portion 13 182
- - ----------------------------------------------------------------------
Long-term debt $ 107,071 $ 109,358
======================================================================
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 in 2003.
The Company's 6.75% Convertible Subordinated Debentures ("the
-F19-
("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 under certain circumstances. As of December 31, 1998, 282,916
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.
The debt agreements relating to the Senior Notes and the Term Loan
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, 1998, management
believes the Company was in compliance with the covenants associated with
these debt instruments. Other long-term debt relates principally to
capitalized lease obligations.
There are no annual maturities of long-term debt and all sinking
fund requirements have been met for the years 1999, 2000 and 2001. Annual
maturities of long-term debt and sinking fund requirements are $.3
million in 2002 and $15.6 million in 2003.
6. INCOME TAXES
The provisions (benefit) for the years ended December 31, 1998, 1997
and 1996 consisted of the following (in thousands):
1998 1997 1996
- - ----------------------------------------------------------------------
Current: Federal $ 16,610 $ 3,731 $ 22,218
State 1,814 437 4,794
- - ----------------------------------------------------------------------
Total 18,424 4,168 27,012
- - ----------------------------------------------------------------------
Deferred: Federal (7,286) 6,642 (24,107)
State (1,452) 1,460 (4,528)
- - ----------------------------------------------------------------------
Total (8,738) 8,102 (28,635)
- - ----------------------------------------------------------------------
Total $ 9,686 $ 12,270 $ (1,623)
======================================================================
The tax effects of significant items comprising the Company's net
deferred tax assets as of December 31 were as follows (in thousands):
1998 1997
- - ----------------------------------------------------------------------
Current deferred tax asset:
Accrued vacation $ 1,937 $ 1,413
Deferred revenue 676 1,787
Accrued liabilities 4,212 1,844
Other 7,571 5,719
- - ----------------------------------------------------------------------
Total 14,396 10,763
- - ----------------------------------------------------------------------
Non-current deferred tax asset (liability):
Difference between book and tax basis
of property 2,387 (1,468)
Deferred revenue 1,161 2,069
Deferred compensation 1,584 1,643
Postretirement benefit obligation 3,329 3,118
Other 6,139 4,132
- - ----------------------------------------------------------------------
Total 14,600 9,494
Valuation allowance 0 0
- - ----------------------------------------------------------------------
Net deferred tax asset $ 28,996 $ 20,257
======================================================================
-F20-
The following reconciles the income tax provision (benefit) at the
U.S. federal income tax statutory rate to that in the financial
statements (in thousands):
1998 1997 1996
- - ----------------------------------------------------------------------
Statutory rate $(3,836) $10,348 $(5,417)
State and local income taxes, net of
Federal income tax benefit 235 1,233 172
Income from Puerto Rico (175) (113) (1,378)
In-process research
and development costs 2,791
Non-deductible goodwill 12,418 1,514 2,269
Other " net 1,044 (712) (60)
- - ----------------------------------------------------------------------
Effective income tax rate $ 9,686 $12,270 $(1,623)
======================================================================
7. 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 Shareholder Rights Agreement. The
rights expire on July 5, 1999.
In December 1998, the Company announced it had renewed its
Shareholder Rights Agreement to take effect when the existing rights
expire. The renewed plan is substantially similar to the current plan.
Rights will be distributed as a dividend at the rate of one Right for
each share of common stock of the Company held by shareholders of record
at the close of business on July 5, 1999. Each Right will entitle
shareholders to buy, upon occurrence of certain events, one share of
common stock for $90.00 (compared to $80.00 under the current plan). The
Rights generally will be exercisable only if a person or group acquires
beneficial ownership of 15 percent or more of the Company's common stock,
or commences a tender or exchange offer that, upon consummation, would
result in a person or group owning 30 percent or more of the Company's
common stock. Under certain circumstances the new Rights are redeemable
at a price of $.001 per Right and will expire on July 5, 2009.
8. 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 earnings (loss) per share
would have changed to the pro forma amounts listed below (in thousands,
except per share amounts):
1998 1997
- - ------------------------------------------------------------------------------
Net income (loss):
As reported $(20,647) $ 17,296
Pro forma (22,573) 15,738
Basic and diluted earnings (loss) per common share:
As reported $ (.66) $ .56
Pro forma (.73) .51
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 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 1998, 1997 and 1996,
-F21-
employees exercised options to purchase 200,033 shares, 194,003 shares
and 196,458 shares, respectively. Options granted under the ESPP were at
prices ranging from $11.42 to $13.79 in 1998, $17.64 to $20.77 in 1997,
and $17.80 to $25.87 in 1996. Pro forma compensation cost associated with
options granted under the ESPP is estimated based on the discount from
market value. At December 31, 1998, there were 421,596 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 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
In December 1998, the board of directors of the Company adopted a
new stock option plan covering the issuance of options to purchase up to
2,000,000 shares of common stock to employees at no less than fair market
value on the date of grant. On December 17, 1998, options covering an
aggregate of 483,340 shares were issued under this plan. Such options are
exercisable ratably over a five year period beginning on the first
anniversary of the date of grant, and have a maximum life of ten years.
The fair value of options granted during 1998 was estimated as
$4.36, using the Black-Scholes option pricing model and the following
weighted average assumptions: dividend yield 2.2%, expected volatility of
26.0%, risk-free interest rate of 5.4%, assumed forfeiture rate of 3.0%
and an expected life of eight years. The fair value of options granted
during 1997 was estimated as $7.47, using the Black-Scholes option
pricing model and the following weighted average assumptions: dividend
yield 2.3%, expected volatility of 24.1%, risk-free interest rate of
6.3%, assumed forfeiture rate of 3.0% and an expected life of eight
years. The fair value of options granted during 1996 was estimated as
$7.40, using 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 3.0% and an expected life of eight years.
A summary of option transactions during the three years ended
December 31, 1998, follows:
Weighted Average
Shares Exercise Price
- - -------------------------------------------------------------------------
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
Options granted 105,000 24.27
Options exercised (44,280) 20.84
Options canceled (182,072) 23.83
- - ------------------------------------------------------------------------
Outstanding - December 31, 1997 2,233,934 $ 25.64
Options granted 1,973,250 14.47
Options canceled (927,184) 23.37
- - ------------------------------------------------------------------------
Outstanding - December 31, 1998 3,280,000 $ 19.16
========================================================================
-F22-
As of December 31, 1998, there were 2,576,828 and 2,000,000 shares
of common stock reserved for issuance under the ISOP and the new plan,
respectively. The following tables summarizes information pertaining to
options outstanding and exercisable as of December 31, 1998:
- - -----------------------------------------------------------------------------------
Outstanding Exercisable
------------------------------------ --------------------------
Weighted Weighted Weighted
Average Average Average
Range of Contractual Exercise Exercise
Exercise Prices Options Life(Years) Price Options Price
- - -----------------------------------------------------------------------------------
$12.75 to $14.75 1,708,250 9.83 $ 13.88
$16.13 to $20.00 311,750 7.81 19.07 67,750 $ 19.07
$20.75 to $23.63 613,334 5.85 22.86 379,334 22.86
$25.00 to $30.00 311,666 4.55 27.77 275,666 27.77
$30.50 to $31.88 335,000 7.81 31.36 140,000 31.36
- - -----------------------------------------------------------------------------------
Total 3,280,000 8.19 $ 19.16 862,750 $ 25.51
===================================================================================
In October 1998, the board of directors granted 50,000 restricted
shares of the Company's common stock to the Company's chief executive
officer. Of this amount, 39,596 shares were immediately issued in the
name of the individual with the remainder being issued in January 1999.
The shares have all the rights of other shares of common stock, subject
to certain restrictions and forfeiture provisions. The restriction
expires as follows: 25,000 shares in October 2001; 12,500 shares in
October 2002; and 12,500 shares in October 2003. Unearned compensation
was recorded at the date of the award based on the market value of shares
issued and is being amortized over the periods of restriction.
9. 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.
Harland PR's profit sharing plan is a non-contributory plan to
provide retirement income for Harland PR employees. In 1996,
contributions to the profit sharing plan were $0.4 million.
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. The Company matches
employee contributions $0.50 for every dollar up to a maximum Company-
matching contribution of 3% of qualified annual compensation. Additional
contributions may be made from accumulated or current net profits at the
discretion of the board of directors. Contributions to the 401(k) plan
were $2.9 million in 1998, $3.4 million in 1997 and $3.5 million in 1996.
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 $3.7 million and $3.9 million at December 31, 1998 and 1997,
respectively. The charge to expense for these agreements is not
significant.
10. 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-
-F23-
contributory. The Company's intent is that the retiree provide the
majority of the actual cost of providing the medical plan. Neither plan
is funded.
As of December 31, 1998, the accumulated postretirement benefit
obligation ("APBO") under such plans was $15.6 million. The following
table reconciles the plans' beginning and ending balances of the APBO and
reconciles the plans' status to the accrued postretirement health care
and life insurance liability reflected on the balance sheet as of
December 31 (in thousands):
1998 1997
- - -------------------------------------------------------------------
APBO:
Retirees $ 7,248 $ 3,201
Fully eligible participants 1,720 2,054
Other participants 3,804 4,094
- - -------------------------------------------------------------------
12,772 9,349
Net Change in APBO:
Service Costs 336 322
Interest Costs 910 711
Benefits Paid (707) (431)
Change in Discount Rate 1,569 804
Change in Assumed Claims (2,213) (268)
Demographic Experience 3,490 2,285
Other (558)
- - -------------------------------------------------------------------
Total Net Change in APBO 2,827 3,423
- - -------------------------------------------------------------------
APBO as of December 31:
Retirees 9,591 7,248
Fully eligible participants 1,856 1,720
Other participants 4,152 3,804
- - -------------------------------------------------------------------
15,599 12,772
Unrecognized net loss (5,888) (3,794)
- - -------------------------------------------------------------------
Accrued postretirement cost "
included in Other Liabilities $ 9,711 $ 8,978
===================================================================
Net periodic postretirement costs ("NPPC") are summarized as follows
(in thousands):
1998 1997 1996
- - -------------------------------------------------------------------
Service costs $ 336 $ 322 $ 313
Interest on APBO 910 712 661
Net amortization 194 3 1
- - -------------------------------------------------------------------
Total $ 1,440 $1,037 $ 975
===================================================================
The cost of providing medical benefits was assumed to increase by
7.0% in 1999 with a reduction of 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 trend rates would have had the effect of increasing the APBO by
$1.7 million and the NPPC by $158,000. A decrease of 1.0% in the assumed
trend rates would have had the effect of decreasing the APBO by $1.7
million and the NPPC by $143,000. The weighted average discount rate used
in determining the APBO was 6.75% in 1998, 7.25% in 1997 and 7.75% in
1996, and employee earnings were estimated to increase 3.5% annually
until age 65.
11. 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:
-F24-
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 fair value of the Company's
other investments, which are not actively traded and are immaterial, 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 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 values and estimated fair values of the Company's
financial instruments at December 31 are as follows (in thousands):
Carrying Value Fair Value
- - ------------------------------------------------------------------
1998 1997 1998 1997
- - ------------------------------------------------------------------
Investments:
Long-term $ 4,276 $ 5,185 $ 4,465 $ 5,321
Debt:
Long-term 107,071 109,358 109,969 109,095
12. 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 $11.7 million in 1998 and $9.4 million in
1997 and 1996. Minimum annual rentals under non-cancelable operating
leases at December 31, 1998 are as follows (in thousands):
1999 $ 11,364
2000 8,970
2001 6,069
2002 5,721
2003 5,755
Thereafter 29,951
- - ------------------------------------------------
Total $ 67,830
================================================
The Company has an agreement with a vendor who will perform certain
customer-related functions through 2001. Annual costs under this
relationship are estimated to be $12.0 million per year through 2001.
13. BUSINESS SEGMENTS
The Company operates its business in two segments. The Financial
Services segment ("FS") includes checks and forms, database marketing
software, direct marketing and loan and deposit origination software sold
primarily to financial institutions.
The Scantron segment includes optical mark reading equipment,
scannable forms, survey services and field maintenance services. Scantron
sells these products and services primarily to the commercial and
education markets.
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
-F25-
customer. Equity investments as well as foreign assets are not
significant to the consolidated results of the Company. The Company's
accounting policies for segments are the same as those described in Note
1. Management evaluates segment performance based on segment income or
loss before income taxes. Segment income or loss includes restructuring
charges, software and other development and acquired in-process research
and development costs written off but excludes interest income, interest
expense and certain other non-operating gains and losses which are
considered corporate items. Corporate assets consist primarily of cash
and cash equivalents, investments and other assets not employed in
production.
Summarized financial information for 1998, 1997 and 1996 is as follows
(in thousands):
Business Segment
------------------------ Consol-
FS Scantron Corporate idated
- - ------------------------------------------------------------------------------
1998
Net Sales $ 478,282 $ 88,440 $ 566,722
Income (loss) 5,974 13,604 $ (30,539) (10,961)
Identifiable assets 271,408 51,436 68,926 391,770
Depreciation and amortization 36,956 5,459 42,415
Capital expenditures 29,613 3,873 33,486
1997
Net Sales $ 477,480 $ 85,229 $ 562,709
Income (loss) 46,162 13,018 $ (29,614) 29,566
Identifiable assets 330,635 55,107 40,444 426,186
Depreciation and amortization 34,192 5,082 39,274
Capital expenditures 42,589 2,805 45,394
1996
Net Sales $ 527,168 $ 82,216 $ 609,384
Income (loss) 13,888 629 $ (29,994) (15,477)
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
-F26-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
John H. Harland Company:
We have audited the consolidated balance sheets of John H. Harland
Company and its subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, cash flows and
shareholders' equity for each of the three years in the period ended
December 31, 1998. Our audits also included the financial statement
schedule listed in Item 14(a)2. These financial statements and financial
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, 1998 and 1997,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, 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.
/s/DELOITTE & TOUCHE LLP
Atlanta, Georgia
January 29, 1999
-F27-
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/William M. Dollar
Corporate Controller
January 29, 1999
-F28-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
Supplemental Financial Information
(In thousands except per share amounts)
SELECTED QUARTERLY FINANCIAL DATA, DIVIDENDS PAID AND STOCK PRICE RANGE
--------- Quarter ended ----------
April 3 July 3 October 2 December 31
-----------------------------------------------------------------------
1998:
Net sales $ 143,538 $ 135,272 $ 147,364 $ 140,548
Gross profit 62,143 57,373 69,055 62,689
Net income 6,071 4,081 4,008 (34,807)(a)
Per common share:
Basic and diluted
earnings .20 .13 .13 (1.12)
Dividends paid .075 .075 .075 .075
Stock market price:
High 21 7/8 19 3/16 17 7/16 16 7/8
Low 14 1/8 15 9/16 12 1/2 12 1/4
(a) In the fourth quarter of 1998, the Company recorded restructuring
charges of $46.2 million, which had an impact of $1.32 per share for
the period. These charges primarily reflected the impact of the
Company's decision to discontinue development of the Harland
Relationship Manager Product. Also included in the charges were
costs associated with organizational changes and impairment of
certain assets.
--------- Quarter ended ----------
March 31 June 30 September 30 December 31
------------------------------------------------------------------------
1997:
Net sales $ 139,266 $ 139,691 $ 142,099 $ 141,653
Gross profit 59,777 57,889 59,521 60,747
Net income 5,023 6,592 4,829 852
Per common share:
Basic and diluted
earnings .16 .21 .16 .03
Dividends paid .075 .075 .075 .075
Stock market price:
High 32 7/8 24 1/2 24 1/4 23 15/16
Low 23 5/8 18 3/8 18 3/8 20 1/4
SELECTED FINANCIAL DATA
--------- Year ended December 31 --------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------------
Net sales $ 566,722 $ 562,709 $ 609,384 $ 561,617 $521,266
Net income (loss) (20,647) 17,296 (13,854) 46,017 51,240
Total assets 391,770 426,186 454,731 474,650 422,283
Long-term debt 107,071 109,358 114,075 114,574 115,226
Per common share:
Basic earnings (loss) (.66) .56 (.45) 1.51 1.68
Diluted earnings (loss) (.66) .56 (.45) 1.50 1.67
Cash dividends .30 .30 1.02 1.02 .98
Average number of
shares outstanding:
Basic 31,087 30,971 31,056 30,558 30,517
Diluted 31,087 31,446 31,056 30,878 30,999
Earnings (loss) per share are calculated based on the weighted average
number of shares outstanding during the quarter
The Company's common stock (symbol:JH) is listed on the New York Stock
Exchange. At December 31, 1998 there were 6,618 shareholders of record.
Refer to Note 2 regarding the impact of restructuring charges in 1998,
1997 and 1996.
Refer to Note 3 regarding the impact of acquisitions in 1998 and 1996.
-F29-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(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, 1998
Allowance for doubtful accounts $ 3,341 $ 5,581 $ 245 $ 2,361 $ 6,806
======= ======== ======= ======= =======
Year Ended December 31, 1997
Allowance for doubtful accounts $ 2,886 $ 1,682 $ 367 $ 1,594 $ 3,341
======= ======== ======= ======= =======
Year Ended December 31, 1996
Allowance for doubtful accounts $ 2,251 $ 737 $ 1,266 $ 1,368 $ 2,886
======= ======== ======= ======= =======
(1) Represents recovery of previously written-off and credit balance accounts receivable.
(2) Represents write-off 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 through February 1,1999.
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 * Rights Agreement, dated as of December 17, 1998, between
Registrant and First Chicago Trust Company of New York.
4.6 * 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.
4.7 See Articles IV, V and VII 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 Registrant
and Robert R. Woodson.
10.2 * Form of Monthly Benefit Amendment to Deferred Compensation
Agreement between 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
Registrant and Messrs. Woodson and Rogers.
10.5 * Form of Noncompete and Termination Agreement between
Registrant and S. David Passman III, Mark C. Perlberg, Mr. Rogers
and John C. Walters
10.6 * Form of Executive Life Insurance Plan between Registrant and
Messrs. Woodson and Rogers
10.7 Noncompete and Termination Agreement, dated as of October 6,
1998, between Registrant and Timothy C. Tuff.
10.8 Restricted Stock Agreement, dated October 6, 1998, between
Registrant and Mr. Tuff.
10.9 Supplemental Retirement Agreement, dated as of January 14, 1999,
between Registrant and Mr. Tuff.
10.10 * John H. Harland Company 1981 Incentive Stock Option Plan, as
Extended.
10.11 John H. Harland Company 1999 Stock Option Plan.
10.12 * John H. Harland Company Employee Stock Purchase Plan, as
extended
10.13 * John H. Harland Company Deferred Compensation Plan for
Outside Directors.
21 Subsidiaries of the Registrant.
23 Independent Auditors' Consent.
27 Financial Data Schedule for the year ending December 31,1998
-X1-