UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2009
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from
to
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Commission File Number
333-133253
HARLAND CLARKE HOLDINGS
CORP.
(formerly Clarke American Corp.)
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
2939 Miller Road, Decatur, GA
(Address of principal executive offices)
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84-1696500
(I.R.S. Employer Identification No.)
30035
(Zip code)
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770-981-9460
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No x
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No x
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 o*
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. x
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer x
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No x
As of February 26, 2010, there were 100 shares of the
registrants common stock outstanding, with a par value of
$0.01 per share. All outstanding shares are owned by a
subsidiary of M & F Worldwide Corp.
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The registrant is not subject to the filing requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934.
The registrant is a voluntary filer.
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HARLAND
CLARKE HOLDINGS CORP.
INDEX TO
ANNUAL REPORT ON
FORM 10-K
For the
Year Ended December 31, 2009
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PART I
Harland Clarke Holdings Corp. (Harland Clarke
Holdings and, together with its subsidiaries, the
Company) is a holding company that conducts its
operations through its direct and indirect, wholly owned
operating subsidiaries and was incorporated in Delaware on
October 19, 2005. On December 15, 2005, CA Investment
Corp., an indirect wholly owned subsidiary of M & F
Worldwide Corp. (M & F Worldwide)
purchased 100% of the capital stock of Novar USA Inc.
(Novar) (the Clarke American
Acquisition) and was renamed Clarke American Corp.
(Clarke American) which was the successor by merger
to Novar, which indirectly wholly owned the operating
subsidiaries of the Clarke American business. On May 1,
2007, the Company completed the acquisition of John H. Harland
Company (Harland), and a subsidiary of the Company
was merged with and into Harland, with Harland continuing after
the merger as the surviving corporation and as a wholly owned
subsidiary of the Company (the Harland Acquisition).
After the closing of the Harland Acquisition, the Company
changed its name on May 2, 2007 from Clarke American to
Harland Clarke Holdings.
During December 2009, Harland Clarke Corp., a wholly owned
subsidiary of the Company, acquired in separate transactions
SubscriberMail and Protocol Integrated Marketing Services
(Protocol IMS), a division of Protocol Global
Solutions, for aggregate consideration of $12.9 million,
subject to achievement of certain revenue targets in 2010 and
2011. The aggregate consideration of $12.9 million includes
contingent consideration of $1.8 million for SubscriberMail
upon the achievement of revenue targets, with a maximum
contingent consideration of $2.0 million if the targets are
met. SubscriberMail is a leading email marketing service
provider that offers patented tools to develop and deliver
professional email communications. Protocol IMS focuses on
direct marketing services with solutions that include B2B
strategic services, B2C strategic services, database marketing
and analytics, outbound B2B teleservices and production and
fulfillment.
In December 2008, Harland Clarke Corp. acquired Transaction
Holdings Inc. (Transaction Holdings) for total cash
consideration of $8.2 million (the Transaction
Holdings Acquisition). Transaction Holdings produces
personal and business checks, payment coupon books and
promotional checks and provides direct marketing services to
financial institutions as well as individual consumers and small
businesses.
In February 2008, the Companys wholly owned subsidiary,
Scantron Corporation, purchased all of the limited liability
membership interests of Data Management I LLC (Data
Management) from NCS Pearson for $218.7 million in
cash after giving effect to working capital adjustments of
$1.6 million (the Data Management Acquisition).
Data Management designs, manufactures and services scannable
data collection products, including printed forms, scanning
equipment and related software, and provides survey consulting
and tracking services, including medical device tracking, as
well as field maintenance services to corporate and governmental
clients.
The Company has organized its business and corporate structure
along the following three business segments: Harland Clarke,
Harland Financial Solutions and Scantron.
The Harland Clarke segment offers checks and related products,
forms and treasury supplies, and related delivery and fraud
prevention services to financial services, retail and software
providers. It also provides direct marketing services to their
clients including direct marketing campaigns, direct mail,
database marketing, telemarketing and
e-mail
marketing. In addition, the Harland Clarke segment provides
check-related delivery and fraud prevention services,
stationery, business cards and other business and home office
products to consumers and small businesses.
The Harland Financial Solutions segment provides technology
products and services to financial services clients worldwide,
including lending and mortgage compliance and origination
applications, risk management solutions, business intelligence
solutions, Internet and mobile banking applications, branch
automation solutions and core processing systems.
The Scantron segment provides data management solutions and
related services to educational, commercial, healthcare and
governmental entities worldwide including testing and assessment
solutions, patient
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information collection and tracking, and survey services.
Scantrons solutions combine a variety of data collection,
analysis, and management tools, including software, scanning
equipment, forms, and related field maintenance services.
Company
Overview
Harland
Clarke
Harland Clarke provides checks and related products, direct
marketing services and customized business and home office
products to financial services, retail and software providers as
well as consumers and small business. In 2009, Harland Clarke
generated revenues of $1,226.0 million (72% of the
Companys 2009 consolidated net revenues).
Products
and Services
Checks
and Related Products
In addition to offering basic consumer and small business
checks, Harland Clarke also offers checks customized with
licensed designs and characters, such as cartoon characters,
collegiate designs and photographs. Harland Clarke also offers a
variety of financial documents in conjunction with consumer and
small business financial software packages. Accessory products
include leather checkbook covers, endorsement stamps, address
labels, recording registers and other bill paying accessories.
In addition, Harland Clarke also offers its clients a variety of
fraud prevention solutions.
Harland Clarke offers various delivery options, including
expedited and trackable delivery. Check users often prefer
expedited delivery to both receive their order sooner and for
the security and tracking features that these expedited methods
provide. These delivery services represent an important
component of the range of value-added service offerings.
Harland Clarke also offers a wide variety of standard financial
forms and flexible formats to suit clients needs, and the
products are also compatible with image processing systems.
Harland Clarke also provides treasury management supplies, such
as integrated cash deposit products, customized deposit tickets
and security bags.
Marketing
Services
Harland Clarke also offers integrated, multi-channel marketing
services that help clients measure, understand, manage and
optimize their
business-to-consumer
and
business-to-business
relationships as well as their returns on marketing investments.
These services include:
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marketing strategies such as acquisition, lead generation and
nurturing, retention, activation, cross-selling and up-selling;
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data management and analytics;
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database design, development and hosting;
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print production and lettershop;
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teleservices; and
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online and
e-mail
marketing with advanced filtering to deliver targeted messages,
social media and web analytics integration, and tools to manage
complex enterprise and channel programs.
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Customized
Business and Home Office Products
In addition to a wide variety of checks and related products,
Harland Clarke offers consumers and small businesses customized
products including stationery, business cards, notepads,
invitations, announcements, labels, rubber stamps and envelopes.
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Sales
and Marketing
Harland Clarke manages relationships with large and complex
financial and commercial institutions through dedicated account
management teams composed of relationship management, marketing,
operations and service oriented skill sets. In addition, Harland
Clarke has a national sales force targeting distinct financial
institution segments ranging from major nationwide and large
regional banks and securities firms to community banks and
credit unions. Hosted websites, contact center services and mail
order forms enable clients to offer convenient ordering options
to their customers.
Harland Clarke also markets its products directly to consumers
and small businesses through advertising inserts in newspapers,
advertisements sent directly to residences, and online and
e-mail
advertising. Online shopping, contact center access and mail
order forms enable consumers to order at their convenience.
Clients
The clients of Harland Clarke range from major national and
large regional banks and securities firms to community banks,
credit unions, brokerage houses, retailers and software
companies. In addition, Harland Clarke clients include consumers
and small businesses.
Harland Clarke contracts with its clients are generally
sole-source contracts for the sale of its checks and related
products to the clients customers. The initial terms of
the agreements generally range from three to five years and
generally are terminable for cause, although some of its
financial institution clients, including Bank of America, can
terminate their contracts for convenience.
Competition
Harland Clarkes primary competition comes from alternative
payment methods such as debit cards, credit cards, ACH, and
other electronic and online payment options. Harland Clarke also
competes with large providers that offer a wide variety of
products and services including Deluxe Corporation,
Harte-Hanks,
Inc., and R.R. Donnelly & Sons Company. There are also
many other competitors that specialize in providing one or more
of the products and services Harland Clarke offers to its
clients. Harland Clarke competes on the basis of service,
convenience, quality, product range and price.
Environmental
Matters
Harland Clarkes current check printing operations use
hazardous materials in the printing process and generate solid
wastes, wastewater and air emissions. Consequently, its
facilities are subject to many existing and proposed federal,
state and local laws and regulations designed to protect human
health and the environment. While enforcement of these laws may
require the expenditure of material amounts for environmental
compliance or cleanup, Harland Clarke believes that its
facilities are currently in material compliance with such laws
and regulations.
Historic check printing operations at Harland Clarkes
current and former facilities used hazardous materials and
generated regulated wastes in greater quantities than Harland
Clarkes current operations. In some instances Harland
Clarke has sold these facilities and agreed to indemnify the
buyer of the facility for potential environmental liabilities.
Harland Clarke may also be subject to liability under
environmental laws for environmental conditions at these current
or former facilities or in connection with the disposal of waste
generated at these facilities. Harland Clarke is not aware of
any fact or circumstance that would require the expenditure of
material amounts for environmental cleanup or indemnification in
connection with its historic operations. However, if
environmental contamination is discovered at any of these former
facilities or at locations where wastes were disposed, Harland
Clarke could be required to spend material amounts for
environmental cleanup.
It is generally not possible to predict the ultimate total costs
relating to any remediation that may be demanded at any
environmental site due to, among other factors, uncertainty
regarding the extent of prior pollution, the complexity of
applicable environmental laws and regulations and their
interpretations, uncertainty regarding future changes to such
laws and regulations or their enforcement, the varying costs and
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effectiveness of alternative cleanup technologies and methods,
and the questionable and varying degrees of responsibility
and/or
involvement by Harland Clarke.
Harland
Financial Solutions
Harland Financial Solutions provides technology products and
services to financial services clients worldwide including
lending and mortgage applications, risk management solutions,
business intelligence solutions, Internet and mobile banking
applications, branch automation solutions and core processing
systems. In 2009, Harland Financial Solutions generated revenues
of $278.9 million (16% of the Companys 2009
consolidated net revenues).
Products
and Services
Harland Financial Solutions provides host processing systems on
both an in-house and outsourced basis to financial institutions,
including banks, credit unions and thrifts. Its products
centralize customer information and facilitate high speed and
reliable processing of transactions from every delivery channel.
Harland Financial Solutions has integrated its compliance,
branch automation, Internet banking, mobile banking and business
intelligence products into its core processing solutions.
Management believes that this integration capability
differentiates Harland Financial Solutions from other providers.
Harland Financial Solutions helps financial institutions
increase the profitability of customer relationships through
business intelligence and branch automation software. Harland
Financial Solutions offers Internet banking, mobile banking and
branch automation systems designed to enhance the customer
experience through integrated teller, platform, call center and
self-service tools.
Harland Financial Solutions also sells loan and deposit
origination and compliance software to financial institutions.
Harland Financial Solutions offers a complete product suite,
Pro Suite, including solutions for lending, account
opening, sales management and loan underwriting. Harland
Financial Solutions also offers a commercial lending risk
management, underwriting and portfolio management product suite
marketed as CreditQuest. Harland Financial Solutions
provides mortgage loan origination, production and servicing
solutions through its Interlinq solution.
Backlog
Harland Financial Solutions backlog, which consists
primarily of contracted products and services prior to delivery,
was $363.8 million at December 31, 2009. The Company
expects to deliver approximately 32% of this backlog during
2010. Due to the long-term nature of certain service contracts,
primarily in the service bureau business, the remainder of the
backlog will be delivered in 2011 and beyond.
Sales
and Marketing
Harland Financial Solutions predominately sells its products and
services directly to financial institutions through its own
national sales organization supported by dedicated product
management, marketing, and client support organizations.
Clients
Harland Financial Solutions is a leading supplier of financial
software and services to financial institutions, including
banks, credit unions and thrifts. Harland Financial Solutions
contracts generally provide for a license with ongoing
maintenance or a term-based service arrangement.
Competition
Providing technological solutions to financial institutions is
highly competitive and fragmented. Harland Financial Solutions
competes with several large and diversified financial technology
providers, including, among others, Fidelity National
Information Services, Inc., FISERV, Inc., Jack Henry &
Associates, Inc., Open Solutions Inc., Computer Services Inc.,
and many regional providers. Many multi-national and
international providers of technological
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solutions to financial institutions also compete with products
or services offered by Harland Financial Solutions both
domestically and internationally, including TEMENOS Group AG,
Misys plc, Infosys Technologies Limited, Tata Consultancy and
BISYS Group, Inc. There are also many other competitors that
offer one or more specialized products or services that compete
with products and services offered by Harland Financial
Solutions. Management believes that competitive factors
influencing buying decisions include product features and
functionality, client support, price and vendor financial
stability.
Scantron
Scantron provides data management solutions and related services
to educational, commercial, healthcare and governmental entities
worldwide. Scantrons solutions combine a variety of data
collection, analysis and management tools, including web-based
software tools, scanning equipment, forms, and related field
maintenance services. For the year ended December 31, 2009,
Scantron generated revenue of $208.0 million (12% of the
Companys 2009 consolidated net revenues).
Products
and Services
Education-Related
Products
Scantrons sales to K-12 educational institutions have
historically represented the largest portion of Scantrons
revenues, although it also generates revenues from sales to
higher education, healthcare, government and commercial
institutions. In 2009, Scantron derived approximately 33% of its
revenues from sales to K-12 educational institutions.
Scantrons Achievement Series is a set of web-based
testing solutions that provide schools and other enterprises
with a content-neutral platform for measuring achievement, with
real-time reporting. Scantron also offers solutions for managing
and centralizing the data generated by the testing process to
measure progress against state and national standards.
Scantrons Performance Series is an
Internet-delivered, standards-based, computer adaptive
assessment that provides valid and reliable diagnostic and
placement assessment data. Each assessment is adapted for each
student, is aligned to individual state standards, and links to
instructional applications that can help educators design
formative assessment-based instruction.
Scantron has integrated Achievement Series and
Performance Series to provide an overall diagnostic,
achievement testing, monitoring and data reporting solution.
These solutions also allow the easy integration of disparate
technologies and content. Scantrons Achievement Series
and Performance Series solutions generate
subscription revenues and the opportunity for the sale of
associated products, including forms and scanner solutions,
testing content, testing-based instruction applications and data
management tools.
Scantron provides educational institutions with a patented forms
and scanner solution for standardized and classroom-based
testing needs. The Scantron forms and scanner solution has
achieved widespread acceptance among educational institutions.
Scantron generates forms and scanner solutions revenues by
charging for the purchase or lease of scanners and the purchase
of forms by the client. In addition, Scantron has a loan
marketing program, under which a scanner is loaned to a client
in exchange for a minimum annual forms purchase.
Scantron also offers custom form and scanner solutions, course
evaluations and classroom testing software packages, and student
response devices.
Commercial,
Healthcare, and Government Related
Products
Scantron provides data management outsourcing services for
clients using web-based, telephone and paper-based methods for
data collection, processing, analysis and reporting. These
services include customer and employee surveys, patient
information tracking, and a wide variety of other data
collection, analysis and management applications.
Scantron provides custom form and scanner solutions for a wide
variety of data collection applications such as patient
information collection, safety assessments and employee testing
or information collection.
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Scantron offers scanners with both optical mark and full image
capabilities. The scanners range in size and speed for various
customer applications. Scantron also provides software that
converts optical marks and images into digital data for delivery
to third-party applications.
In addition, Scantron offers software packages for
client-managed survey and general data collection.
Field
Maintenance Services
Scantron provides field maintenance services including
installation, maintenance and repairs for computers and other
third-party equipment as well as Scantron scanners.
Backlog
Scantrons backlog, which consists primarily of contracted
products and services prior to delivery, was $65.3 million
at December 31, 2009. The Company expects to deliver
approximately 68% of this backlog during 2010.
Sales,
Marketing and Product Support
Scantron sells its products and services directly through sales
organizations segmented by industry vertical or product
category. Scantron provides comprehensive product support to its
clients directly with telephone and online support and provides
on-site and
depot support for scanner products.
Clients
Clients for Scantrons educational products range from K-12
institutions and districts to higher education institutions.
Clients for Scantrons other data management products
include commercial, healthcare and government organizations.
Competition
Scantron competes with many education software providers at the
K-12 and higher education levels. Scantron also faces
significant competition from a number of local and regional
education competitors. Scantron faces competition with respect
to its forms and scanners from large international and regional
printers and manufacturers. The business landscape for
commercial, healthcare and governmental data management is
highly fragmented, and Scantron faces competition for its
products and services from many large and small companies.
The
Companys Suppliers
The main supplies used in check and form printing are paper,
print ink, binders, boxes, packaging and delivery services. For
all critical supplies, Harland Clarke has at least two qualified
suppliers or multiple qualified production sites in order to
ensure that supplies are available as needed. Using alternative
suppliers may, however, result in increased costs. Harland
Clarke has not historically experienced any material shortages
and management believes Harland Clarke has redundancy in its
supplier network for each of its key inputs.
Scantron purchases a majority of the paper for its business from
a single supplier. It purchases scanner components from various
equipment manufacturers and supply firms. Scantron historically
has not experienced shortages of materials and believes it will
continue to be able to obtain such materials or suitable
substitutes in acceptable quantities and at acceptable prices.
The
Companys Foreign Sales
The Company conducts business outside the United States in
Canada, Israel and Ireland. Its foreign sales totaled
$18.1 million in 2009, $19.1 million in 2008 and
$8.4 million in 2007.
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The
Companys Employees
As of December 31, 2009, the Company had approximately
7,300 employees. None of the Companys employees are
represented by a labor union. The Company considers its employee
relations to be good.
The
Companys Intellectual Property
The Company relies on a combination of trademark, copyright and
patent laws, trade secret protection and confidentiality and
license agreements to protect its trademarks, copyrights,
software, inventions, trade secrets, know-how and other
intellectual property. The sale of products bearing trademarks
or designs licensed from third parties accounts for a
significant portion of the Companys revenue. Typically,
such license agreements are effective for a two- to three-year
period, provide for the retention of ownership of the trade
name, know-how or other intellectual property by the licensor
and require the payment of a royalty to the licensor. There can
be no guarantee that such licenses will be renewed or will
continue to be available on terms that would allow the Company
to sell the licensed products profitably.
Governmental
Regulation Related to the Company
The Company is subject to the federal financial modernization
law known as the Gramm-Leach-Bliley Act and the regulations
implementing its privacy and information security requirements,
as well as other privacy and data security federal and state
laws and regulations. The Company is also subject to additional
privacy and information security requirements in many of its
contracts with financial institution clients, which are often
more restrictive than the laws or regulations. These laws,
regulations and agreements require the Company to develop and
implement policies to protect the security and confidentiality
of consumers nonpublic personal information and to
disclose these policies to consumers before a customer
relationship is established and periodically thereafter.
These laws and regulations require some of the Companys
businesses to provide a notice to consumers to allow them the
opportunity to have their nonpublic personal information removed
from the Companys files before the Company shares their
information with certain third parties. These laws and
regulations may limit the Companys ability to use its
direct-to-consumer
data in its businesses. Current laws and regulations allow the
Company to transfer consumer information to process a
consumer-initiated transaction, but also require the Company to
protect the confidentiality of a consumers records or to
protect against actual or potential fraud, unauthorized
transactions, claims or other liabilities. The Company is also
allowed to transfer consumer information for required
institutional risk control and for resolving customer disputes
or inquiries. The Company may also contribute consumer
information to a consumer-reporting agency under the Fair Credit
Reporting Act. Some of the Companys financial institution
clients request various contractual provisions in their
agreements that are intended to comply with their obligations
under the Gramm-Leach-Bliley Act and other laws and regulations.
Congress and many states have passed and are considering
additional laws or regulations that, among other things,
restrict the use, purchase, sale or sharing of nonpublic
personal information about consumers and business customers. For
example, legislation has been introduced in Congress to further
restrict the sharing of consumer information by financial
institutions, as well as to require that a consumer opt-in prior
to a financial institutions use of his or her data in its
marketing programs.
New laws and regulations may be adopted in the future with
respect to the Internet,
e-commerce
or marketing practices generally relating to consumer privacy.
Such laws or regulations may impede the growth of the Internet
and/or use
of other sales or marketing vehicles. For example, new privacy
laws could decrease traffic to the Companys websites,
decrease telemarketing opportunities and decrease the demand for
its products and services. Additionally, the applicability to
the Internet of existing laws governing property ownership,
taxation and personal privacy is uncertain and may remain
uncertain for a considerable length of time.
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Non-Operating
Contingent Claims, Indemnification and Insurance
Matters
Honeywell
Indemnification
Certain of the intermediate holding companies of the predecessor
of the Company had issued guarantees on behalf of operating
companies formerly owned by these intermediate holding
companies, which operating companies are not part of the
Companys businesses. In the stock purchase agreement
executed in connection with the acquisition of Clarke American
by M & F Worldwide, Honeywell agreed to use its
commercially reasonable efforts to assume, replace or terminate
such guarantees and indemnify M & F Worldwide and its
affiliates, including the Company, with respect to all
liabilities arising under such guarantees.
Other
In June 2008, Kenneth Kitson, purportedly on behalf of himself
and a class of other alleged similarly situated commercial
borrowers from the Bank of Edwardsville, an Illinois-based
community bank (BOE), filed in an Illinois state
court an amended complaint that re-asserted previously filed
claims against BOE and added claims against Harland Financial
Solutions, Inc. (HFS). The amended complaint
alleged, among other things, that HFSs LaserPro
software permitted BOE to generate loan documents that were
deceptive and usurious in that they failed to disclose properly
the effect of the 365/360 method of calculating
interest. Following the removal of the action to the United
States District Court for the Southern District of Illinois, the
District Court entered an order granting with prejudice
HFSs motion to dismiss Mr. Kitsons claims. In
August 2009, Mr. Kitson, individually and as class
representative, and BOE agreed to settle and dismiss with
prejudice all remaining claims. Separately but concurrently,
BOEs warranty claim against HFS was settled, in exchange
for, among other things, payment by HFS of $0.2 million.
The class settlement agreement was approved by the District
Court in January 2010.
Other commercial borrowers that have obtained loans from other
banks in Illinois, Ohio and South Carolina have commenced
similar class actions against their banks using similar
theories. In some cases, the banks have made warranty claims
against HFS related to these class actions. Many of the class
actions and related warranty claims are at early stages, and
their likely progress is not yet clear. The Company has not
accepted any of the asserted warranty claims and does not
believe that any of these claims will result in material
liability for the Company, but there can be no assurance.
Various other legal proceedings, claims and investigations are
pending against the Company, including those relating to
commercial transactions, product liability, environmental,
safety and health matters, employment matters and other matters.
Most of these matters are covered by insurance, subject to
deductibles and maximum limits, and by third-party indemnities.
In the opinion of management, based upon the information
available at this time, the outcome of the matters referred to
above will not have a material adverse effect on the
Companys financial position or results of operations.
Availability
of Reports
Copies of the Companys annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and any amendments to these documents, are available without
charge upon request to the Chief Financial Officer, Harland
Clarke Holdings Corp., 2939 Miller Road, Decatur, GA 30035.
Risks
Related to Our Substantial Indebtedness
We
have substantial indebtedness, which may adversely affect our
ability to operate our business and prevent us from fulfilling
our obligations under our debt agreements.
As of December 31, 2009, we had total indebtedness of
$2,238.8 million (including $5.7 million of capital
lease obligations and other indebtedness), and
$87.5 million of additional availability under our
revolving credit facility (after giving effect to the issuance
of $12.5 million of letters of credit). In addition, under
certain circumstances, we are permitted to incur additional term
loan and/or
revolving credit facility
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indebtedness in an aggregate principal amount of up to
$250.0 million, and the terms of our senior secured credit
facilities and notes allow us to borrow substantial additional
debt, including additional secured debt. Our substantial level
of indebtedness could have important consequences. For example,
it could:
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make it more difficult for us to satisfy our obligations with
respect to our indebtedness;
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increase our vulnerability to general adverse economic and
industry conditions;
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require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, thereby
reducing the availability of our cash flow to fund working
capital, capital expenditures, research and development efforts
and other general corporate purposes;
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limit our flexibility in planning for, or reacting to, changes
in our businesses and the industries in which we
operate; and
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limit our ability to borrow additional funds.
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Our
ability to make payments on our indebtedness depends on our
ability to generate sufficient cash in the future.
Our ability to make payments on our indebtedness and to fund
planned capital expenditures will depend on our ability to
generate cash in the future. This is subject to general
economic, financial, competitive, legislative, regulatory and
other factors beyond our control.
We are required to make scheduled payments of principal on our
senior secured term loan in the amount of $18.0 million per
year in equal quarterly installments. In addition, our term loan
facility requires that a portion of our excess cash flow be
applied to prepay amounts borrowed under that facility. No such
excess cash flow payment was paid in 2009 with respect to 2008
and no such excess cash flow payment is required to be paid in
2010 with respect to 2009. We are required to repay our senior
secured term loan in full in 2014 and are required to repay our
senior notes in 2015. Our revolving credit facility will mature
in 2013.
We may not be able to generate sufficient cash flow from
operations and future borrowings may not be available to us
under our senior secured credit facilities in an amount
sufficient to enable us to repay our debt or to fund our other
liquidity needs. If our future cash flow from operations and
other capital resources are insufficient to pay our obligations
as they mature or to fund our liquidity needs, we may be forced
to reduce or delay our business activities and capital
expenditures, sell assets, obtain additional debt or equity
capital or restructure or refinance all or a portion of our debt
on or before maturity. We may not be able to accomplish any of
these alternatives on a timely basis or on satisfactory terms,
if at all. In addition, the terms of our existing and future
indebtedness, including the notes and our senior secured credit
facilities, may limit our ability to pursue any of these
alternatives.
Despite
our current indebtedness levels, we may still be able to incur
substantially more debt. Additional indebtedness could
exacerbate the risks associated with our substantial
leverage.
We may be able to incur substantial additional indebtedness in
the future. The terms of our senior secured credit facilities
and the indenture governing our senior notes do not fully
prohibit us from doing so. In addition, as of December 31,
2009, there was $87.5 million of additional availability
under our $100.0 million revolving credit facility (after
giving effect to the issuance of $12.5 million of letters
of credit). Under certain circumstances, we are permitted to
incur additional term loan
and/or
revolving credit facility indebtedness under our senior secured
credit facilities in an aggregate principal amount of up to
$250.0 million. In addition, the terms of our senior
secured credit facilities and senior notes allow us to borrow
substantial additional debt, including additional secured debt.
If new indebtedness is added to our current debt levels, the
related risks that we now face could intensify.
9
Covenant
restrictions under our indebtedness may limit our ability to
operate our business.
The indenture governing the notes and the agreement governing
our senior secured credit facilities contain, among other
things, covenants that restrict our ability to finance future
operations or capital needs or to engage in other business
activities. The indenture restricts, among other things, our
ability to:
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incur or guarantee additional indebtedness;
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make certain investments;
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make restricted payments;
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pay certain dividends or make other distributions;
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incur liens;
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enter into transactions with affiliates; and
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merge or consolidate or transfer and sell assets.
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Our senior secured credit facilities contain customary
affirmative and negative covenants including, among other
things, restrictions on indebtedness, liens, mergers and
consolidations, sales of assets, loans, investments,
acquisitions, restricted payments, transactions with affiliates,
dividends and other payment restrictions affecting subsidiaries
and sale-leaseback transactions.
In addition, our credit agreement requires us to maintain a
maximum consolidated leverage ratio for the benefit of the
lenders under our revolving credit facility only. These
restrictions may limit our ability to operate our businesses and
may prohibit or limit our ability to enhance our operations or
take advantage of potential business opportunities as they arise.
Risks
Related to Our Business
Weak
economic conditions and further acceleration of check unit
declines may continue to have an adverse effect on the
Companys revenues and profitability and could result in
additional impairment charges.
The Company has substantial intangible assets, including
substantial goodwill arising from previous acquisitions.
Goodwill and other intangible assets determined to have an
indefinite life are not amortized, but are tested for impairment
annually in the fourth quarter, or when events or changes in
circumstances indicate that the assets might be impaired. The
Company also has a significant amount of property, plant and
equipment and amortizable intangible assets, such as customer
relationships, which are tested for impairment whenever events
or changes in circumstances indicate that the carrying value may
not be recoverable. The impairment test processes are more fully
described in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of
Operations Critical Accounting Policies and
Estimates included elsewhere in this Annual Report on
Form 10-K.
The annual impairment evaluations for goodwill and
indefinite-lived intangible assets involve significant estimates
and assumptions made by management regarding specific business
and operating factors as well as discount rates. Changes in
estimates and assumptions, as well as the occurrence of various
events or changes in circumstances could have a material impact
on the fair value of goodwill or indefinite-lived intangible
assets in future periods, which in turn may result in material
asset impairments. Similar considerations apply to any
impairment evaluation of our property, plant and equipment and
amortizable intangible assets as well as our determinations as
to whether interim impairment tests are necessary.
The Company periodically updates its long-range business plans
and forecasts, which include financial projections that are
incorporated in the annual impairment tests. Estimated revenue
growth rates for all reporting units may be lower than past
projections due to the various factors discussed in this report,
including, but not limited to, the following:
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the continued adverse economic environment, which may negatively
affect future revenue and margins as a result of lower demand
and pricing pressure; and
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check unit declines that have continued at a higher rate than in
the past and are expected to continue to decline at higher rates
than in recent years, which may negatively affect future revenue
for our Harland Clarke segment.
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Depending on the nature of these factors and the expected
relative magnitude and permanency of their effects, the
Companys businesses may not be able to achieve previous
levels of performance even when overall economic conditions
improve. During the 2009 annual impairment test for goodwill and
indefinite-lived tradenames, the Company determined the fair
value of the Harland Clarke tradename was less than its carrying
value due to declines in revenues from check unit volumes that
are projected to decline at rates that are higher than recent
years and also due to the continuing economic downturn. As a
result of this impairment, the useful life of the Harland Clarke
tradename was reassessed and determined to no longer be
indefinite. Based on an analysis of future cash flows
attributable to the Harland Clarke tradename, the Company
determined the economic life for the Harland Clarke tradename is
25 years. A non-cash impairment charge of
$44.2 million was recorded in the fourth quarter of 2009
based on the current fair value of the Harland Clarke tradename
being less than its carrying value and the useful life was
reclassified from an indefinite life to a life of 25 years.
Future impairment tests may result in a determination that there
have been additional material asset impairments. Any asset
impairment would be reported as a non-cash operating loss, would
have a negative effect on the Companys earnings and total
assets, and could have a negative impact on the market prices of
the Companys outstanding securities. Impairment charges in
the future would not impact the Companys consolidated cash
flows, current liquidity, capital resources and covenants under
its existing credit facilities.
Difficult
conditions in the financial markets and a general economic
downturn may adversely affect the business and results of
operations of the Company and we cannot determine if these
conditions will improve or worsen in the near
future.
The economic conditions in late 2008 and 2009 and the volatility
in the financial markets during this period have contributed and
may continue to contribute to high unemployment levels,
decreased consumer spending, reduced credit availability
and/or
declining business and consumer confidence. During this period,
a number of financial institutions have taken significant
write-downs of asset values. These write-downs have caused many
financial institutions to seek additional capital, to merge with
other institutions and, in some cases, to fail. We cannot
determine whether the difficult conditions in the economy in
general
and/or the
financial markets will improve or worsen in the near future. Our
businesses have been and may continue to be adversely affected
by these difficult conditions. Harland Clarke may experience
reduced revenues due to losses of customers in the event the
financial institutions upon which it depends either merge with
or are sold to other institutions, or fail, or in the event that
consumer spending continues to decline, or checking account
openings continue to decrease, resulting in further acceleration
in the decline of check usage and the use of Harland
Clarkes other products. Similarly, Harland Financial
Solutions, which also depends on its financial institution
customers, may be adversely affected due to losses of financial
institution customers from mergers, consolidations or failures.
Reductions in financial institution information technology
budgets in response to market difficulties could continue to
result in further delays or cancellations of Harland Financial
Solutions client purchases, as well as potential pricing
pressure on Harland Financial Solutions products. Economic
slowdown and liquidity constraints may also cause state and
local public and private education budgets to be further
reduced, which could continue to result in reduced revenues at
Scantron, as well as pricing pressure on Scantron products. In
addition, further disruptions in the credit and other financial
markets could, among other things, impair the financial
condition of suppliers of the Company, thereby increasing the
risk of supplier performance.
Account
data breaches involving stored client data or misuse of such
data could adversely affect our reputation, revenues, profits
and growth.
We, our clients, and other third parties store customer account
information relating to our Harland Clarke segments
checks. In addition, a number of clients use our Harland
Financial Solutions products and Scantron products to store and
manage sensitive customer and student information. Scantron also
provides services
11
which involve the storage of non-public customer information.
Any breach of the systems on which sensitive customer data and
account information are stored or archived and any misuse by our
own employees, by employees of data archiving services or by
other unauthorized users of such data could lead to fraudulent
activity involving our clients and our financial institution
clients customers information
and/or
funds, damage the reputation of our brands and result in claims
against us. If we are unsuccessful in defending any lawsuit
involving such data security breaches or misuse, we may be
forced to pay damages, which could materially and adversely
affect our profitability and could have a material adverse
impact on our transaction volumes, revenue and future growth
prospects. In addition, such breaches could adversely affect our
financial institution clients perception as to our
reliability, and could lead to the termination of client
contracts.
Legislation
and contracts relating to protection of personal data could
limit or harm our future business.
We are subject to state and federal laws and regulations
regarding the protection of consumer information commonly
referred to as non-public personal information.
Examples include the federal financial modernization law known
as the Gramm-Leach-Bliley Act and the regulations implementing
its privacy and information security requirements, as well as
other privacy and data security federal and state laws and
regulations. We are also subject to additional requirements in
many of our contracts with financial institution clients, which
are often more restrictive than the regulations. These laws,
regulations and agreements require us to develop and implement
policies to protect non-public personal information and to
disclose these policies to consumers before a customer
relationship is established and periodically thereafter. The
laws, regulations, and agreements limit our ability to use or
disclose non-public personal information for other than the
purposes originally intended.
Where not preempted by the provisions of the Gramm-Leach-Bliley
Act, states may enact legislation or regulations that are more
restrictive on our use of data. In addition, more restrictive
legislation or regulations have been introduced in the past and
could be introduced in the future in Congress and the states and
could have a negative impact on our business, results of
operations or prospects. Additionally, future contracts may
impose even more stringent requirements on us which could
increase our operating costs, as well as interfere with the cost
savings we are trying to achieve.
The financial services sector is also subject to various federal
and state regulations and oversight. As a supplier of services
to financial institutions, certain operations of our Harland
Clarke and Harland Financial Solutions segments are examined by
the Office of the Comptroller of the Currency and the Federal
Deposit Insurance Corporation, among other agencies, to confirm
our ability to maintain data security. These agencies regulate
and audit services we provide and the manner in which we
operate, and we are required to comply with a broad range of
applicable laws and regulations. Adverse audit findings could
impact our ability to continue to render services or require
investment in corrective measures. Moreover, current laws and
regulations may be amended in the future or interpreted by
regulators in a manner which could negatively impact the
operations of our Harland Clarke or Harland Financial Solutions
segments or limit their future growth.
The use of our Scantron products and services to store and
manage student and other educational data may be subject to The
Family Education Rights and Privacy Act of 1974, commonly known
as FERPA, which is a federal law that protects the privacy of
student education records in connection with Scantrons
web-based assessment services. Many states have enacted similar
laws to protect the privacy of student data. The operation of
websites by Scantron that are accessed by children under the age
of 13 may be subject to the Childrens Online Privacy
Protection Act of 1998, commonly known as COPPA. The collection
of patient data through Scantrons survey services is
subject to the Health Insurance Portability and Accountability
Act of 1996, commonly known as HIPAA, which protects the privacy
of patient data. Scantron is also subject to the
Gramm-Leach-Bliley Act.
New laws and regulations may be adopted in the future with
respect to the Internet,
e-commerce
or marketing practices generally relating to consumer privacy.
Such laws or regulations may impede the growth of the Internet
and/or use
of other sales or marketing vehicles. As an example, new privacy
laws could decrease traffic to our websites, decrease
telemarketing opportunities and decrease the demand for our
products
12
and services. Additionally, the applicability to the Internet of
existing laws governing property ownership, taxation, libel and
personal privacy is uncertain and may remain uncertain for a
considerable length of time.
We may
experience processing errors or software defects that could harm
our business and reputation.
We use sophisticated software and computing systems in our
Harland Clarke, Harland Financial Solutions and Scantron
segments. We may experience difficulties in installing or
integrating our technologies on platforms used by our clients.
Furthermore, certain financial institution clients of our
Harland Clarke segment have integrated certain components of
their systems with ours, permitting our operators to effect
certain operations directly into our financial institution
clients customers accounts. Errors or delays in the
processing of check orders, software defects or other
difficulties could result in:
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loss of clients;
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additional development costs;
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diversion of technical and other resources;
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negative publicity; or
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exposure to liability claims.
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We may
not successfully implement any or all components of our business
strategies or realize all of our continued cost savings, which
could reduce our revenues and profitability.
Important components of our business strategies are to
cross-sell between business segments, capitalize on
complementary offerings across the client base of our Harland
Clarke segment, cross-sell software products into our combined
client base, continue focusing on software-enabled testing and
assessment products while expanding the offering of survey
services to financial institutions, and continue to reduce costs
and generate strong cash flow.
We may not be able to fully implement any or all components of
our business strategies or realize, in whole or in part or
within the timeframes anticipated, the efficiency improvements
or cost savings from these strategies. These strategies are
subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our
control. Financial industry turmoil and the general economic
slowdown may continue to adversely affect our ability to
implement our business strategies. Additionally, our business
strategies may change from time to time. As a result, we may not
be able to achieve our expected results of operations.
We may
be unable to protect our rights in intellectual property, and
third-party infringement or misappropriation may materially
adversely affect our profitability.
We rely on a combination of measures to protect our intellectual
property, among them, registering trademarks and copyrights,
patenting inventions, implementing procedures that afford trade
secret status and protection to our proprietary information,
such as entering into third-party non-disclosure and
intellectual property assignment agreements, and maintaining our
intellectual property by entering into licenses that grant only
limited rights to third parties. We may be required to spend
significant resources to protect, monitor and police our trade
secrets, proprietary know-how trademarks and other intellectual
property rights. Despite our efforts to protect our intellectual
property, third parties or licensees may infringe or
misappropriate our intellectual property. The confidentiality
agreements that are designed to protect our trade secrets and
proprietary know-how could be breached, or our trade secrets and
proprietary know-how might otherwise become known by others. We
may not have adequate remedies for infringement or
misappropriation of our intellectual property rights or for
breach of our confidentiality agreements. The loss of
intellectual property protection or the inability to enforce our
intellectual property rights could harm our business and ability
to compete.
13
We may
be unable to maintain our licenses to use third-party
intellectual property on favorable terms.
A significant portion of our revenues are derived from the sale
of products by our Harland Clarke segment bearing third-party
trademarks or designs pursuant to royalty-bearing licenses.
Typically, these licenses are for a term of between two and
three years, and some licenses may be terminated at the
licensors option upon a change of control. There can be no
guarantee that such licenses will be renewed or will continue to
be available to us on terms that would allow us to continue to
sell the licensed products profitably.
Third
parties may claim we infringe on their intellectual property
rights.
Third parties may assert intellectual property infringement
claims against us in the future. In particular, there has been a
substantial increase in the issuance of patents for
Internet-related systems and business methods, which may have
broad implications for participants in technology and service
sectors. Claims for infringement of these patents are
increasingly becoming a subject of litigation. Because patent
application information may not always be readily available,
there is also a risk that we could adopt a technology without
knowledge of a pending patent application, which technology
would infringe a third-party patent once that patent is issued.
Responding to these infringement claims may require us to enter
into royalty-bearing license agreements, to stop selling or to
redesign affected products, services and technologies, to pay
damages,
and/or to
satisfy indemnification commitments under agreements with our
licensees. In the event that our trademarks are successfully
challenged by third parties, we could be forced to rebrand our
products, which could result in the loss of brand recognition.
Future litigation relating to infringement claims could also
result in substantial costs to us and a diversion of management
resources. Adverse determinations in any litigation or
proceeding could also subject us to significant liabilities and
could prevent us from using some of our products, services or
technologies.
We are
dependent upon third-party providers for significant information
technology needs, and an interruption of services from these
providers could materially and adversely affect our
operations.
We have entered into agreements with third-party providers for
the licensing of certain software and the provision of
information technology services, including software development
and support services, and personal computer, telecommunications,
network server and help desk services. In the event that one or
more of these providers is not able to provide adequate
information technology services or terminates a license or
service, we would be adversely affected. Although we believe
that information technology services and substantially
equivalent software and services are available from numerous
sources, a failure to perform or a termination by one or more of
our service providers could cause a disruption in our business
while we obtain an alternative source of supply and we may not
be able to find such an alternative source on commercially
reasonable terms, or at all.
We
depend upon the talents and contributions of a limited number of
individuals, many of whom would be difficult to replace, and the
loss or interruption of their services could materially and
adversely affect our business, financial condition and results
of operations.
Our business is largely driven by the personal relationships of
our senior management teams. Despite executing employment
agreements with certain members of our senior management teams,
these individuals may discontinue service with us and we may not
be able to find individuals to replace them at the same cost, or
at all. We have not obtained key person insurance
for any member of our senior management teams. The loss or
interruption of the services of these executives could have a
material adverse effect on our business, financial condition and
results of operations.
We
face uncertainty with respect to future acquisitions, and
unsuitable or unsuccessful acquisitions could materially and
adversely affect our business, prospects, results of operations
and financial condition.
We have acquired complementary businesses in the past, and we
may pursue acquisitions of complementary businesses in the
future. We cannot predict whether suitable acquisition
candidates can be acquired on acceptable terms or whether future
acquisitions, even if completed, will be successful. Future
acquisitions by
14
us could result in the incurrence of contingent liabilities,
debt or amortization expenses relating to intangible assets
which could materially adversely affect our business, results of
operations and financial condition. Moreover, the success of any
past or future acquisition will depend upon our ability to
integrate effectively the acquired businesses.
We also cannot predict whether any acquired products, technology
or business will contribute to our revenues or earnings to any
material extent or whether cost savings and synergies we expect
at the time of an acquisition can be realized once the
acquisition has been completed. Furthermore, if we incur
additional indebtedness to finance an acquisition, we cannot
predict whether the acquired business will be able to generate
sufficient cash flow to service that additional indebtedness.
Unsuitable or unsuccessful acquisitions could therefore have a
material and adverse effect on our business, prospects,
financial condition and results of operations.
Our
business is exposed to changes in interest rates.
We are exposed to changes in interest rates on our variable-rate
debt. A hypothetical increase of 1 percentage point in the
variable component of interest rates applicable to floating rate
debt outstanding as of December 31, 2009 would have
resulted in an increase to interest expense of approximately
$9.0 million per year including the effect of interest rate
swaps outstanding at December 31, 2009. Adverse interest
rate changes could have a material adverse effect on our
business, results of operations and financial condition.
We are
dependent on the success of our research and development and the
failure to develop new and improved products could adversely
affect our business.
We have in the past made, and intend to continue in the future
to make, investments in research and development in order to
enable us to identify and develop new products. The development
process for new products can be lengthy. Despite investments in
this area, our research and development may not result in the
discovery or successful development of new products. The success
of our new product offerings will depend on several factors,
including our ability to:
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accurately anticipate and properly identify our customers
needs and industry trends;
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price our products competitively;
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innovate, develop and commercialize new products and
applications in a timely manner;
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obtain necessary regulatory approvals;
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differentiate our products from competitors
products; and
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use our research and development budget efficiently.
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The continuous introduction of new products is important to our
growth. Our financial condition could deteriorate if we cannot
timely and cost effectively develop and commercialize new
products.
We may
be subject to sales and other taxes, which could have adverse
effects on our business.
In accordance with current federal, state and local tax laws,
and the constitutional limitations thereon, we currently collect
sales, use or other similar taxes in state and local
jurisdictions where we have a physical presence. One or more
state or local jurisdictions may seek to impose sales tax
collection obligations on us and other
out-of-state
companies which engage in remote or online commerce. Several
states in the United States have taken various initiatives to
prompt retailers to collect local and state sales taxes on
purchases made over the Internet. Furthermore, tax law and the
interpretation of constitutional limitations thereon is subject
to change. In addition, any new operations of these businesses
in states where they do not currently have a physical presence
could subject shipments of goods by these businesses into such
states to sales tax under current or future laws. If one or more
state or local jurisdictions successfully asserts that we must
collect sales or other taxes beyond our current practices, it
could have a material, adverse affect on our business.
15
We may
be subject to environmental risks, and liabilities for
environmental compliance or cleanup could have a material,
adverse effect on our profitability.
Our operations are subject to many existing and proposed
federal, state, local and foreign laws and regulations
pertaining to pollution and protection of human health and the
environment, the violation of which can result in substantial
costs and liabilities, including material civil and criminal
fines and penalties. Such requirements include those pertaining
to air emissions; wastewater discharges; occupational safety and
health; the generation, handling, treatment, remediation, use,
storage, transport, release, and exposure to hazardous
substances and wastes. Under certain of these laws and
regulations, such as the federal Superfund statute, the
obligation to investigate and remediate contamination at a
facility may be imposed on current and former owners or
operators or on persons who may have sent waste to that facility
for disposal. In addition, environmental laws and regulations,
and interpretation or enforcement thereof, are constantly
evolving and any such changes could affect the business,
financial condition or results of operations. Enforcement of
these laws and regulations may require the expenditure of
material amounts for environmental compliance or cleanup.
The operations of our Harland Clarke segment use hazardous
materials in the printing process and generate wastewater and
air emissions. Some of our historic check and form printing
operations at current and former facilities used hazardous
materials in greater quantities. In some instances, we have sold
these facilities and agreed to indemnify the buyer of the
facility for certain environmental liabilities. We may also be
subject to liability under environmental laws and regulations
for environmental conditions at our current or former facilities
or in connection with the disposal of waste generated at these
facilities. Although we are not aware of any fact or
circumstance that would require the expenditure of material
amounts for environmental compliance or cleanup, if
environmental liabilities are discovered at our current or
former facilities or at locations where our wastes were
disposed, we could be required to spend material amounts for
environmental compliance or cleanup.
It is generally not possible to predict the ultimate total costs
relating to any remediation that may be demanded at any
environmental site due to, among other factors, uncertainty
regarding the extent of prior pollution, the complexity of
applicable environmental laws and regulations and their
interpretations, uncertainty regarding future changes to such
laws and regulations or their enforcement, the varying costs and
effectiveness of alternative cleanup technologies and methods,
and the questionable and varying degrees of responsibility
and/or
involvement by us.
M &
F Worldwide, our indirect parent company, and its principal
stockholder have significant influence over us.
MacAndrews & Forbes Holdings Inc. is a corporation
wholly owned by Mr. Ronald O. Perelman. Mr. Perelman,
directly and through MacAndrews & Forbes Holdings
Inc., beneficially owned, as of December 31, 2009,
approximately 43.4% of the outstanding common stock of
M & F Worldwide, which beneficially owns 100% of our
stock. In addition, two of our directors and two of
M & F Worldwides directors, as well as
M & F Worldwides senior executives, are
affiliated with MacAndrews & Forbes Holdings Inc. As a
result, MacAndrews & Forbes Holdings Inc. and its sole
stockholder possess significant influence over our business
decisions.
Risks
Related to our Harland Clarke Segment
The
paper check industry overall is a mature industry and check
usage is declining. Our business will be harmed if check usage
declines faster than expected.
Check and related products and services, including delivery
services, account for most of our revenues. The check industry
overall is a mature industry. The number of checks written in
the United States has declined in recent years, and we believe
that it will continue to decline due to the increasing use of
alternative payment methods, including credit cards, debit
cards, smart cards, automated teller machines, direct deposit,
wire transfers, electronic, home banking applications, Internet
based payment services and other bill paying services. The
actual rate and extent to which alternative payment methods will
achieve consumer acceptance and replace checks, whether as a
result of legislative developments, personal preference or
otherwise, cannot
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be predicted with certainty and could decline at a more rapid
rate. Changes in technology or the widespread adoption of
current technologies may also make alternative payment methods
more popular. An increase in the use of any of these alternative
payment methods could have a material adverse effect on the
demand for checks and a material adverse effect on our business,
results of operations and prospects. In recent quarters, Harland
Clarke had experienced check unit declines at a higher rate than
in the past, as evidenced by recent
period-over-period
declines in Harland Clarke revenue. Harland Clarke is unable to
determine at this time whether these higher rates of decline are
attributable to recent economic and financial market
difficulties, the depth and length of the economic recession,
higher unemployment, decreased openings of checking accounts,
changing business strategies of our financial institution
clients, decreased consumer spending
and/or a
further acceleration in the use of alternative non-cash
payments. Harland Clarke expects that check unit volume will
continue to decline at rates that are higher than it had
previously experienced in recent years, resulting in a
corresponding decrease in check revenues and depending on the
nature and relative magnitude of the causes for the decreases,
such decreases may not be mitigated when overall economic
conditions improve. Harland Clarke is focused on growing its
non-check related products and services, including marketing
services, and optimizing its existing catalog of offerings to
better serve its clients, as well as managing its costs,
overhead and facilities to reflect the decline in check unit
volumes. Harland Clarke does not believe that revenues from
non-check related products and services will fully offset
revenue declines from declining check unit volumes. In the
future, Harland Clarke may not be able to mitigate the revenue
declines from declining check unit volumes through cost
management, which could negatively affect Harland Clarkes
margins.
Consolidation
among financial institutions may adversely affect our
relationships with our clients and our ability to sell our
products and may therefore result in lower revenues and
profitability.
Mergers, acquisitions and personnel changes at financial
institutions, as well as failures or liquidations of such
financial institutions, may adversely affect our business,
financial condition and results of operations. For the year
ended December 31, 2009, financial institutions accounted
for approximately 85% of revenues for our Harland Clarke
segment. In recent years, the number of financial institutions
has declined due to consolidation. Consolidation among financial
institutions could cause us to lose current and potential
clients as such clients are, for example, acquired by financial
institutions with pre-existing relationships with other
providers. The increase in general negotiating strength
possessed by such consolidated entities also presents a risk
that new
and/or
renewed contracts with these institutions may not be secured on
terms as favorable as those historically negotiated with these
clients. Consolidation among or failure of financial
institutions could therefore decrease our revenues and
profitability.
We are
dependent on a few large clients, and adverse changes in our
relationships with these highly concentrated clients may
adversely affect our revenues and profitability.
The majority of sales from our Harland Clarke segment has been,
and very likely will continue to be, concentrated among a small
group of clients. For the year ended December 31, 2009, the
top 20 clients of our Harland Clarke segment represented
approximately 42% of its revenues, with sales to Bank of America
representing a significant portion of revenues. A number of
contracts with Harland Clarke segment clients may be terminated
by the client for convenience upon written notice or for
cause. A significant decrease or interruption in business
from any of our Harland Clarke segment significant clients, or
the termination of our contracts with any of our most
significant clients could have a material adverse effect on our
revenues and profitability.
Our financial results can also be adversely affected by the
business practices and actions of our large clients in a number
of ways, including timing, size and mix of product orders and
supply chain management. Several contracts with our significant
clients expire over the next several years. We may not be able
to renew them on terms favorable to us, or at all. The loss of
one or more of these clients or a shift in the demand by,
distribution methods of, pricing to, or terms of sale to, one or
more of these clients could materially adversely affect us. The
write-off of any significant receivable due from delays in
payment or return of products by any of our significant clients
could also adversely impact our revenues and profitability.
17
We
face intense competition and pricing pressures in certain areas
of our business, which could result in lower revenues, higher
costs and lower profitability.
The check printing industry is intensely competitive. In
addition to competition from alternative payment methods, we
also face considerable competition from other check printers and
other similar providers of printed products. The principal
factors on which we compete are service, convenience, quality,
product range and price. We may not be able to compete
effectively against current and future competitors, which could
result in lower revenues, higher costs and lower profitability.
Interruptions
or adverse changes in our vendor or supplier relationships or
delivery services could have a material adverse effect on our
business.
We have strong relationships with many of the countrys
largest paper mills and ink suppliers. These relationships
afford us certain purchasing advantages, including stable supply
and favorable pricing arrangements. Our supplier arrangements
are by purchase order and terminable at will at the option of
either party. While we have been able to obtain sufficient paper
supplies during recent paper shortages and otherwise, in part
through purchases from foreign suppliers, we are subject to the
risk that we will be unable to purchase sufficient quantities of
paper to meet our production requirements during times of tight
supply. An interruption in our relationship with service
providers for our digital printers could compromise our ability
to fulfill pending orders for checks and related products. In
addition, disruptions in the credit and other financial markets
could, among other things, impair the financial condition of
suppliers of the Company, thereby increasing the risk of
supplier performance. Any interruption in supplies or service
from these or other vendors or suppliers or delivery services
could result in a disruption to our business if we are unable to
readily find alternative service providers at comparable rates.
Increased
production and delivery costs, such as fluctuations in paper
costs, could materially adversely affect our
profitability.
Increases in production costs such as paper and labor could
adversely affect our profitability, our business, our financial
condition and results of operations. For example, the principal
raw material used by our Harland Clarke segment is paper. Rising
inflation may cause our material and delivery costs to rise. Any
significant increase in paper prices as a result of a short
supply or otherwise would adversely affect our costs. In
addition, disruptions in parcel deliveries or increases in
delivery rates, which are often tied to fuel prices, could also
increase our costs. Our contracts with clients in our Harland
Clarke segment may contain certain restrictions on our ability
to pass on to clients increased production costs or price
increases. In addition, competitive pressures in the check
industry may have the effect of inhibiting our ability to
reflect these increased costs in the prices of our products and
services.
Softness
in direct mail response rates could have an adverse impact on
our operating results.
The
direct-to-consumer
business of our Harland Clarke segment has experienced declines
in response and retention rates related to direct mail
promotional materials. We believe that these declines are
attributable to a number of factors, including the decline in
check usage, the overall increase in direct mail solicitations
received by our target customers, and the multi-box promotional
strategies employed by us and our competitors. To offset these
factors, we may have to modify
and/or
increase our marketing efforts, which could result in increased
expense.
The profitability of the
direct-to-consumer
business of our Harland Clarke segment depends in large part on
our ability to secure adequate advertising media placements at
acceptable rates, as well as the consumer response rates
generated by such advertising. Suitable advertising media may
not be available at a reasonable cost, or available at all.
Furthermore, the advertising we utilize may not be effective.
Competitive pricing pressure may inhibit our ability to reflect
any of these increased costs in the prices of our products. We
may not be able to sustain our current levels of profitability
as a result.
18
Risks
Related to our Harland Financial Solutions and Scantron
Segments
If we
fail to continually improve our Harland Financial Solutions and
Scantron products, effectively manage our product offerings and
introduce new products and service offerings, our business may
suffer.
Harland Financial Solutions and Scantrons businesses
are affected by technological change, evolving industry
standards, changes in client requirements and frequent new
product introductions and enhancements. The businesses of
providing technological solutions to financial institutions,
educational organizations and other enterprises have been and
continue to be intensely competitive, requiring us to
continually improve our existing products and create new
products while at the same time controlling our costs. We face
intense competition from a number of multi-national,
international, national, regional and local providers of
software and services, some of whom may have greater financial
and other resources than we have, greater familiarity with our
prospective clients than we do, or the ability to offer more
attractive products and services than we do. Our future success
will depend in part upon our ability to:
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|
|
|
|
continue to enhance and expand existing Harland Financial
Solutions and Scantron products and services;
|
|
|
|
make Harland Financial Solutions and Scantron products
compatible with future and existing operating systems and
applications that achieve popularity within the business
application marketplace, including current and future versions
of Windows, Unix and IBM iSeries;
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engage in new business initiatives; and
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|
develop and introduce new products and new services that satisfy
increasingly sophisticated client requirements, keep pace with
technological and regulatory developments, provide client value
and are attractive to customers.
|
We may not successfully anticipate and develop product
enhancements or new products and services to adequately address
changing technologies and client requirements. Any such
products, solutions or services may not be successful or may not
generate expected revenues or cash flow, and the business and
results of operations of our Harland Financial Solutions and
Scantron businesses may be materially and adversely affected as
a result.
The
revenues, cash flows and results of operations of our Harland
Financial Solutions segment may be reduced if we need to lower
prices or offer other favorable terms on our products and
services to meet competitive pressures in the software
industry.
Providing technological solutions to financial institutions has
been and continues to be intensely competitive. Some of our
competitors have advantages over Harland Financial Solutions due
to their significant worldwide presence, longer operating and
product development history, larger installed client base, and
substantially greater financial, technical and marketing
resources. In response to competition, Harland Financial
Solutions has been required in the past, and may be required in
the future, to furnish additional discounts to clients,
otherwise modify pricing practices or offer more favorable
payment terms or more favorable contractual implementation
terms. These developments have and may increasingly negatively
impact the revenues, cash flows and results of operations of the
Harland Financial Solutions business.
Consolidation
among financial institutions may adversely affect our
relationships with Harland Financial Solutions clients and our
ability to sell our products and may therefore result in lower
revenues and profitability.
Mergers, acquisitions and personnel changes at financial
institutions, as well as failures or liquidations of such
financial institutions, may adversely affect our Harland
Financial Solutions business, financial condition and results of
operations. For the year ended December 31, 2009, financial
institutions accounted for substantially all of our Harland
Financial Solutions segment revenues. In recent years, the
number of financial institutions has declined due to
consolidation. Consolidation among financial institutions could
cause us to lose current and potential clients as such clients
are, for example, acquired by financial institutions with
relationships with other providers. The increase in general
negotiating strength possessed by such consolidated
19
entities also presents a risk that new
and/or
renewed contracts with these institutions may not be secured on
terms as favorable as those historically negotiated with these
clients. Consolidation among or failure of financial
institutions could therefore decrease our revenues and
profitability.
Downturns
in general economic and industry conditions, enhanced regulatory
burdens and reductions in information technology budgets could
cause decreases in demand for our software and related services
which could negatively affect our revenues, cash flows and
results of operations.
Our revenues, cash flows and results of operations depend on the
overall demand for our products, software and related services.
Economic downturns in one or more of the countries in which we
do business and enhanced regulatory burdens, including through
increased fees and assessments charged to financial institutions
by the Federal Deposit Insurance Corporation (FDIC)
and National Credit Union Administration (NCUA) or
due to newly proposed Federal legislation for additional taxes
on certain financial institutions, could result in reductions in
the information technology budgets for some portion of our
clients and potentially longer lead-times for acquiring Harland
Financial Solutions products and services. Such reductions and
longer lead times could result in delays or cancellations of
client purchases and could have a material adverse effect on our
business, financial position, results of operations and cash
flows. Recent financial industry turmoil and the general
economic slowdown may adversely affect our financial institution
clients ability or willingness to commit financial
resources to our products, and spending decisions by these
clients may continue to be delayed. Prolonged economic slowdowns
may result in clients requiring us to renegotiate existing
contracts on less advantageous terms than those currently in
place or default on payments due on existing contracts.
As our
software offerings increase in number, scope and complexity, our
need to prevent any undetected errors and to correct any
identified errors may increase our costs, slow the introduction
of new products and we may become subject to warranty or product
liability claims which could be costly to resolve and result in
negative publicity.
Although our Harland Financial Solutions and Scantron businesses
test each of their new products and product enhancement releases
and evaluate and test the products obtained through acquisition
before introducing them to customers, significant errors may be
found in existing or future releases of our software products,
and vulnerability to cyber attacks may arise, with the possible
result that significant resources and expenditures may be
required in order to correct such errors or otherwise satisfy
client demands. In addition, defects in our products or
difficulty integrating our products with our clients
systems could result in delayed or lost revenues, warranty or
other claims against us by clients or third parties, adverse
client reaction and negative publicity about us or our products
and services or reduced acceptance of our products and services
in the marketplace, any of which could have a material adverse
effect on our business, financial position, results of
operations and cash flows.
Errors,
defects or other performance problems of our products could
result in harm or damage to our clients and expose us to
liability, which may adversely affect our business and operating
results.
Because our clients may use our products for mission critical
applications, errors, defects or other performance problems may
cause financial or other damages to our clients and result in
claims for substantial damages against us, regardless of our
responsibility for such errors, defects or other performance
problems. For example, Harland Financial Solutions has been
named in at least one lawsuit challenging certain provisions in
Harland Financial Solutions lending products.
The terms of our contracts with our clients are generally
designed to limit our liability for errors, defects or other
performance problems and damages relating to such errors,
defects or other performance problems, but these provisions may
not be enforced by a court or otherwise effectively protect us
from legal claims. Our liability insurance may not be adequate
to cover all of the costs resulting from these legal claims. Our
current liability insurance coverage may not continue to be
available on acceptable terms and insurers may deny coverage as
to any future claim. The successful assertion against us of one
or more large claims that exceed available insurance coverage,
or the occurrence of changes in our insurance policies,
including premium increases or the imposition of large
deductible or coinsurance requirements, could have a material
adverse effect on our business, financial position, results of
operations and cash flows. Furthermore, even if we
20
succeed in the litigation, we are likely to incur additional
costs and our managements attention might be diverted from
our normal operations.
Failure
to hire and retain a sufficient number of qualified information
technology professionals could have a material adverse effect on
our business, results of operations and financial
condition.
Our business of delivering professional information technology
services is labor intensive, and, accordingly, our success
depends upon our ability to attract, develop, motivate, retain
and effectively utilize highly skilled information technology
professionals. We believe that there is a growing shortage of,
and significant competition for, information technology
professionals in the United States who possess the technical
skills and experience necessary to deliver our services, and
that such information technology professionals are likely to
remain a limited resource for the foreseeable future. We believe
that, as a result of these factors, we operate within an
industry that experiences a significant rate of annual turnover
of information technology personnel. Our business plans are
based on hiring and training a significant number of additional
information technology professionals each year to meet
anticipated turnover and increased staffing needs. Our ability
to maintain and renew existing engagements and to obtain new
business depends, in large part, on our ability to hire and
retain qualified information technology professionals. We may
not be able to recruit and train a sufficient number of
qualified information technology professionals, and we may not
be successful in retaining current or future employees.
Increased hiring by technology companies and increasing
worldwide competition for skilled technology professionals may
lead to a shortage in the availability of qualified personnel in
the markets in which we operate and hire. Failure to hire and
train or retain qualified information technology professionals
in sufficient numbers could have a material adverse effect on
our business, results of operations and financial condition.
We may
not receive significant revenues from our current research and
development efforts.
Developing and localizing software is expensive, and the
investment in product development may involve a long payback
cycle. Our future plans include significant investments in
software research and development and related product
opportunities. We believe that we must continue to dedicate a
significant amount of resources to our research and development
efforts to maintain our competitive position, but future
revenues from these investments are not fully predictable.
Therefore, we may not realize any benefits from our research and
development efforts in a timely fashion or at all.
Our
Harland Financial Solutions segment provides services to clients
that are subject to government regulations that could constrain
its operations.
The financial services sector is subject to various federal and
state regulations and oversight. As a supplier of services to
financial institutions, certain Harland Financial Solutions
operations are examined by the Office of the Comptroller of the
Currency, the FDIC and the NCUA, among other agencies. These
agencies regulate services we provide and the manner in which we
operate, and we are required to comply with a broad range of
applicable laws and regulations. Current laws and regulations
may be amended in the future or interpreted by regulators in a
manner which could negatively impact our current Harland
Financial Solutions operations or limit its future growth.
We may
not be able to successfully develop new products and services
for our Scantron segment, and those products and services may
not receive widespread acceptance. As a result, the business,
prospects, results of operations and financial condition of
Scantron could be materially and adversely
affected.
The data collection and educational testing industry has also
changed significantly during recent years due to technological
advances and regulatory changes, and we must successfully
develop new products and solutions in our Scantron segment to
respond to those changes. Scantron must continue to keep pace
with changes in testing and data collection technology and the
needs of its clients. The development of new testing methods and
technologies depends on the timing and costs of the development
effort, product performance, functionality, customer acceptance,
adoption rates and competition, all of which could have a
negative impact on our business. If we are not able to adopt new
electronic data collection solutions at a rate that keeps pace
with other technological advances, the business, business
prospects, results of operations and financial condition of
Scantron could be materially and adversely affected.
21
Budget
deficits may reduce funding available for Scantron products and
services and have a negative impact on our
revenue.
Our Scantron segment derives a significant portion of its
revenues from public schools and colleges, which are heavily
dependent on local, state and federal governments for financial
support. Government budget deficits, including deficits arising
from the current economic slowdown, may have a negative effect
on the availability of funding for Scantron products. Budget
deficits experienced by schools or colleges may also cause those
institutions to react negatively to future price increases for
Scantron products. If budget deficits significantly reduce
funding available for Scantron products and services, our
revenue could be adversely affected.
If we
are not able to obtain paper and other supplies at acceptable
quantities and prices, our revenue could be adversely
affected.
Our Scantron segment purchases a majority of its paper from one
supplier. Scantron purchases scanner components from equipment
manufacturers, supply firms and others. Scantron may not be able
to purchase those supplies in adequate quantities or at
acceptable prices. Rising inflation will also cause
Scantrons material and delivery costs to rise. If Scantron
is forced to obtain paper and other supplies at higher prices or
lower quantities, our profitability could be adversely affected.
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Item 1B.
|
Unresolved
Staff Comments
|
None
Harland Clarke is headquartered in San Antonio, Texas,
Harland Financial Solutions is headquartered in Lake Mary,
Florida and Scantron is headquartered in Eagan, Minnesota. The
principal properties for each segment are as follows:
Harland
Clarke
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|
|
|
|
|
|
Approximate Floor
|
|
|
Location
|
|
Use
|
|
Space (Square Feet)
|
|
Leased/Owned Status
|
|
Atlanta, GA
|
|
Holding Company Headquarters and Harland Clarke Administration,
Sales and Marketing
|
|
|
96,400
|
|
|
|
Owned
|
|
Atlanta, GA
|
|
Information Technology
|
|
|
36,000
|
|
|
|
Owned
|
|
Atlanta,
GA(a)
|
|
Closed
|
|
|
54,000
|
|
|
|
Owned
|
|
Atlanta,
GA(a)
|
|
Closed
|
|
|
132,300
|
|
|
|
Owned
|
|
Atlanta, GA
|
|
Tech Center
|
|
|
14,294
|
|
|
|
Leased
|
|
Atlanta, GA
|
|
Operations Support
|
|
|
9,665
|
|
|
|
Leased
|
|
Boulder City, NV
|
|
Administration and Production
|
|
|
4,000
|
|
|
|
Leased
|
|
Braintree, MA
|
|
Marketing Services and Production
|
|
|
102,000
|
|
|
|
Leased
|
|
Charlotte, NC
|
|
Administration
|
|
|
4,906
|
|
|
|
Leased
|
|
Clayton, MO
|
|
Services
|
|
|
1,803
|
|
|
|
Leased
|
|
Colorado Springs, CO
|
|
Services
|
|
|
22,665
|
|
|
|
Leased
|
|
Des Moines, IA
|
|
Printing
|
|
|
65,250
|
|
|
|
Leased
|
|
Glen Burnie, MD
|
|
Marketing Services and Production
|
|
|
120,000
|
|
|
|
Leased
|
|
Grapevine, TX
|
|
Printing
|
|
|
83,282
|
|
|
|
Leased
|
|
Greensboro,
NC(a)
|
|
Closed
|
|
|
66,250
|
|
|
|
Owned
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Floor
|
|
|
Location
|
|
Use
|
|
Space (Square Feet)
|
|
Leased/Owned Status
|
|
Hato Rey, Puerto Rico
|
|
Printing
|
|
|
22,125
|
|
|
|
Leased
|
|
Hato Rey, Puerto Rico
|
|
Sales
|
|
|
2,356
|
|
|
|
Leased
|
|
High Point, NC
|
|
Printing
|
|
|
135,000
|
|
|
|
Leased
|
|
Jeffersonville, IN
|
|
Printing
|
|
|
141,332
|
|
|
|
Leased
|
|
Kansas City, MO
|
|
Marketing Services
|
|
|
5,401
|
|
|
|
Leased
|
|
Lisle, IL
|
|
Marketing Services
|
|
|
7,050
|
|
|
|
Leased
|
|
Louisville, KY
|
|
Printing
|
|
|
50,000
|
|
|
|
Leased
|
|
Milton, WA
|
|
Printing
|
|
|
87,640
|
|
|
|
Leased
|
|
Nashville, TN
|
|
Administration
|
|
|
21,309
|
|
|
|
Leased
|
|
New Braunfels, TX
|
|
Administration, Printing and Contact Center
|
|
|
98,030
|
|
|
|
Owned
|
|
Phoenix, AZ
|
|
Printing
|
|
|
64,000
|
|
|
|
Leased
|
|
Redwood City, CA
|
|
Administration
|
|
|
10,000
|
|
|
|
Leased
|
|
Salt Lake City, UT
|
|
Printing, Distribution and Contact Center
|
|
|
129,100
|
|
|
|
Owned
|
|
San Antonio, TX
|
|
Printing
|
|
|
166,000
|
|
|
|
Leased
|
|
San Antonio, TX
|
|
Contact Center
|
|
|
68,000
|
|
|
|
Leased
|
|
San Antonio, TX
|
|
Contact Center
|
|
|
42,262
|
|
|
|
Leased
|
|
San Antonio, TX
|
|
Corporate Headquarters
|
|
|
90,000
|
|
|
|
Leased
|
|
San Antonio, TX
|
|
Administration
|
|
|
1,936
|
|
|
|
Leased
|
|
San Antonio, TX
|
|
Warehouse
|
|
|
16,166
|
|
|
|
Leased
|
|
San Antonio, TX
|
|
Warehouse
|
|
|
18,675
|
|
|
|
Leased
|
|
Harland
Financial Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Floor
|
|
|
Location
|
|
Use
|
|
Space (Square Feet)
|
|
Leased/Owned Status
|
|
Atlanta, GA
|
|
Development and Support
|
|
|
7,098
|
|
|
|
Leased
|
|
Birmingham, AL
|
|
Development and Support
|
|
|
5,500
|
|
|
|
Leased
|
|
Bothell, WA
|
|
Development and Support
|
|
|
20,784
|
|
|
|
Leased
|
|
Carmel, IN
|
|
Development and Support
|
|
|
5,931
|
|
|
|
Leased
|
|
Cincinnati, OH
|
|
Administration and Service Bureau
|
|
|
63,901
|
|
|
|
Leased
|
|
Clive, IA
|
|
Service Bureau
|
|
|
36,466
|
|
|
|
Leased
|
|
Cotuit, MA
|
|
Development and Support
|
|
|
3,200
|
|
|
|
Leased
|
|
Englewood, CO
|
|
Development and Support
|
|
|
28,800
|
|
|
|
Leased
|
|
Fargo, ND
|
|
Development and Support
|
|
|
18,371
|
|
|
|
Leased
|
|
Grand Rapids, MI
|
|
Development and Support
|
|
|
5,703
|
|
|
|
Leased
|
|
Lake Mary, FL
|
|
Corporate Headquarters, Development and Support
|
|
|
80,390
|
|
|
|
Leased
|
|
Miamisburg, OH
|
|
Development and Support
|
|
|
15,286
|
|
|
|
Leased
|
|
Orlando, FL
|
|
Processing
|
|
|
14,800
|
|
|
|
Leased
|
|
Pleasanton, CA
|
|
Development and Support
|
|
|
49,115
|
|
|
|
Leased
|
|
Portland, OR
|
|
Administration, Development and Support
|
|
|
79,089
|
|
|
|
Leased
|
|
Tel Aviv, Israel
|
|
Development and Support
|
|
|
4,693
|
|
|
|
Leased
|
|
23
Scantron
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Floor
|
|
|
Location
|
|
Use
|
|
Space (Square Feet)
|
|
Leased/Owned Status
|
|
Columbia, PA
|
|
Printing
|
|
|
121,370
|
|
|
|
Owned
|
|
Eagan, MN
|
|
Corporate Headquarters, Development and Support
|
|
|
109,500
|
|
|
|
Owned
|
|
Irvine, CA
|
|
Development and Support
|
|
|
110,000
|
|
|
|
Leased
|
|
Lawrence, KS
|
|
Administration
|
|
|
21,000
|
|
|
|
Leased
|
|
Omaha, NE
|
|
Field Services, Administration and Support
|
|
|
50,000
|
|
|
|
Owned
|
|
San Diego, CA
|
|
Development and Support
|
|
|
10,175
|
|
|
|
Leased
|
|
|
|
Item 3.
|
Legal
Proceedings
|
In June 2008, Kenneth Kitson, purportedly on behalf of himself
and a class of other alleged similarly situated commercial
borrowers from the Bank of Edwardsville, an Illinois-based
community bank (BOE), filed in an Illinois state
court an amended complaint that re-asserted previously filed
claims against BOE and added claims against Harland Financial
Solutions, Inc. (HFS). The amended complaint
alleged, among other things, that HFSs LaserPro
software permitted BOE to generate loan documents that were
deceptive and usurious in that they failed to disclose properly
the effect of the 365/360 method of calculating
interest. Following removal of the action to the United States
District Court for the Southern District of Illinois, the
District Court entered an order granting with prejudice
HFSs motion to dismiss Mr. Kitsons claims. In
August 2009, Mr. Kitson, individually and as class
representative, and BOE agreed to settle and dismiss with
prejudice all remaining claims. Separately but concurrently,
BOEs warranty claim against HFS was settled, in exchange
for, among other things, payment by HFS of $0.2 million.
The class settlement agreement was approved by the District
Court in January 2010.
Other commercial borrowers that have obtained loans from other
banks in Illinois, Ohio and South Carolina have commenced
similar class actions against their banks using similar
theories. In some cases, the banks have made warranty claims
against HFS related to these class actions. Many of the class
actions and related warranty claims are at early stages, and
their likely progress is not yet clear. The Company has not
accepted any of the asserted warranty claims and does not
believe that any of these claims will result in material
liability for the Company, but there can be no assurance.
Various legal proceedings, claims and investigations are pending
against the Company, including those relating to commercial
transactions, product liability, safety and health matters,
employment matters and other matters. The Company is also
involved in various stages of legal proceedings, claims,
investigations and cleanup relating to environmental or natural
resource matters, some of which relate to waste disposal sites.
Most of these matters are covered by insurance, subject to
deductibles and maximum limits, and by third-party indemnities.
The Company believes that the outcome of all pending legal
proceedings in the aggregate will not have a material adverse
effect on its consolidated financial position or results of
operations.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matter was submitted to a vote of security holders during the
fourth quarter of 2009.
24
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
We are an indirect, wholly owned subsidiary of M & F
Worldwide. As such, our common stock is not listed on any stock
exchange or traded in any
over-the-counter
market and is held by only one holder.
|
|
Item 6.
|
Selected
Financial Data
|
The table below reflects historical financial data, which are
derived from our consolidated financial statements for the years
ended December 31, 2009, 2008, 2007, 2006, and the periods
December 15 to December 31, 2005, April 1 to
December 14, 2005, and January 1 to March 31, 2005.
We were acquired by M & F Worldwide on
December 15, 2005 from Honeywell. Honeywell acquired us
effective April 1, 2005 by purchasing all of the
outstanding stock of the company that was then our indirect
parent, Novar plc. As a result of the changes in ownership,
under GAAP, we are required to present separately our operating
results for our two predecessors. The period during which we
were owned by Honeywell (April 1, 2005 to December 14,
2005) is presented below as Predecessor
(Honeywell). The period prior to our acquisition by
Honeywell (2004 fiscal year and the three months ended
March 31, 2005) is presented below as
Predecessor (Novar). The period subsequent to the
Clarke American Acquisition is presented below as
Successor. Our predecessors were not separate
stand-alone companies. The selected financial data for those
periods have been prepared as if each of our predecessors had
existed as a stand-alone company for the periods presented.
The selected financial data are not necessarily indicative of
results of future operations, and should be read in conjunction
with Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and notes thereto
included elsewhere in this Annual Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
|
Successor
|
|
|
Successor
|
|
|
Successor
|
|
|
Successor
|
|
|
|
Successor
|
|
|
(Honeywell)
|
|
|
(Novar)
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
Dec 15 to
|
|
|
Apr. 1 to
|
|
|
Jan 1 to
|
|
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
|
Dec. 31,
|
|
|
Dec. 14,
|
|
|
Mar. 31,
|
|
(In millions)
|
|
|
2009(a)
|
|
|
2008(b)
|
|
|
2007(c)
|
|
|
2006
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
$
|
1,712.3
|
|
|
$
|
1,794.6
|
|
|
$
|
1,369.9
|
|
|
$
|
623.9
|
|
|
|
$
|
24.1
|
|
|
$
|
439.9
|
|
|
$
|
154.4
|
|
Cost of revenues
|
|
|
|
997.7
|
|
|
|
1,066.9
|
|
|
|
833.8
|
|
|
|
388.4
|
|
|
|
|
17.4
|
|
|
|
285.6
|
|
|
|
91.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
714.6
|
|
|
|
727.7
|
|
|
|
536.1
|
|
|
|
235.5
|
|
|
|
|
6.7
|
|
|
|
154.3
|
|
|
|
63.3
|
|
Selling, general and administrative expenses
|
|
|
|
387.4
|
|
|
|
445.9
|
|
|
|
333.2
|
|
|
|
145.2
|
|
|
|
|
6.0
|
|
|
|
99.0
|
|
|
|
38.8
|
|
Asset impairment charges
|
|
|
|
44.4
|
|
|
|
2.4
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs
|
|
|
|
32.5
|
|
|
|
14.6
|
|
|
|
5.6
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
1.8
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
250.3
|
|
|
|
264.8
|
|
|
|
194.2
|
|
|
|
87.0
|
|
|
|
|
0.7
|
|
|
|
53.5
|
|
|
|
24.1
|
|
Gain (loss) on early extinguishment of debt
|
|
|
|
65.0
|
|
|
|
|
|
|
|
(54.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
(135.9
|
)
|
|
|
(184.2
|
)
|
|
|
(159.9
|
)
|
|
|
(60.0
|
)
|
|
|
|
(2.8
|
)
|
|
|
(2.4
|
)
|
|
|
(5.6
|
)
|
Other income (expense), net
|
|
|
|
0.1
|
|
|
|
(0.4
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
179.5
|
|
|
|
80.2
|
|
|
|
(20.8
|
)
|
|
|
27.0
|
|
|
|
|
(2.1
|
)
|
|
|
51.1
|
|
|
|
18.5
|
|
Provision (benefit) for income taxes
|
|
|
|
67.4
|
|
|
|
33.0
|
|
|
|
(5.4
|
)
|
|
|
7.5
|
|
|
|
|
(0.8
|
)
|
|
|
20.1
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$
|
112.1
|
|
|
$
|
47.2
|
|
|
$
|
(15.4
|
)
|
|
$
|
19.5
|
|
|
|
$
|
(1.3
|
)
|
|
$
|
31.0
|
|
|
$
|
11.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In millions)
|
|
2009(a)
|
|
|
2008(b)
|
|
|
2007(c)
|
|
|
2006
|
|
|
|
2005
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,252.0
|
|
|
$
|
3,391.8
|
|
|
$
|
3,447.6
|
|
|
$
|
1,118.3
|
|
|
|
$
|
1,149.9
|
|
Long-term debt, including current portion and short-term
borrowings(d)
|
|
|
2,238.8
|
|
|
|
2,390.6
|
|
|
|
2,409.9
|
|
|
|
603.8
|
|
|
|
|
626.2
|
|
Stockholders equity
|
|
|
246.0
|
|
|
|
166.3
|
|
|
|
190.5
|
|
|
|
219.3
|
|
|
|
|
201.2
|
|
|
|
|
(a) |
|
Includes the financial position and results of operations of
Transaction Holdings from the date of its acquisition on
December 31, 2008, the financial position and results of
operations of Protocol IMS from the date of its acquisition on
December 4, 2009 and the financial position of
SubscriberMail from the date of its acquisition on
December 31, 2009. See Note 3 to our consolidated
financial statements included elsewhere in this Annual Report on
Form 10-K. |
|
(b) |
|
Includes the financial position and results of operations of
Data Management from the date of its acquisition on
February 22, 2008. See Note 3 to our consolidated
financial statements included elsewhere in this Annual Report on
Form 10-K. |
|
(c) |
|
Includes the financial position and results of operations of
Harland from the date of its acquisition on May 1, 2007.
See Note 3 to our consolidated financial statements
included elsewhere in this Annual Report on
Form 10-K. |
|
(d) |
|
Includes capital leases of $5.7 million, $2.6 million,
and $3.4 million at December 31, 2009, 2008 and 2007,
respectively. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion should be read in conjunction with
Item 6. Selected Financial Data and the Harland
Clarke Holdings consolidated financial statements and notes
thereto included elsewhere in this Annual Report on
Form 10-K.
Overview
of Business
Harland Clarke Holdings Corp. (Harland Clarke
Holdings and, together with its subsidiaries, the
Company) is a holding company that conducts its
operations through its direct and indirect wholly owned
operating subsidiaries and was incorporated in Delaware on
October 19, 2005. On December 15, 2005, CA Investment
Corp., an indirect wholly owned operating subsidiary of
M & F Worldwide Corp. (M & F
Worldwide) purchased 100% of the capital stock of Novar
USA Inc. (Novar) (the Clarke American
Acquisition) and was renamed Clarke American Corp., which
was the successor by merger to Novar, which indirectly wholly
owned the operating subsidiaries of the Clarke American Corp.
business.
On May 1, 2007, the Company completed the acquisition of
John H. Harland Company (Harland), and a subsidiary
of the Company was merged with and into Harland, with Harland
continuing after the merger as the surviving corporation and as
a wholly owned subsidiary of the Company (the Harland
Acquisition). Subsequent to the Harland Acquisition, the
Company changed its name on May 2, 2007 from Clarke
American Corp. to Harland Clarke Holdings Corp. The
Companys businesses are organized along three business
segments together with a corporate group for certain support
services.
The Harland Clarke segment offers checks and related products,
forms and treasury supplies, and related delivery and fraud
prevention services to financial services, retail and software
providers. It also provides direct marketing services to their
clients including direct marketing campaigns, direct mail,
database marketing, telemarketing and
e-mail
marketing. In addition, the Harland Clarke segment provides
check-related delivery and fraud prevention services,
stationery, business cards and other business and home office
products to consumers and small businesses.
The Harland Financial Solutions segment provides technology
products and services to financial services clients worldwide
including lending and mortgage compliance and origination
applications, risk management
26
solutions, business intelligence solutions, Internet and mobile
banking applications, branch automation solutions and core
processing systems.
The Scantron segment provides data management solutions and
related services to educational, commercial, healthcare and
governmental entities worldwide including testing and assessment
solutions, patient information collection and tracking, and
survey services. Scantrons solutions combine a variety of
data collection, analysis, and management tools including
software, scanning equipment, forms, and related field
maintenance services.
The
SubscriberMail and Protocol IMS Acquisitions
During December 2009, Harland Clarke Corp., a wholly owned
subsidiary of the Company, acquired in separate transactions
SubscriberMail and Protocol Integrated Marketing Services
(Protocol IMS), a division of Protocol Global
Solutions, for aggregate consideration of $12.9 million,
subject to achievement of certain revenue targets in 2010 and
2011. The aggregate consideration of $12.9 million includes
contingent consideration of $1.8 million for SubscriberMail
upon the achievement of revenue targets with a maximum
contingent consideration of $2.0 million if the targets are
met. SubscriberMail is a leading email marketing service
provider that offers patented tools to develop and deliver
professional email communications. Protocol IMS focuses on
direct marketing services with solutions that include B2B
strategic services, B2C strategic services, database marketing
and analytics, outbound B2B teleservices and production and
fulfillment.
The
Transaction Holdings Acquisition
In December 2008, Harland Clarke Corp. acquired Transaction
Holdings Inc. (Transaction Holdings) for total cash
consideration of $8.2 million (the Transaction
Holdings Acquisition). Transaction Holdings produces
personal and business checks, payment coupon books and
promotional checks and provides direct marketing services to
financial institutions as well as individual consumers and small
businesses.
The Data
Management Acquisition
In February 2008, the Companys wholly owned subsidiary,
Scantron Corporation, purchased all of the limited liability
membership interests of Data Management I LLC (Data
Management) from NCS Pearson, for $218.7 million in
cash after giving effect to working capital adjustments of
$1.6 million (the Data Management Acquisition).
Data Management designed, manufactured and serviced scannable
data collection products, including printed forms, scanning
equipment and related software, and provided survey consulting
and tracking services, including medical device tracking, as
well as field maintenance services to corporate and governmental
clients. The Company financed the Data Management Acquisition
and related fees and expenses with cash on hand.
The
Harland Acquisition
On May 1, 2007, M & F Worldwide consummated an
agreement and plan of merger with Harland, pursuant to which a
wholly owned subsidiary of M & F Worldwide merged with
and into Harland, with Harland continuing after the merger as
the surviving corporation and as a wholly owned subsidiary of
the Company. The cash consideration paid was $52.75 per share,
or a total of approximately $1,423.0 million, for the
outstanding equity of Harland. Subsequent to the completion of
the Harland Acquisition, Clarke American was renamed Harland
Clarke Holdings on May 2, 2007.
To fund the purchase price in the Harland Acquisition, to
refinance the Companys and Harlands prior existing
indebtedness, and to pay the fees and expenses for the Harland
Acquisition and the related financings:
|
|
|
|
|
The Company entered into a $1,800.0 million senior secured
term loan facility and a $100.0 million revolving credit
facility; and
|
|
|
|
The Company issued $305.0 million aggregate principal
amount of senior floating rate notes due 2015 and
$310.0 million aggregate principal amount of
9.50% senior fixed rate notes due 2015.
|
27
Economic
and Other Factors Affecting the Businesses of the
Company
Harland
Clarke
While total non-cash payments including checks,
credit cards, debit cards and other electronic forms of
payment are growing, the number of checks written
has declined and is expected to continue to decline. Harland
Clarke believes the number of checks printed is driven by the
number of checks written, the number of new checking accounts
opened and reorders reflecting changes in consumers
personal situations, such as name or address changes. In recent
quarters, Harland Clarke had experienced check unit declines at
a higher rate than in the past, as evidenced by recent
period-over-period
declines in Harland Clarke revenue which are discussed in more
detail elsewhere in this report. Harland Clarke is unable to
determine at this time whether these higher rates of decline are
attributable to recent economic and financial market
difficulties, the depth and length of the economic recession,
higher unemployment, decreased openings of checking accounts,
changing business strategies of our financial institution
clients, decreased consumer spending
and/or a
further acceleration in the use of alternative non-cash
payments. Harland Clarke expects that check unit volume will
continue to decline at rates that are higher than it had
previously experienced in recent years, resulting in a
corresponding decrease in check revenues and depending on the
nature and relative magnitude of the causes for the decreases,
such decreases may not be mitigated when overall economic
conditions improve. Harland Clarke is focused on growing its
non-check related products and services, including marketing
services, and optimizing its existing catalog of offerings to
better serve its clients, as well as managing its costs,
overhead and facilities to reflect the decline in check unit
volumes. Harland Clarke does not believe that revenues from
non-check related products and services will fully offset
revenue declines from declining check unit volumes. In the
future, Harland Clarke may not be able to mitigate the revenue
declines from declining check unit volumes through cost
management, which could negatively affect Harland Clarkes
margins.
Harland Clarkes primary competition comes from alternative
payment methods such as debit cards, credit cards, ACH, and
other electronic and online payment options. Harland Clarke also
competes with large providers that offer a wide variety of
products and services including Deluxe Corporation,
Harte-Hanks,
Inc., and R.R. Donnelly & Sons Company. There are also
many other competitors that specialize in providing one or more
of the products and services Harland Clarke offers to its
clients. Harland Clarke competes on the basis of service,
convenience, quality, product range and price.
The Harland Clarke segments operating results are also
affected by consumer confidence and employment. Consumer
confidence directly correlates with consumer spending, while
employment also affects revenues through the number of new
checking accounts being opened. The Harland Clarke
segments operating results may be negatively affected by
slow or negative growth of, or downturns in, the United States
economy. Business confidence affects a portion of the Harland
Clarke segment. In addition, if Harland Clarkes financial
institution customers fail or merge with other financial
institutions, Harland Clarke may lose any or all revenue from
such financial institutions
and/or
experience further pricing pressure, which would negatively
affect Harland Clarkes operating results.
Harland
Financial Solutions
Harland Financial Solutions operating results are affected
by the overall demand for our products, software and related
services which is based upon the technology budgets of our
clients and prospects. Economic downturns in one or more of the
countries in which we do business and enhanced regulatory
burdens, including through increased fees and assessments
charged to financial institutions by the FDIC and NCUA or due to
newly proposed Federal legislation for additional taxes on
certain financial institutions, could result in reductions in
the information technology budgets for some portion of our
clients and potentially longer lead-times for acquiring Harland
Financial Solutions products and services. In addition, if
Harland Financial Solutions financial institution
customers fail or merge with other financial institutions,
Harland Financial Solutions may lose any or all revenue from
such financial institutions
and/or
experience further pricing pressure, which would negatively
affect Harland Financial Solutions operating results.
Harland Financial Solutions business is affected by
technological change, evolving industry standards, regulatory
changes in client requirements and frequent new product
introductions and enhancements. The
28
business of providing technological solutions to financial
institutions and other enterprises requires that we continually
improve our existing products and create new products while at
the same time controlling our costs to remain price competitive.
Providing technological solutions to financial institutions is
highly competitive and fragmented. Harland Financial Solutions
competes with several large and diversified financial technology
providers, including, among others, Fidelity National
Information Services, Inc., FISERV, Inc., Jack Henry &
Associates, Inc., Open Solutions Inc., Computer Services Inc.,
and many regional providers. Many multi-national and
international providers of technological solutions to financial
institutions also compete with Harland Financial Solutions both
domestically and internationally, including TEMENOS Group AG,
Misys plc, Infosys Technologies Limited, Tata Consultancy and
BISYS Group, Inc. There are also many other competitors that
offer one or more specialized products or services that compete
with Harland Financial Solutions. Management believes that
competitive factors influencing buying decisions include product
features and functionality, client support, price and vendor
financial stability.
Scantron
While the number of tests given annually in K-12 and higher
education continues to grow, the demand for optical mark reader
paper-based testing has declined and is expected to continue to
decline. Changes in educational funding can affect the rate at
which schools adopt new technology thus slowing the decline for
paper-based testing but also slowing the demand for
Scantrons on-line testing products. Educational funding
changes may also reduce the rate of consumption of
Scantrons forms and purchase of additional hardware to
process these forms. Scantrons education-based customers
may turn to lower cost solutions for paper-based forms and
hardware in furtherance of addressing their budget needs. A weak
economy in the United States may negatively affect education
budgets and spending, which would have an adverse impact on
Scantrons operating results. Data collection is also
experiencing a conversion to non-paper based methods of
collection. Scantron believes this trend will also continue as
the availability of these alternative technologies becomes more
widespread. While Scantrons non-paper data collection
business could benefit from this trend, Scantrons
paper-based data collection business could be negatively
affected by this trend. Changes in the overall economy can
affect the demand for data collection to the extent that
Scantrons customers adjust their research or testing
expenditures.
Critical
Accounting Policies and Estimates
The Company reviews its accounting policies on a regular basis.
The Company makes estimates and judgments as part of its
financial reporting that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. On an ongoing basis, the
Company evaluates its estimates, including those related to
accounts receivable, investments, intangible assets, other
postretirement benefits, income taxes, contingencies and
litigation, as well as other assets and liabilities. The Company
bases its estimates on historical experience and on various
other assumptions that it believes reasonable under the
circumstances. These estimates form the basis for making
judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Results may
differ from these estimates due to actual outcomes being
different from the assumed outcomes. The Company believes the
following critical accounting policies affect its more
significant judgments and estimates.
Revenue Recognition The Company
considers its revenue recognition policy as critical to its
reported results of operations primarily in its Harland
Financial Solutions and Scantron segments. Revenue recognition
requires judgment, including amongst other things, whether a
software arrangement includes multiple elements, whether any
elements are essential to the functionality of any other
elements, and whether vendor-specific objective evidence
(VSOE) of fair value exists for those elements.
Customers receive certain elements of the Companys
products and services over time.
Changes to the elements in a software arrangement or in the
Companys ability to identify VSOE for those elements could
materially affect the amount of earned and unearned revenue
reflected in the financial statements.
29
For software license agreements that do not require significant
modification or customization of the software, the Company
recognizes software license revenue when persuasive evidence of
an arrangement exists, delivery of the product has occurred, the
license fee is fixed and determinable and collection is
probable. The Companys software license agreements include
multiple products and services or elements. None of
these elements are deemed to be essential to the functionality
of the other elements. The accounting guidance generally
requires revenue earned on software arrangements involving
multiple elements to be allocated proportionally to each element
based on VSOE of fair value. Fair value is determined for
license fees based upon the price charged when sold separately.
In the event that the Company determines that VSOE does not
exist for one or more of the delivered elements of a software
arrangement, but does exist for all of the undelivered elements,
revenue is recognized using the residual method. Under the
residual method, a residual amount of the total arrangement fee
is recognized as revenue for the delivered elements after the
established fair value of all undelivered elements has been
deducted.
Implementation services are generally for installation,
training, implementation and configuration. These services are
not considered essential to the functionality of the related
software. VSOE of fair value is established by pricing used when
these services are sold separately. Generally revenue is
recognized when services are completed. On implementations for
outsourced data processing services, revenue is deferred and
recognized over the life of the outsourcing arrangement. On
certain larger implementations, revenue is recognized based on
milestones during the implementation. Milestones are triggered
by tasks completed or based on labor hours. Estimates of efforts
to complete a project are used in the
percentage-of-completion
calculation. Due to uncertainties inherent in these estimates,
actual results could differ from these estimates.
Maintenance fees are deferred and recognized ratably over the
maintenance period, which is usually twelve months. VSOE of fair
value is determined based on contract renewal rates.
Outsourced data processing services and other transaction
processing services are recognized in the month the transactions
are processed or the services are rendered.
The Company recognizes product and service revenue when
persuasive evidence of a non-cancelable arrangement exists,
products have been shipped
and/or
services have been rendered, the price is fixed or determinable,
collectability is reasonably assured, legal title and economic
risk is transferred to the customer and an economic exchange has
taken place. Revenues are recorded net of any applicable
discounts, contract acquisition payments amortization, accrued
incentives and allowances for sales returns. Deferred revenues
represent amounts billed to the customer in excess of amounts
earned.
Revenues for direct response marketing services are recognized
from the Companys fixed price direct mail and marketing
contracts based on the proportional performance method for
specific projects.
Income Taxes The Company
estimates its actual current tax liability together with
temporary differences resulting from differing treatment of
items, such as net operating losses and depreciation, for tax
and accounting purposes. These temporary differences result in
deferred tax assets and liabilities. The Company must assess the
likelihood that it will recover deferred tax assets from future
taxable income and, to the extent it believes that recovery is
not likely, establish a valuation allowance. To the extent the
Company establishes a valuation allowance or increases this
allowance in a period, it must include and expense the allowance
within the tax provision in the consolidated statement of
operations. Significant management judgment is required in
determining the provision for income taxes, deferred tax assets
and liabilities and any valuation allowance recorded against net
deferred tax assets.
As part of the process of preparing its consolidated financial
statements, the Company is required to calculate the amount of
income tax in each of the jurisdictions in which it operates. On
a regular basis the amount of taxable income is reviewed by
various federal, state and foreign taxing authorities. As such,
the Company routinely provides reserves for items that it
believes could be challenged by these taxing authorities.
Long-Lived Assets The Company
assesses the impairment of property, plant and equipment and
amortizable intangible assets whenever events or changes in
circumstances indicate that the carrying value
30
may not be recoverable. Some factors the Company considers
important that could trigger an impairment review include the
following:
|
|
|
|
|
Significant underperformance relative to expected historical or
projected future operating results;
|
|
|
|
Significant changes in the manner of use of these assets or the
strategy for the Companys overall business; and
|
|
|
|
Significant negative industry or economic trends.
|
When the Company determines that the carrying value of
long-lived assets may not be recoverable based upon the
existence of one or more indicators of impairment, it measures
the impairment based on a projected discounted cash flow method
using a discount rate determined by management to be
commensurate with the risk inherent in the Companys
current business model. Significant assumptions requiring
judgment are required to determine future cash flows, including
but not limited to the estimated remaining useful life of the
asset, future revenue streams and future expenditures to
maintain the existing service potential of the asset. The
Company re-evaluates the useful life of these assets at least
annually to determine if events and circumstances continue to
support their recorded useful lives. Assets held for sale are
carried at the lower of carrying amount or fair value, less
estimated costs to sell such assets.
Goodwill and Acquired Intangible
Assets Goodwill represents the excess
of consideration transferred over the fair value of identifiable
net assets acquired. Acquired intangibles are recorded at fair
value as of the date acquired. Goodwill and other intangibles
determined to have an indefinite life are not amortized, but are
tested for impairment annually in the fourth quarter, or when
events or changes in circumstances indicate that the assets
might be impaired, such as a significant adverse change in the
business climate.
The goodwill impairment test is a two-step process, which
requires management to make judgments in determining what
assumptions to use in the calculation. The first step of the
process consists of estimating the fair value of the
Companys reporting units. In 2009, the Company reduced the
number of reporting units from five to four as a result of an
organizational realignment and the integration of two former
reporting units into a single reporting unit. Certain of the
Companys reporting units are the same as its reportable
segments and certain reporting units are one level below the
reportable segment, which is at the operating segment level.
The Company utilizes both the income and market approaches to
estimate the fair value of the reporting units. The income
approach involves discounting future estimated cash flows. The
discount rate used is the value-weighted average of the
reporting units estimated cost of equity and debt
(cost of capital) derived using, both known and
estimated, customary market metrics. The Company performs
sensitivity tests with respect to growth rates and discount
rates used in the income approach. In applying the market
approach, valuation multiples are derived from historical and
projected operating data of selected guideline companies;
evaluated and adjusted, if necessary, based on the strengths and
weaknesses of the reporting unit relative to the selected
guideline companies; and applied to the appropriate historical
and/or
projected operating data of the reporting unit to arrive at an
indication of fair value. The Company weights the results of the
income and market approaches equally, except where guideline
companies are not similar enough to provide a reasonable value
using the market approach. When that occurs, the market approach
is weighted less than the income approach.
If the estimated fair value of a reporting unit is less than the
carrying value, a second step is performed to compute the amount
of the impairment by determining an implied fair
value of goodwill. The determination of the Companys
implied fair value requires the Company to allocate
the estimated fair value of the reporting unit to the assets and
liabilities of the reporting unit. Any unallocated fair value
represents the implied fair value of goodwill, which
is compared to the corresponding carrying value.
The Company measures impairment of its indefinite-lived
tradenames and trademarks based on the
relief-from-royalty-method. Under the relief-from-royalty method
of the income approach, the value of an intangible asset is
determined by quantifying the cost savings a company enjoys by
owning, as opposed to licensing, the intangible asset.
Assumptions about royalty rates are based on the rates at which
similar tradenames and
31
trademarks are licensed in the marketplace. The Company also
re-evaluates the useful life of these assets to determine
whether events and circumstances continue to support an
indefinite useful life.
The annual impairment evaluations for goodwill and
indefinite-lived intangible assets involve significant estimates
made by management. The discounted cash flow analyses require
various judgmental assumptions about sales, operating margins,
growth rates and discount rates. Assumptions about sales,
operating margins and growth rates are based on the
Companys budgets, business plans, economic projections,
anticipated future cash flows and marketplace data. Changes in
estimates could have a material impact in the carrying amount of
goodwill and indefinite-lived intangible assets in future
periods.
Intangible assets that are deemed to have a finite life are
evaluated for impairment as discussed above in Long-Lived
Assets.
Contingencies and Indemnification
Agreements The Company records the
estimated impacts of various conditions, situations or
circumstances involving uncertain outcomes. These events are
contingencies, and the accounting for such events
follows accounting guidance for contingencies.
The accrual of a contingency involves considerable judgment by
management. The Company uses internal expertise and consults
with outside experts, as necessary, to help estimate the
probability that the Company has incurred a loss and the amount
(or range) of the loss. When evaluating the need for an accrual
or a change in an existing accrual, the Company considers
whether it is reasonably probable to estimate an outcome for the
contingency based on its experience, any experience of others
facing similar contingencies of which the Company is aware and
the particulars of the circumstances creating the contingency.
See Item 3. Legal Proceedings and Note 16
Commitments and Contingencies to the consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K.
Postretirement Benefits The
Company sponsors unfunded defined benefit postretirement plans
that cover certain former salaried and non-salaried employees.
One postretirement benefit plan provides health care benefits
and the other provides life insurance benefits. The Company
consults with outside actuaries who use several statistical and
other factors that attempt to estimate future events to
calculate the expense and liability related to the plans. These
factors include assumptions about the discount rate within
certain guidelines. In addition, the Companys actuarial
consultants also use subjective factors such as withdrawal and
mortality rates and the expected health care cost trend rate to
estimate these factors.
The actuarial assumptions used by the Company may differ
materially from actual results due to changing market and
economic conditions, higher or lower withdrawal rates, higher or
lower healthcare inflation rates or longer or shorter life spans
of participants, among other things. Differences from these
assumptions may result in a significant difference with the
amount of postretirement benefits expense and liability that the
Company recorded.
Derivative Financial
Instruments The Company uses derivative
financial instruments to manage interest rate risk related to a
portion of its long-term debt. The Company recognizes all
derivatives at fair value as either assets or liabilities on the
consolidated balance sheets and changes in the fair values of
such instruments are recognized in earnings unless specific
hedge accounting criteria are met. If specific cash flow hedge
accounting criteria are met, the Company recognizes the changes
in fair value of these instruments in other comprehensive income
(loss) until the underlying debt instrument being hedged is
settled or the Company determines that the specific hedge
accounting criteria are no longer met.
On the date the interest rate derivative contract is entered
into, the Company designates the derivative as either a fair
value hedge or a cash flow hedge. The Company formally documents
the relationship between hedging instruments and the hedged
items, as well as its risk-management objectives and strategy
for undertaking various hedge transactions. The Company links
all hedges that are designated as fair value hedges to specific
assets or liabilities on the balance sheet or to specific firm
commitments. The Company links all hedges that are designated as
cash flow hedges to forecasted transactions or to liabilities on
the balance sheet. The Company also assesses, both at the
inception of the hedge and on an on-going basis, whether the
derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of
hedged items. If an existing derivative were to become not
highly effective as a hedge, the Company
32
would discontinue hedge accounting prospectively. The Company
assesses the effectiveness of the hedge based on total changes
in the hedges cash flows at each payment date as compared
to the change in the expected future cash flows on the long-term
debt.
Accounting
Guidance
See Note 2 to the consolidated financial statements
included elsewhere in this Annual Report on
Form 10-K
regarding the impact of recently issued accounting guidance on
the Companys financial condition and results of operations.
Off-Balance
Sheet Arrangements
It has not been the Companys practice to enter into
off-balance sheet arrangements. In the normal course of business
the Company periodically enters into agreements that incorporate
general indemnification language. These indemnifications
encompass such items as intellectual property rights,
governmental regulations
and/or
employment-related matters. Performance under these indemnities
would generally be triggered by a breach of terms of the
contract or by a third-party claim. There has historically been
no material losses related to such indemnifications, and the
Company does not expect any material adverse claims in the
future.
The Company is not engaged in any transactions, arrangements or
other relationships with any unconsolidated entity or other
third party that is reasonably likely to have a material effect
on its consolidated results of operations, financial position or
liquidity. In addition, the Company has not established any
special purpose entity.
Asset
Impairments
Changes in estimates and assumptions used in the Companys
financial projections resulting from the factors discussed above
for any of the Companys business segments could have a
material impact on the fair value of goodwill, indefinite-lived
intangible assets or other long-lived assets in future periods,
which may result in material asset impairments, as more fully
described in Item 1A, Risk Factors Weak
economic conditions and further acceleration of check unit
declines may continue to have an adverse effect on the
Companys revenues and profitability and could result in
additional impairment charges.
Restructuring
The Company has taken restructuring actions in the past in an
effort to achieve manufacturing and contact center efficiencies
and other cost savings. Past restructuring actions have related
to both acquisitions and ongoing cost reduction initiatives and
have included manufacturing plant closures, contact center
closures and workforce rationalization. The Company anticipates
future restructuring actions, where appropriate, to realize
process efficiencies, to continue to align our cost structure
with business needs and remain competitive in the marketplace.
The Company expects to incur severance and severance-related
costs, facilities closures costs and other costs such as
inventory write-offs, training, hiring and travel in connection
with future restructuring actions.
Consolidated
Operating Results
The Company has organized its business along three reportable
segments together with a corporate group for certain support
services. The Companys operations are aligned on the basis
of products, services and industry. Management measures and
evaluates the reportable segments based on operating income.
In the tables below, dollars are in millions.
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
The operating results for the years ended December 31, 2009
and 2008, as reflected in the accompanying consolidated
statements of operations and described below, include the
acquired Protocol IMS, Transaction
33
Holdings and Data Management businesses from the respective
dates of acquisition (see Note 3 to the consolidated
financial statements included elsewhere in this Annual Report on
Form 10-K).
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Consolidated Net Revenues:
|
|
|
|
|
|
|
|
|
Harland Clarke segment
|
|
$
|
1,226.0
|
|
|
$
|
1,290.4
|
|
Harland Financial Solutions segment
|
|
|
278.9
|
|
|
|
293.7
|
|
Scantron segment
|
|
|
208.0
|
|
|
|
211.3
|
|
Eliminations
|
|
|
(0.6
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,712.3
|
|
|
$
|
1,794.6
|
|
|
|
|
|
|
|
|
|
|
Net revenues decreased by $82.3 million, or 4.6%, to
$1,712.3 million in 2009 from $1,794.6 million in 2008.
Net revenues from the Harland Clarke segment decreased by
$64.4 million, or 5.0%, to $1,226.0 million in 2009
from $1,290.4 million in 2008. The decrease was primarily
due to volume declines from check and related products, which
the Company believes was partially affected by the economic
downturn. Declines in volumes were partially offset by increased
revenues per unit.
Net revenues from the Harland Financial Solutions segment
decreased by $14.8 million, or 5.0%, to $278.9 million
in 2009 from $293.7 million in 2008. The decrease was
primarily due to declines in license, hardware and professional
services revenues as well as in mortgage products, partially
offset by increases in lending products. The Company believes
the declines were partially affected by the economic downturn,
which has negatively affected financial institution purchases.
Net revenues from the Scantron segment decreased by
$3.3 million, or 1.6%, to $208.0 million in 2009 from
$211.3 million in 2008. The Data Management Acquisition
accounted for an increase of $14.6 million. The remaining
$17.9 million decrease was a result of volume declines in
hardware and forms products, partially offset by organic growth
in software products. The Company believes transactions related
to hardware and forms product lines were partially affected by
the economic downturn.
Cost
of Revenues:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Consolidated Cost of Revenues:
|
|
|
|
|
|
|
|
|
Harland Clarke segment
|
|
$
|
764.3
|
|
|
$
|
822.5
|
|
Harland Financial Solutions segment
|
|
|
119.6
|
|
|
|
124.1
|
|
Scantron segment
|
|
|
114.4
|
|
|
|
121.1
|
|
Eliminations
|
|
|
(0.6
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
997.7
|
|
|
$
|
1,066.9
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues decreased by $69.2 million, or 6.5%, to
$997.7 million in 2009 from $1,066.9 million in 2008.
Cost of revenues for the Harland Clarke segment decreased by
$58.2 million, or 7.1%, to $764.3 million in 2009 from
$822.5 million in 2008. The decrease was primarily due to
lower volumes, which resulted in decreases in delivery,
materials, and other variable overhead expenses. Labor costs
decreased due to cost reduction and restructuring activities.
Decreases in travel expenses and depreciation also contributed
to the decrease in cost of revenues. These decreases were
partially offset by inflation in delivery and materials
34
expenses, as well as an increase in the amortization of
intangible assets of $5.1 million. Cost of revenues as a
percentage of revenues for the Harland Clarke segment was 62.3%
in 2009 as compared to 63.7% in 2008.
Cost of revenues for the Harland Financial Solutions segment
decreased by $4.5 million, or 3.6%, to $119.6 million
in 2009 from $124.1 million in 2008. The decrease was
primarily due to lower hardware and third-party license costs
related to volume declines, as well as reductions in labor and
related expenses due to cost reduction activities. Decreases in
depreciation and amortization also contributed to the decrease
in cost of revenues. Cost of revenues as a percentage of
revenues for the Harland Financial Solutions segment was 42.9%
in 2009 as compared to 42.3% in 2008.
Cost of revenues for the Scantron segment decreased by
$6.7 million, or 5.5%, to $114.4 million in 2009 from
$121.1 million in 2008. The Data Management Acquisition
accounted for an increase of $9.4 million. The remaining
$16.1 million decrease was primarily due to volume declines
and cost reductions related to the Data Management Acquisition,
in addition to other restructuring activities. Cost of revenues
as a percentage of revenues for the Scantron segment was 55.0%
in 2009 as compared to 57.3% in 2008.
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Consolidated Selling, General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
Harland Clarke segment
|
|
$
|
206.6
|
|
|
$
|
240.1
|
|
Harland Financial Solutions segment
|
|
|
112.1
|
|
|
|
131.6
|
|
Scantron segment
|
|
|
55.9
|
|
|
|
59.4
|
|
Corporate
|
|
|
12.8
|
|
|
|
14.8
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
387.4
|
|
|
$
|
445.9
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses decreased by
$58.5 million, or 13.1%, to $387.4 million in 2009
from $445.9 million in 2008.
Selling, general and administrative expenses for the Harland
Clarke segment decreased by $33.5 million, or 14.0%, to
$206.6 million in 2009 from $240.1 million in 2008.
The decrease was primarily due to labor cost reductions and
lower integration-related and travel expenses. Selling, general
and administrative expenses as a percentage of revenues for the
Harland Clarke segment was 16.9% in 2009 as compared to 18.6% in
2008.
Selling, general and administrative expenses for the Harland
Financial Solutions segment decreased by $19.5 million, or
14.8%, to $112.1 million in 2009 from $131.6 million
in 2008. The decrease was primarily due to labor cost
reductions, a reduction in compensation expense related to an
incentive agreement for an acquisition and reductions in
occupancy, travel and depreciation expenses. Selling, general
and administrative expenses in 2009 and 2008 included charges of
$3.5 million and $8.1 million, respectively, for
compensation expense related to an incentive agreement for an
acquisition. Selling, general and administrative expenses as a
percentage of revenues for the Harland Financial Solutions
segment was 40.2% in 2009 as compared to 44.8% in 2008.
Selling, general and administrative expenses for the Scantron
segment decreased $3.5 million, or 5.9%, to
$55.9 million in 2009 from $59.4 million in 2008. The
Data Management Acquisition accounted for an increase of
$3.3 million, which was more than offset by a
$6.8 million decrease, primarily due to cost reductions
related to the Data Management Acquisition, in addition to other
restructuring activities, and a decrease in integration-related
expenses. In 2009, the Scantron segment incurred approximately
$1.3 million in one-time expenses related to a contractual
obligation owing to a former employee upon termination of
employment. Selling, general and administrative expenses as a
percentage of revenues for the Scantron segment was 26.9% in
2009 as compared to 28.1% in 2008.
35
Corporate selling, general and administrative expenses decreased
$2.0 million, or 13.5%, to $12.8 million in 2009 from
$14.8 million in 2008, primarily due to lower professional
fees.
Asset
Impairment Charges
During 2009, the Company recorded non-cash asset impairment
charges of $33.6 million for the Harland Clarke segment,
$10.6 million for the Harland Financial Solutions segment
and $0.2 million for the Scantron segment, of which
$44.2 million related to an impairment of the Harland
Clarke tradename. This impairment resulted from the 2009 annual
impairment test for indefinite-lived tradenames and the
Companys decision to reclassify the Harland Clarke
tradename to a definite life.
During 2008, the Company recorded non-cash asset impairment
charges of $2.4 million for the Harland Clarke segment. The
charges consisted of $1.9 million primarily related to the
Companys decision to consolidate facilities as a result of
the Harland Acquisition. In addition, the Company experienced
declines in customer revenues from Alcott Routon operations in
2008 and assessed the customer relationship intangible asset for
impairment resulting in an impairment charge of
$0.5 million.
See Notes 6, 7 and 15 to the consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K
for additional information regarding these asset impairment
charges.
Restructuring
Costs
During 2007 and 2008, as a result of acquisition activity, the
Company adopted plans to restructure its businesses. These plans
focused on improving operating margins through consolidating
facilities and reducing duplicative expenses, such as selling,
general and administrative, executive and shared services
expenses. As a result of the economic downturn and the sales
decline experienced in recent periods, the Company adopted
further restructuring plans during 2008 and 2009 to strengthen
operating margins and leverage incremental synergies within the
printing plants, contact centers and selling, general and
administrative areas by leveraging the Companys shared
services capabilities and reorganizing certain operations and
sales and support functions.
During 2009, the Company recorded restructuring costs of
$25.7 million for the Harland Clarke segment and Corporate,
$3.8 million for the Harland Financial Solutions segment
and $3.0 million for the Scantron segment related to these
plans. During 2008, the Company recorded restructuring costs of
$8.3 million for the Harland Clarke segment and Corporate,
$3.9 million for the Harland Financial Solutions segment
and $2.4 million for the Scantron segment related to these
plans (see Notes 3 and 15 to the consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K).
Interest
Income
Interest income was $1.0 million in 2009 as compared to
$2.2 million in 2008. The decrease in interest income was
primarily due to lower average cash equivalents balances in 2009
as compared to 2008 and lower interest rates on investments in
cash equivalents in 2009 as compared to 2008, partially offset
by higher interest income on notes receivable from a related
party in 2009.
Interest
Expense
Interest expense was $136.9 million in 2009 as compared to
$186.4 million in 2008. The decrease in interest expense
was primarily due to lower effective interest rates and also a
decrease in total debt outstanding.
Gain
(Loss) on Early Extinguishment of Debt
During 2009, the Company extinguished debt with a total
principal amount of $136.9 million by purchasing 2015
Senior Notes in individually negotiated transactions for an
aggregate purchase price of $67.6 million, resulting in a
gain of $65.0 million after the write-off of
$4.3 million of unamortized deferred
36
financing fees related to the extinguished debt (see
Note 11 to the consolidated financial statements included
elsewhere in this Annual Report on
Form 10-K).
Other
Income (Expense), Net
Other income (expense), net was income of $0.1 million in
2009 as compared to an expense of $0.4 million in 2008. The
income in 2009 was due to non-recurring miscellaneous income.
The expense in 2008 was attributable to a $0.8 million
write-down of an equity investment due to an
other-than-temporary
decline in its market value, partially offset by non-recurring
miscellaneous income.
Provision
for Income Taxes
The Companys effective tax rate was 37.5% in 2009 and
41.1% in 2008. The change was primarily due to the effects of a
net reduction in reserves for uncertain tax positions in 2009
and a reduction in foreign rate differential from 2008.
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
The operating results for the years ended December 31, 2008
and 2007, as reflected in the accompanying consolidated
statements of operations and described below, include the
acquired Data Management, Harland and Peldec businesses from
their respective dates of acquisition (see Note 3 to the
consolidated financial statements included elsewhere in this
Annual Report on
Form 10-K).
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Consolidated Net Revenues:
|
|
|
|
|
|
|
|
|
Harland Clarke segment
|
|
$
|
1,290.4
|
|
|
$
|
1,104.5
|
|
Harland Financial Solutions segment
|
|
|
293.7
|
|
|
|
183.0
|
|
Scantron segment
|
|
|
211.3
|
|
|
|
83.6
|
|
Eliminations
|
|
|
(0.8
|
)
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,794.6
|
|
|
$
|
1,369.9
|
|
|
|
|
|
|
|
|
|
|
Net revenues increased by $424.7 million to
$1,794.6 million in 2008 from $1,369.9 million in
2007, due to the Harland Acquisition, which accounted for an
increase of $345.1 million and the Data Management
Acquisition, which accounted for an increase of
$88.5 million.
Net revenues for the Harland Clarke segment increased by
$185.9 million to $1,290.4 million in 2008 from
$1,104.5 million in 2007, due to the Harland Acquisition,
which accounted for an increase of $210.9 million. The
remaining $25.0 million decrease is primarily due to
declines in marketing services products, which were negatively
affected by the economic downturn, and volume declines in check
and related products, partially offset by increased revenues per
unit. Net revenues in 2007 also included charges of
$0.6 million for non-cash fair value purchase accounting
adjustments to deferred revenue related to the Harland
Acquisition.
Net revenues for the Harland Financial Solutions segment
increased by $110.7 million to $293.7 million in 2008
from $183.0 million in 2007, primarily as a result of the
Harland Acquisition, which accounted for $94.8 million of
the increase. The remaining $15.9 million of the increase
was due in part to $6.5 million of organic growth in the
risk management and enterprise solutions product lines. The
balance of the increase was substantially due to a decrease in
charges for non-cash fair value purchase accounting adjustments
to deferred revenue related to the Harland Acquisition. Net
revenues in 2008 and 2007 included charges of $1.4 million
and $9.6 million, respectively, for non-cash fair value
purchase accounting adjustments to deferred revenue related to
the Harland Acquisition.
Net revenues for the Scantron segment increased by
$127.7 million to $211.3 million in 2008 from
$83.6 million in 2007, due to the Data Management
Acquisition, which accounted for an increase of
37
$88.5 million, and the Harland Acquisition, which accounted
for an increase of $40.0 million. Net revenues in 2008 and
2007 also included charges of $1.2 million and
$2.0 million, respectively, for non-cash fair value
purchase accounting adjustments to deferred revenue related to
the Data Management and Harland Acquisitions.
The fair value adjustments are one-time reductions in revenues
attributable to the purchase accounting for the Harland
Acquisition and the Data Management Acquisition. The Company has
recognized substantially all of the reduction in net revenues
resulting from the deferred revenue fair value adjustments for
the Harland Acquisition and expects to recognize substantially
all of the reductions in net revenues resulting from the Data
Management deferred revenue fair value adjustments during the
twelve-month period following the Data Management Acquisition.
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Consolidated Cost of Revenues:
|
|
|
|
|
|
|
|
|
Harland Clarke segment
|
|
$
|
822.5
|
|
|
$
|
711.8
|
|
Harland Financial Solutions segment
|
|
|
124.1
|
|
|
|
75.7
|
|
Scantron segment
|
|
|
121.1
|
|
|
|
47.5
|
|
Eliminations
|
|
|
(0.8
|
)
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,066.9
|
|
|
$
|
833.8
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues increased by $233.1 million to
$1,066.9 million in 2008 from $833.8 million in 2007
due to the Harland Acquisition, which accounted for an increase
of $207.2 million, and the Data Management Acquisition,
which accounted for an increase of $57.2 million.
Cost of revenues for the Harland Clarke segment increased by
$110.7 million to $822.5 million in 2008 from
$711.8 million in 2007 due to the Harland Acquisition,
which accounted for an increase of $146.6 million. Cost
reductions and lower expenses due to volume declines were
partially offset by increases in delivery, labor and materials
costs. Cost of revenues in 2007 also included charges of
$1.4 million for non-cash fair value purchase accounting
adjustments to inventory related to the Harland Acquisition.
Cost of revenues as a percentage of revenues for the Harland
Clarke segment was 63.7% in 2008 as compared to 64.4% in 2007.
Cost of revenues for the Harland Financial Solutions segment
increased by $48.4 million to $124.1 million in 2008
from $75.7 million in 2007, primarily as a result of the
Harland Acquisition, which accounted for $39.7 million of
the increase. The remaining $8.7 million of the increase
primarily resulted from higher revenues and an increase of
$2.9 million in the amortization of intangible assets
related to the Harland Acquisition. Cost of revenues as a
percentage of revenues for the Harland Financial Solutions
segment was 42.3% in 2008 as compared to 41.4% in 2007.
Cost of revenues for the Scantron segment increased by
$73.6 million to $121.1 million in 2008 from
$47.5 million in 2007 due to the Data Management
Acquisition, which accounted for an increase of
$57.2 million and the Harland Acquisition, which accounted
for an increase of $20.7 million. These increases were
partially offset by cost reductions. Cost of revenues in 2008
and 2007 also included charges of $0.4 million and
$3.0 million, respectively, for non-cash fair value
purchase accounting adjustments to inventory related to the Data
Management and Harland acquisitions. Cost of revenues as a
percentage of revenues for the Scantron segment was 57.3% in
2008 as compared to 56.8% in 2007.
38
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Consolidated Selling, General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
Harland Clarke segment
|
|
$
|
240.1
|
|
|
$
|
202.9
|
|
Harland Financial Solutions segment
|
|
|
131.6
|
|
|
|
90.5
|
|
Scantron segment
|
|
|
59.4
|
|
|
|
23.7
|
|
Corporate
|
|
|
14.8
|
|
|
|
16.1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
445.9
|
|
|
$
|
333.2
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses increased by
$112.7 million to $445.9 million in 2008 from
$333.2 million in 2007, due to the Harland Acquisition,
which accounted for an increase of $91.7 million and the
Data Management Acquisition, which accounted for an increase of
$20.1 million.
Selling, general and administrative expenses for the Harland
Clarke segment increased by $37.2 million to
$240.1 million in 2008 from $202.9 million in 2007,
primarily due to the Harland Acquisition, which accounted for
$26.3 million of the increase. The remaining
$10.9 million of the increase was primarily due to an
increase in integration expenses related to the Harland
Acquisition and a change in vacation policy, partially offset by
labor cost reductions. Selling, general and administrative
expenses as a percentage of revenues for the Harland Clarke
segment was 18.6% and 18.4% in 2008 and 2007, respectively.
Selling, general and administrative expenses for the Harland
Financial Solutions segment increased by $41.1 million to
$131.6 million in 2008 from $90.5 million in 2007 due
to the Harland Acquisition, which accounted for an increase of
$46.9 million. The increase was partially offset by labor
cost reductions. Selling, general and administrative expenses in
2008 and 2007 also included $8.1 million and
$3.3 million, respectively, for compensation expense
related to an incentive agreement for the Peldec assets
purchase. The Peldec assets purchase was completed on
August 15, 2007. Selling, general and administrative
expenses as a percentage of revenues for the Harland Financial
Solutions segment was 44.8% in 2008 as compared to 49.5% in 2007.
Selling, general and administrative expenses for the Scantron
segment increased by $35.7 million to $59.4 million in
2008 from $23.7 million in 2007, primarily due to the Data
Management Acquisition, which accounted for $20.1 million
of the increase and the Harland Acquisition, which accounted for
$12.4 million of the increase. The remaining
$3.2 million of the increase was primarily due to
integration expenses incurred in connection with the Data
Management Acquisition, partially offset by cost reductions.
Selling, general and administrative expenses as a percentage of
revenues for the Scantron segment was 28.1% in 2008 as compared
to 28.3% in 2007.
Corporate selling, general and administrative expenses decreased
by $1.3 million to $14.8 million in 2008 from
$16.1 million in 2007. The Harland Acquisition accounted
for an increase of $5.6 million, which was more than offset
by cost reductions. The 2007 period also included
$2.4 million of non-recurring retention bonus expenses
related to the Harland Acquisition.
Asset
Impairment Charges
During 2008, the Company recorded non-cash asset impairment
charges of $2.4 million for the Harland Clarke segment. The
charges consisted of $1.9 million primarily related to the
Companys decision to consolidate facilities as a result of
the Harland Acquisition. In addition, the Company experienced
declines in customer revenues from Alcott Routon operations in
2008 and assessed the customer relationship intangible asset for
impairment resulting in an impairment charge of
$0.5 million. During 2007, the Company recorded non-cash
asset impairment charges of $3.1 million for the Harland
Clarke segment. These charges resulted from the Companys
impairment assessments of tradename and customer relationship
intangible assets of Alcott Routon operations due to greater
revenue attrition than expected.
39
See Notes 6, 7 and 15 to the consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K
for additional information regarding these asset impairment
charges.
Restructuring
Costs
During 2007, as a result of the Harland Acquisition, the Company
adopted a plan to restructure its business. The plan focused on
improving operating margin through consolidating facilities and
reducing duplicative expenses, such as selling, general and
administrative, executive and shared services expenses. During
2008, the Company adopted further restructuring plans within the
Harland Clarke segment to leverage incremental synergies within
the printing plants, contact centers and selling, general and
administrative areas. During the first quarter of 2008, as a
result of the Data Management Acquisition, the Company adopted
plans to restructure the Scantron segment. These plans focused
on improving operating margin through consolidating facilities
and reducing duplicative selling, general and administrative
expenses. During the second quarter of 2008, the Company adopted
a plan to restructure certain selling, general and
administrative functions within the Harland Financial Solutions
segment. This plan focused on improving operating margin through
reducing selling, general and administrative expenses by
leveraging the Companys shared services capabilities.
The Company recorded restructuring costs, net of adjustments, of
$8.3 million for the Harland Clarke segment and Corporate,
$3.9 million for the Harland Financial Solutions segment
and $2.4 million for the Scantron segment for the year
ended December 31, 2008 related to these plans. The Company
also recorded $0.6 million, $1.5 million and
$2.5 million of restructuring costs in the purchase
accounting for the Harland Acquisition, the Transaction Holdings
Acquisition and the Data Management Acquisition, respectively,
for the year ended December 31, 2008 (see Notes 3 and
15 to the consolidated financial statements included elsewhere
in this Annual Report on
Form 10-K).
The Company recorded $5.6 million of restructuring costs
for the Harland Clarke segment and Corporate in the year ended
December 31, 2007 related primarily to these plans.
Interest
Income
Interest income was $2.2 million in 2008 as compared to
$6.0 million in 2007. The decrease in interest income was
due to lower cash balances available for investments in cash
equivalents in 2008 primarily due to cash used for the Data
Management Acquisition and a dividend paid to M & F
Worldwide.
Interest
Expense
Interest expense was $186.4 million in 2008 as compared to
$165.9 million in 2007. The increase in interest expense
was primarily due to higher amounts of long-term debt
outstanding subsequent to May 1, 2007 as a result of the
financing transactions completed in connection with the Harland
Acquisition, partially offset by lower interest rates.
Gain
(Loss) on Early Extinguishment of Debt
The loss on early extinguishment of debt of $54.6 million
in 2007 relates to the refinancing transactions completed in
connection with the Harland Acquisition. This loss consists of
$37.3 million for prepayment premiums and consent payments
on the 2013 Senior Notes, a $3.9 million prepayment penalty
on the prior credit facilities, a non-cash expense of
$1.5 million for the write off of unamortized original
discount on the Prior Credit Facilities, and a non-cash expense
of $11.9 million for the write-off of unamortized deferred
financing fees related to the 2013 Senior Notes and the prior
credit facilities (see Note 11 to the consolidated
financial statements included elsewhere in this Annual Report on
Form 10-K).
Other
Income (Expense), Net
Other income (expense), net was an expense of $0.4 million
in 2008 as compared to an expense of $0.5 million in 2007.
These amounts primarily relate to non-recurring miscellaneous
expenses and income.
40
Provision
(Benefit) for Income Taxes
The Companys effective tax rate was a provision of 41.1%
in 2008 and a benefit of 26.0% in 2007. The change is primarily
due to the tax benefit in 2007 being lower than the statutory
rate (9.0%), 2008 foreign rate differential (2.1%) and
2008 state taxes (3.9%).
Related
Party Transactions
Notes
Receivable
In 2008, the Company acquired the senior secured credit facility
and outstanding note of Delphax Technologies, Inc.
(Delphax), the supplier of Imaggia printing machines
and related supplies and service for the Harland Clarke segment.
The senior secured credit facility is comprised of a revolving
credit facility of up to $14.0 million and a term loan of
$0.5 million, subject to borrowing limitations set forth
therein, that mature in September 2011. The senior secured
credit facility is collateralized by a perfected security
interest in substantially all of Delphaxs assets. The
revolving facility has a borrowing base calculated based on
Delphaxs eligible accounts receivable and inventory. The
senior secured credit facility has an interest rate equal to the
sum of Wells Fargo N. A. prime rate plus 2.5%, with accrued
interest payable quarterly. The note had an original principal
amount of $7.0 million, matures in September 2012 and
originally bore interest at an annual rate of 12%, payable
quarterly either in cash, or in a combination of cash and up to
25% Delphax stock. Contemporaneous with its acquisition of the
facility and note, the Company also acquired 250,000 shares
of Delphax common stock from the previous holder of the Delphax
note. In January 2010, the note was restated to reduce the
interest rate to 9%, payable solely in cash, effective
October 1, 2009, and to require the repayment of
$3.0 million of principal in 2010.
The outstanding balance on the senior secured credit facility
and the note are included in other assets in the consolidated
balance sheets included elsewhere in this Annual Report on
Form 10-K.
During 2009, the Company received $15.0 million in payments
and released $9.8 million in draws on the revolver,
bringing the principal balance of the debt to $7.0 million
at December 31, 2009. During 2008, the Company received
$15.2 million in payments and released $13.5 million
in draws on the revolver, bringing the principal balance of the
debt to $12.2 million at December 31, 2008. Interest
income of $0.8 million and $0.4 million was recorded
in 2009 and 2008, respectively.
Other
The Company expensed $2.7 million, $2.7 million and
$2.1 million during 2009, 2008 and 2007, respectively, for
services provided to the Company by M & F Worldwide.
This amount is reflected in selling, general and administrative
expenses and accrued expenses.
During 2009 and 2008, the Company paid cash dividends of
$41.3 million and $65.0 million, respectively to
M & F Worldwide as permitted by restricted payment
baskets within the Companys debt agreements. During 2007,
the Company paid a cash dividend in the amount of
$1.8 million to M & F Worldwide to cover certain
public company related expenses.
As discussed in Note 3 to our consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K,
the Company paid $2.0 million in February 2008 to
MacAndrews & Forbes Holdings Inc. for its services
related to sourcing, analyzing, negotiating and executing the
Data Management Acquisition.
The Company participates in MacAndrews & Forbes
Holdings Inc.s directors and officers insurance
program, which covers the Company as well as
MacAndrews & Forbes Holdings Inc. and its other
affiliates. MacAndrews & Forbes Holdings Inc. directly
and indirectly beneficially owned, as of December 31, 2009,
approximately 43.4% of outstanding common stock of M &
F Worldwide. The limits of coverage are available on aggregate
losses to any or all of the participating companies and their
respective directors and officers. The Company reimburses
MacAndrews & Forbes Holdings Inc. for its allocable
portion of the premiums for such coverage, which the Company
believes is more favorable than the premiums the Company could
secure were it to secure its own coverage. At December 31,
2009 and 2008, the Company recorded prepaid expenses of
$0.4 million and $0.3 million, respectively, relating
to the directors and officers insurance program in the
41
accompanying consolidated balance sheets. The Company paid
$0.1 million, $0.3 million and $0.4 million to
MacAndrews & Forbes Holdings Inc. in 2009, 2008 and
2007, respectively, under the insurance program.
Liquidity
and Capital Resources
Cash
Flow Analysis
The Companys net cash provided by operating activities for
the year ended December 31, 2009 was $205.3 million as
compared to $200.7 million during the year ended
December 31, 2008. The increase in net cash provided by
operating activities of $4.6 million was due to an increase
in cash flow from operations partially offset by changes in
working capital. Working capital increased primarily due to
lower incentive compensation and interest accruals in addition
to higher spare parts inventories in 2009, as well as the timing
of year-end payments related to prepaid expenses and other
accrued expenses.
The Companys net cash used in investing activities was
$76.8 million for year ended December 31, 2009 as
compared to $290.8 million for the year ended
December 31, 2008. The decrease in cash used in investing
activities was primarily due to the Data Management Acquisition
in 2008 and an investment in related-party notes receivable in
2008, decreased capital expenditures in 2009 and increased net
repayments on related-party notes receivable in 2009, partially
offset by an investment in marketable securities and
acquisitions in 2009.
The Companys net cash used in financing activities was
$129.2 million for the year ended December 31, 2009 as
compared to $85.0 million for the year ended
December 31, 2008. The increase in net cash used in
financing activities in 2009 was primarily due to cash used to
extinguish $136.9 million principal amount of 2015 Senior
Notes for an aggregate purchase price of $67.6 million,
partially offset by a decrease in dividends paid to
M & F Worldwide.
The
Companys Consolidated Contractual
Obligations
The Company has certain cash obligations and other commercial
commitments which will affect its short-term liquidity. At
December 31, 2009, such obligations and commitments, which
do not include options for renewal, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
5 years
|
|
|
|
(In millions)
|
|
|
Revolving credit
facilities(1)(7)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Senior secured term
loans(2)(7)
|
|
|
1,755.0
|
|
|
|
18.0
|
|
|
|
36.0
|
|
|
|
1,701.0
|
|
|
|
|
|
|
|
|
|
Senior
notes(3)(7)
|
|
|
478.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
478.1
|
|
|
|
|
|
Interest on long-term
debt(4)(7)
|
|
|
455.5
|
|
|
|
104.9
|
|
|
|
190.3
|
|
|
|
146.0
|
|
|
|
14.3
|
|
|
|
|
|
Capital lease obligations and other indebtedness
|
|
|
6.4
|
|
|
|
1.8
|
|
|
|
2.8
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
131.0
|
|
|
|
27.1
|
|
|
|
46.5
|
|
|
|
30.8
|
|
|
|
26.6
|
|
|
|
|
|
Raw material purchase obligations
|
|
|
17.9
|
|
|
|
17.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
25.5
|
|
|
|
0.6
|
|
|
|
16.9
|
|
|
|
1.8
|
|
|
|
6.2
|
|
|
|
|
|
Client incentive
payments(5)
|
|
|
58.6
|
|
|
|
24.5
|
|
|
|
25.2
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
Other purchase
obligations(6)
|
|
|
24.7
|
|
|
|
11.1
|
|
|
|
5.5
|
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
Postretirement benefits payments
|
|
|
12.4
|
|
|
|
1.2
|
|
|
|
2.5
|
|
|
|
2.4
|
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,965.1
|
|
|
$
|
207.1
|
|
|
$
|
325.7
|
|
|
$
|
1,900.8
|
|
|
$
|
531.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(1) |
|
Consists of our $100.0 million revolving credit facility,
which will mature on June 28, 2013. See Note 11 to the
accompanying consolidated financial statements included
elsewhere in this Annual Report on Form
10-K. |
|
(2) |
|
$1,800.0 million senior secured term loan, which will
mature on June 30, 2014. The Company is required to make
payments of principal in the amount of $18.0 million per
year in equal quarterly installments. See |
42
|
|
|
|
|
Note 11 to the accompanying consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K. |
|
(3) |
|
The senior notes will mature in 2015 and include
$271.3 million of fixed rate notes and $206.8 million
of floating rate notes. See Note 11 to the accompanying
consolidated financial statements included elsewhere in this
Annual Report on
Form 10-K. |
|
(4) |
|
Interest on long-term debt assumes that all floating rates of
interest remain the same as those in effect at December 31,
2009 and includes the effect of the Companys interest rate
derivative arrangements on future cash payments for the
remaining period of those derivatives. The payments noted above
also assume that the level of borrowing under the revolving
credit facility remains at zero, as it was on December 31,
2009, and all mandatory payments are made. |
|
(5) |
|
Represents unpaid amounts under existing client contracts. |
|
(6) |
|
Purchase obligations include amounts due under contracts with
third-party service providers. Such contracts are primarily for
information technology services including license rights for
mainframe software usage, voice and network data services and
telecommunication services. We routinely issue purchase orders
to numerous vendors for the purchase of inventory and other
supplies. These purchase orders are generally cancelable with
reasonable notice to the vendor. As such, these purchase orders
are not included in the purchase obligations presented in the
table above. |
|
(7) |
|
The credit facilities and senior notes include early repayment
provisions if certain events occur, including excess cash flow
payments with respect to the senior secured credit facilities.
See Note 11 to the accompanying consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K.
Payments in the table above assume that only mandatory principal
payments will be made and that there will be no prepayments. |
At December 31, 2009, the Company had a net deferred tax
liability of $396.7 million. Deferred tax liabilities are
temporary differences between tax and financial statement basis
of assets and do not directly relate to income taxes to be paid
in the future. At December 31, 2009, the Company had
unrecognized tax benefits of $13.6 million for which the
Company is unable to make reasonably reliable estimates of the
period of cash settlement with the respective taxing authority.
Thus, these liabilities have not been included in the
contractual obligations table.
The
Companys Credit Agreement
On April 4, 2007, the Company and substantially all of its
subsidiaries as co-borrowers entered into senior secured credit
facilities, which provided for a revolving credit facility of
$100.0 million maturing on June 28, 2013 and a
$1,800.0 million term loan maturing on June 30, 2014.
Portions of the Companys revolving credit facility are
available for the issuance of letters of credit and swing line
loans.
All obligations under the credit facilities are guaranteed by
the Companys direct parent and by each of the
Companys direct and indirect present domestic subsidiaries
and future wholly-owned domestic subsidiaries. The credit
facilities are secured by a perfected first priority security
interest in substantially all of the Company and the
guarantors assets, other than voting stock in excess of
65.0% of the outstanding voting stock of each direct foreign
subsidiary and certain other excluded property.
The term loan facility has an aggregate principal amount of
$1,800.0 million which was drawn in full on May 1,
2007. The term loan facility is required to be repaid in
quarterly installments of $4.5 million until maturity. The
term loan facility requires that a portion of the Companys
excess cash flow (as defined in the senior secured credit
facilities) be applied to prepay amounts borrowed thereunder,
beginning in 2009 with respect to 2008. No such excess cash flow
payment was paid in 2009 with respect to 2008 and no such excess
cash flow payment is required to be paid in 2010 with respect to
2009. The balance of the term loan facility is due in full in
2014.
43
Loans under the credit facilities bear, at the Companys
option, interest at:
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a rate per annum equal to the higher of (a) the prime rate
of Credit Suisse and (b) the Federal Funds rate plus 0.50%,
in each case plus an applicable margin of 1.50% per annum for
revolving loans and for term loans; or
|
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|
|
a rate per annum equal to a reserve-adjusted LIBOR rate, plus an
applicable margin of 2.50% per annum for revolving loans and for
term loans.
|
The credit facilities have a commitment fee for the unused
portion of the revolver and for issued letters of credit of
0.50% and 2.63%, respectively. Interest rate margins and
commitment fees under the revolver are subject to reduction in
increments based upon Harland Clarke Holdings achieving certain
consolidated leverage ratios.
The credit facilities contain representations and warranties
customary for a senior secured credit facility. They also
contain affirmative and negative covenants customary for a
senior secured credit facility, including, among other things,
restrictions on indebtedness, liens, mergers and consolidations,
sales of assets, loans, acquisitions, restricted payments,
transactions with affiliates, dividends and other payment
restrictions affecting subsidiaries and sale leaseback
transactions. The credit facilities also require the Company to
maintain a certain maximum consolidated leverage ratio for the
benefit of lenders under the revolver only.
As of December 31, 2009, $1,755.0 million principal
amount was outstanding under the term loan facility. As of
December 31, 2009, no amounts were drawn under the
Companys $100.0 million revolving credit facility,
and the Company had $87.5 million available for borrowing
(giving effect to the issuance of $12.5 million of letters
of credit).
During 2007 and 2009, the Company entered into interest
derivative transactions in the form of two- and three-year
interest rate swaps with notional amounts totaling
$855.0 million currently outstanding, which swap the
underlying variable rate for fixed rates ranging from 2.140% to
5.362%. Those derivatives are being accounted for as cash flow
hedges. The purpose of the transactions is to limit the
Companys risk on a portion of its variable rate term loan.
The
Companys Senior Notes
Concurrent with the completion of the Harland Acquisition, on
May 1, 2007, the Company issued $305.0 million
aggregate principal amount of Senior Floating Rate Notes due
2015 (the Floating Rate Notes) and
$310.0 million aggregate principal amount of
9.50% Senior Fixed Rate Notes due 2015 (the Fixed
Rate Notes and, together with the Floating Rate Notes, the
2015 Senior Notes). The 2015 Senior Notes mature on
May 15, 2015. The Fixed Rate Notes bear interest at a rate
per annum of 9.50%. The Floating Rate Notes bear interest at a
rate per annum equal to the Applicable LIBOR Rate (as defined in
the indenture governing the 2015 Senior Notes (the
Indenture)), subject to a floor of 1.25%, plus
4.75%. The Senior Notes are unsecured and are therefore
effectively subordinated to all of the Companys senior
secured indebtedness, including outstanding borrowings under the
senior secured credit facilities. The Indenture contains
customary restrictive covenants, including, among other things,
restrictions on the Companys ability to incur additional
debt, pay dividends and make distributions, make certain
investments, repurchase stock, incur liens, enter into
transactions with affiliates, enter into sale and lease back
transactions, merge or consolidate and transfer or sell assets.
The Company must offer to repurchase all of the 2015 Senior
Notes upon the occurrence of a change of control, as
defined in the Indenture, at a purchase price equal to 101% of
their aggregate principal amount, plus accrued and unpaid
interest. The Company must also offer to repurchase the 2015
Senior Notes with the proceeds from certain sales of assets, if
it does not apply those proceeds within a specified time period
after the sale, at a purchase price equal to 100% of their
aggregate principal amount, plus accrued and unpaid interest.
The Senior Notes are guaranteed fully and unconditionally,
jointly and severally by each of the Companys existing
subsidiaries other than unrestricted and certain immaterial
subsidiaries, all of which are wholly owned by the Company.
44
During 2009, the Company extinguished $136.9 million
principal amount of debt by purchasing 2015 Senior Notes in
individually negotiated transactions for an aggregate purchase
price of $67.6 million.
Impact of
Inflation
The Company presents its results of operations and financial
condition based upon historical cost. While it is difficult to
measure accurately the impact of inflation due to the imprecise
nature of the estimates required, the Company believes that, for
the three most recent fiscal years, the effects of inflation, if
any, on its results of operations and financial condition have
been minor.
Liquidity
Assessment
The Company believes that its cash and cash equivalents,
borrowings available under its credit agreements (as further
discussed in Note 11 to the Companys consolidated
financial statements included elsewhere in this Annual Report on
Form 10-K)
and anticipated cash flow from operating activities will be
sufficient to meet the Companys expected operating needs,
investment and capital spending requirements and debt service
requirements for the foreseeable future.
In addition to normal operating cash, working capital
requirements and service of indebtedness, the Company also
requires cash to fund capital expenditures, make contract
acquisition payments to financial institution clients and enable
cost reductions through restructuring projects as follows:
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|
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Capital Expenditures. The Companys
capital expenditures are primarily related to infrastructure
investments, internally developed software, cost reduction
programs, marketing initiatives and other projects that support
future revenue growth. During the years ended December 31,
2009, 2008 and 2007, the Company incurred $42.2 million,
$48.2 million, and $25.5 million of capital
expenditures and $0.3 million, $0.7 million, and
$0.4 million of capitalized interest, respectively. Capital
expenditures for the years ended December 31, 2009 and 2008
include $11.8 million and $21.7 million, respectively
related to integration projects. Capital expenditures related to
Harland operations are not included in periods prior to
May 1, 2007, the date of the Harland Acquisition.
|
|
|
|
Contract Acquisition Payments. During the
years ended December 31, 2009, 2008 and 2007, the Company
made $42.9 million, $43.8 million and
$15.6 million of contract acquisition payments to its
clients, respectively. Payments related to Harland operations
are not included in periods prior to May 1, 2007, the date
of the Harland Acquisition.
|
|
|
|
Restructuring/Cost Reductions. Restructuring
accruals and purchase accounting reserves have been established
for anticipated severance payments, costs related to facilities
closures and other expenses related to the planned restructuring
or consolidation of some of the Companys historical
operations, as well as related to the Harland Acquisition, the
Data Management Acquisition and the Transaction Holdings
Acquisition. During the years ended December 31, 2009, 2008
and 2007, the Company made $33.6 million,
$19.2 million and $15.3 million of payments for
restructuring, respectively. Periods prior to May 1, 2007,
the date of the Harland Acquisition, do not include payments
related to the acquired Harland operations.
|
The Company may also, from time to time, seek to use its cash to
make acquisitions or investments, and also to retire or purchase
its outstanding debt in open market purchases, in privately
negotiated transactions, or otherwise. Such retirement or
purchase of debt may be funded from the operating cash flows of
the business or other sources and will depend upon prevailing
market conditions, liquidity requirements, contractual
restrictions and other factors, and the amounts involved may be
material. During 2009, the Company extinguished
$136.9 million principal amount of debt by purchasing 2015
Senior Notes in individually negotiated transactions for an
aggregate purchase price of $67.6 million.
Cash Flow
Risks
The Companys ability to meet its debt service obligations
and reduce its total debt will depend upon its ability to
generate cash in the future which, in turn, will be subject to
general economic, financial, business,
45
competitive, legislative, regulatory and other conditions, many
of which are beyond the Companys control. The Company may
not be able to generate sufficient cash flow from operations or
borrow under its credit facility in an amount sufficient to
repay its debt or to fund other liquidity needs. As of
December 31, 2009, the Company had $87.5 million of
availability under its revolving credit facility (after giving
effect to the issuance of $12.5 million of letters of
credit). The Company may also use its revolving credit facility
to fund potential future acquisitions or investments. If future
cash flow from operations and other capital resources is
insufficient to pay the Companys obligations as they
mature or to fund its liquidity needs, the Company may be forced
to reduce or delay business activities and capital expenditures,
sell assets, obtain additional debt or equity capital or
restructure or refinance all or a portion of its debt on or
before maturity. The Company may not be able to accomplish any
of these alternatives on a timely basis or on satisfactory
terms, if at all. In addition, the terms of the Companys
existing and future indebtedness may limit its ability to pursue
any of these alternatives.
Honeywell
Indemnification
Certain of the intermediate holding companies of the predecessor
of the Company had issued guarantees on behalf of operating
companies formerly owned by these intermediate holding
companies, which operating companies are not part of the
Companys businesses. In the stock purchase agreement
executed in connection with the acquisition of Clarke American
by M & F Worldwide, Honeywell agreed to use its
commercially reasonable efforts to assume, replace or terminate
such guarantees and indemnify M & F Worldwide and its
affiliates, including Harland Clarke Holdings and its
subsidiaries, with respect to all liabilities arising under such
guarantees.
Other
In June 2008, Kenneth Kitson, purportedly on behalf of himself
and a class of other alleged similarly situated commercial
borrowers from the Bank of Edwardsville, an Illinois-based
community bank (BOE), filed in an Illinois state
court an amended complaint that re-asserted previously filed
claims against BOE and added claims against Harland Financial
Solutions, Inc. (HFS). The amended complaint
alleged, among other things, that HFSs LaserPro
software permitted BOE to generate loan documents that were
deceptive and usurious in that they failed to disclose properly
the effect of the 365/360 method of calculating
interest. Following the removal of the action to the United
States District Court for the Southern District of Illinois, the
District Court entered an order granting with prejudice
HFSs motion to dismiss Mr. Kitsons claims. In
August 2009, Mr. Kitson, individually and as class
representative, and BOE agreed to settle and dismiss with
prejudice all remaining claims. Separately but concurrently,
BOEs warranty claim against HFS was settled, in exchange
for, among other things, payment by HFS of $0.2 million.
The class settlement agreement was approved by the District
Court in January 2010.
Other commercial borrowers that have obtained loans from other
banks in Illinois, Ohio and South Carolina have commenced
similar class actions against their banks using similar
theories. In some cases, the banks have made warranty claims
against HFS related to these class actions. Many of the class
actions and related warranty claims are at early stages, and
their likely progress is not yet clear. The Company has not
accepted any of the asserted warranty claims and does not
believe that any of these claims will result in material
liability for the Company, but there can be no assurance.
Various other legal proceedings, claims and investigations are
pending against the Company, including those relating to
commercial transactions, product liability, environmental,
safety and health matters, employment matters and other matters.
Most of these matters are covered by insurance, subject to
deductibles and maximum limits, and by third-party indemnities.
In the opinion of management, based upon the information
available at this time, the outcome of the matters referred to
above will not have a material adverse effect on the
Companys financial position or results of operations.
46
Forward-Looking
Statements
This Annual Report on
Form 10-K
for the year ended December 31, 2009, as well as certain of
the Companys other public documents and statements and
oral statements, contains forward-looking statements that
reflect managements current assumptions and estimates of
future performance and economic conditions. When used in this
Annual Report on
Form 10-K,
the words believes, anticipates,
plans, expects, intends,
estimates or similar expressions are intended to
identify forward-looking statements, although not all
forward-looking statements contain such identifying words. All
forward-looking statements speak only as of the date of this
Annual Report on
Form 10-K.
Although the Company believes that its plans, intentions and
expectations reflected in or suggested by the forward-looking
statements are reasonable, such plans, intentions or
expectations may not be achieved. Such forward-looking
statements are made in reliance upon the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The
Company cautions investors that any forward-looking statements
are subject to risks and uncertainties that may cause actual
results and future trends to differ materially from those
projected, stated or implied by the forward-looking statements.
In addition, the Company encourages investors to read the
summary of the Companys critical accounting policies and
estimates included in this Annual Report on
Form 10-K
under the heading Managements Discussion and
Analysis of Financial Condition and Results of
Operations Critical Accounting Policies and
Estimates.
In addition to factors described in the Companys SEC
filings and others, the following factors could cause the
Companys actual results to differ materially from those
expressed in any forward-looking statements made by the Company:
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our substantial indebtedness;
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further adverse changes in or worsening of general economic and
industry conditions, including the depth and length of the
economic recession and higher unemployment, which could result
in more rapid declines in product sales of
and/or
pricing pressure on the Harland Clarke and Scantron segments,
and reductions in information technology budgets, which could
result in adverse impacts on the Harland Financial Solutions
segment;
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weak economic conditions and declines in the financial
performance of our business that may result in material
impairment charges, which could have a negative effect on the
Companys earnings, total assets and market prices of the
Companys outstanding securities;
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our ability to generate sufficient cash in the future that
affects our ability to make payments on our indebtedness;
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our ability to incur substantially more debt that could
exacerbate the risks associated with our substantial leverage;
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covenant restrictions under our indebtedness that may limit our
ability to operate our businesses and react to market changes;
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increases in interest rates;
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the maturity of the paper check industry, including a faster
than anticipated decline in check usage due to increasing use of
alternative payment methods, decreased consumer spending and
other factors and our ability to grow non-check-related product
lines;
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consolidation among financial institutions;
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adverse changes or failures or consolidation of the large
financial institution clients on which we depend, resulting in
decreased revenues
and/or
pricing pressure;
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intense competition in all areas of our businesses;
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our ability to successfully manage future acquisitions;
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our ability to implement any or all components of our business
strategy;
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interruptions or adverse changes in our vendor or supplier
relationships;
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47
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increased production and delivery costs;
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fluctuations in the costs of raw materials and other supplies;
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our ability to attract, hire and retain qualified personnel;
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technological improvements that may reduce any advantage over
other providers in our respective industries;
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our ability to protect customer or consumer data against data
security breaches;
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changes in legislation relating to consumer privacy protection
that could increase our costs or limit our future business
opportunities;
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contracts with our clients relating to consumer privacy
protection that could restrict our business;
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our ability to protect our intellectual property rights;
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our reliance on third-party providers for certain significant
information technology needs;
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software defects or cyber attacks that could harm our businesses
and reputation;
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sales and other taxes that could have adverse effects on our
businesses;
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environmental risks;
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the ability of our Harland Financial Solutions segment to
achieve organic growth;
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regulations governing the Harland Financial Solutions segment;
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our ability to develop new products for our Scantron segment;
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future warranty or product liability claims which could be
costly to resolve and result in negative publicity;
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government and school clients budget deficits, which could
have an adverse impact on our Scantron segment;
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softness in direct mail response rates;
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lower than expected cash flow from operations;
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unfavorable foreign currency fluctuations;
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the loss of one of our significant customers;
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work stoppages and other labor disturbances; and
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unanticipated internal control deficiencies or weaknesses.
|
The Company encourages investors to read carefully the risk
factors in the section entitled Risk Factors for a
description of certain risks that could, among other things,
cause actual results to differ from these forward-looking
statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risks
|
The Company has exposure to market risk from changes in interest
rates and foreign currency exchange rates, which could affect
its business, results of operations and financial condition. The
Company manages its exposure to these market risks through its
regular operating and financing activities.
At December 31, 2009, the Company had $1,755.0 million
of term loans outstanding under its credit agreement,
$12.5 million of letters of credit outstanding under its
revolving credit facility, $206.8 million of floating rate
senior notes and $271.3 million of 9.50% fixed rate senior
notes. All of these outstanding loans bear interest at variable
rates, with the exception of the $271.3 million of fixed
rate senior notes. Accordingly, the Company is subject to risk
due to changes in interest rates. The Company believes that a
hypothetical
48
increase of 1 percentage point in the variable component of
interest rates applicable to its floating rate debt outstanding
as of December 31, 2009 would have resulted in an increase
in its annual interest expense of approximately
$9.0 million, including the effect of the interest rate
derivative transactions discussed below.
In order to manage its exposure to fluctuations in interest
rates on a portion of the outstanding variable rate debt, the
Company entered into interest rate derivative transactions in
2007 and 2009 in the form of swaps with notional amounts
totaling $855.0 million currently outstanding as further
described in the notes to the consolidated financial statements
included elsewhere in this Annual Report on
Form 10-K.
These derivatives currently swap the underlying variable rates
for fixed rates ranging from 2.140% to 5.362%.
As of December 31, 2009, the Companys net foreign
currency market exposures were $15.3 million. This is the
value of the equity of the investments in the foreign
subsidiaries in Ireland, Canada and Israel. Since the exposures
are not material, the Company does not generally hedge against
foreign currency fluctuations.
A 10% appreciation in foreign currency exchange rates from the
prevailing market rates would result in a $1.3 million
increase in the related assets or liabilities. Conversely, a 10%
depreciation in these currencies from the prevailing market
rates would result in a $1.3 million decrease in the
related assets or liabilities.
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Item 8.
|
Financial
Statements and Supplementary Data
|
See the financial statements and supplementary data listed in
the accompanying Index to Consolidated Financial Statements and
Financial Statement Schedules on
page F-1
herein. Information required by other schedules called for under
Regulation S-X
is either not applicable or is included in the consolidated
financial statements or notes thereto included elsewhere in this
Annual Report on
Form 10-K.
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Item 9.
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Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
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None.
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Item 9A(T).
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Controls
and Procedures
|
The Companys management, with the participation of the
Companys Chief Executive Officer and the Chief Financial
Officer, has evaluated the effectiveness of the Companys
disclosure controls and procedures (as such term is defined in
Rules 13(a)-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of December 31, 2009. Based
on that evaluation, the Companys Chief Executive Officer
and Chief Financial Officer concluded that the Companys
disclosure controls and procedures were effective as of
December 31, 2009.
There were no material changes in the Companys internal
control over financial reporting (as such term is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) during the fourth quarter of 2009 that
have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial
reporting.
Managements
Report on Internal Control over Financial Reporting
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting for the Company. The Companys internal control
over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
The Companys internal control over financial reporting
includes those policies and procedures that:
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Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of the Company;
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Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and
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49
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expenditures of the Company are being made only in accordance
with authorizations of management and directors of the
Company; and
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Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the
financial statements.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2009. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.
Based on its assessment, management believes that, as of
December 31, 2009, the Companys internal control over
financial reporting was effective.
This annual report does not include an attestation report of the
Companys independent registered public accounting firm
regarding internal control over financial reporting.
Managements report was not subject to attestation by the
Companys registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that
permit the Company to provide only managements report in
this annual report.
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Item 9B.
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Other
Information
|
Not applicable.
50
PART III
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Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Organizational
Structure
Harland Clarke Holdings Corp. (Harland Clarke
Holdings or the Company) is an indirect
wholly-owned subsidiary of M & F Worldwide Corp.
(M & F Worldwide). Harland Clarke Holdings
is organized along the following three business segments:
Harland Clarke Corp. (Harland Clarke), Harland
Financial Solutions, Inc. (Harland Financial
Solutions), and Scantron Corporation
(Scantron).
The following table sets forth information regarding our
directors and executive officers as of February 25, 2010:
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Name
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Age
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Position
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Charles T. Dawson
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60
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President and Chief Executive Officer, Harland Clarke Holdings
Corp.; Chief Executive Officer, Harland Clarke; Director
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Peter A. Fera, Jr.
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41
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Executive Vice President and Chief Financial Officer, Harland
Clarke Holdings Corp. and Harland Clarke
|
James D. Singleton
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50
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President and Chief Operating Officer, Harland Clarke
|
Raju M. Shivdasani
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59
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President, Harland Financial Solutions
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William D. Hansen
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50
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President, Scantron
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Paul G. Savas
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46
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Director
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Barry F. Schwartz
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60
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Director
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Charles T. Dawson was appointed President and Chief
Executive Officer of Harland Clarke Holdings on
September 27, 2007 and President and Chief Executive
Officer of Harland Clarke on May 1, 2007 and was also
elected as a director at that time. Mr. Dawson has over
30 years of experience in the security printing industry.
Mr. Dawson previously served as President and Chief
Executive Officer of Clarke American Corp. (Clarke
American) from April 2005 to May 2007. Mr. Dawson was
the Chief Executive Officer for Rocky Mountain Bank Note Company
before joining Clarke American in 1992. His previous roles at
Clarke American were Executive Vice President/General Manager of
Partnership Development from February 2003 to April 2005 and
Senior Vice President/General Manager of the National
Account/Securities/Business Development divisions from July 2000
to February 2003. Mr. Dawson is also a director of
M & F Worldwide, which is required to file reports
under the Securities Exchange Act of 1934.
Peter A. Fera, Jr. was appointed Executive Vice
President and Chief Financial Officer of Harland Clarke Holdings
on September 27, 2007. Mr. Fera also serves as
Executive Vice President and Chief Financial Officer of Harland
Clarke since May 1, 2007 and served as Senior Vice
President and Chief Financial Officer of Clarke American from
April 2005 to April 2007. Previously, Mr. Fera had been
with Honeywell International, Inc. (Honeywell) for
seven years and held a variety of leadership positions in
finance and marketing. Most recently he served as Chief
Financial Officer for the Aircraft Landing Systems business of
Honeywell from October 2003 to April 2005 in South Bend,
Indiana. At Honeywell, he also served as Director of
Finance Business Analysis and Planning from February
2002 to October 2003 and Global Marketing Manager from October
2000 to February 2002. Earlier in his career he held operational
and engineering roles at General Electric Co.
James D. Singleton was appointed President of Harland
Clarke on August 14, 2009 and Chief Operating Officer of
Harland Clarke on October 5, 2008. Mr. Singleton
previously served as Executive Vice President of Harland Clarke
from May 2007 until October 2008 with responsibility for Sales,
Marketing, and Customer Service and Sales Contact Centers.
Mr. Singleton previously held other roles at Clarke
American including Senior Vice President Partnership Development
from January 2006 to May 2007, as well as a variety of positions
in Sales and Marketing prior to 2000. Previous roles at Indalex
Aluminum Solutions Inc. from November 2000 to January 2006
included Vice President and General Manager, Specialty Products,
Business Unit President South, and SVP Sales Marketing and
International.
51
Raju M. Shivdasani was appointed President of Harland
Financial Solutions on August 31, 2009. Mr. Shivdasani
previously served as President of Enterprise Solutions for
Harland Financial Solutions since August 2001. Prior to joining
Harland Financial Solutions, Mr. Shivdasani was with
Phoenix International, Inc. where he served as President and
Chief Operating Officer from 1998 to 2001, and as Senior Vice
President and President of the International Division from July
1996 to January 1998. Mr. Shivdasani was previously
employed as the Group Executive Vice President for Fiserv, Inc.
and with Citicorp Information Resources as President of CBS
Worldwide. He also served on the IBM AS/400 Strategic Advisory
Board from 1992 to 1994.
William D. Hansen was appointed President of Scantron on
July 13, 2009. Prior to joining Scantron, Mr. Hansen
served as President and Chief Executive Officer of Chartwell
Education Group, LLC, an education-related consulting firm.
Prior to joining Chartwell in 2005, he served as the Senior Vice
President and Managing Director of Affiliated Computer
Services Educational Service business. From May 2001 to
July 2003, Mr. Hansen served as the Deputy Secretary of the
U.S. Department of Education, functioning as its Chief
Operating Officer. Mr. Hansen served as President of the
Education Finance Council, Inc. from 1993 to 2001.
Paul G. Savas has been one of our directors since
May 1, 2007 and served as our Executive Vice President and
Chief Financial Officer from May 1, 2007 to
September 27, 2007. Mr. Savas has been Executive Vice
President and Chief Financial Officer of M & F
Worldwide since May 2006 and previously served as the Senior
Vice President of Finance of M & F Worldwide since
2002. He has been Executive Vice President and Chief Financial
Officer of MacAndrews & Forbes Holdings Inc. and
various affiliates since May 2007, and previously served as
Executive Vice President Finance from April 2006
until May 2007 and was Senior Vice President Finance
of MacAndrews & Forbes Holdings Inc. and various
affiliates from 2002 until April 2006. Mr. Savas joined
MacAndrews & Forbes Holdings Inc. in 1994 as Director
of Corporate Finance and was appointed Vice
President Finance in 1998. Mr. Savas is also a
director of SIGA Technologies Inc., which is required to file
reports under the Securities Exchange Act of 1934.
Barry F. Schwartz has been one of our directors since the
Clarke American acquisition by M & F Worldwide in
2005, has acted as Chairman of our Board since September 2007,
and served as our President and Chief Executive Officer from
May 1, 2007 to September 27, 2007. Mr. Schwartz
has been President and Chief Executive Officer of M &
F Worldwide since September 2007 and prior to that time he
served as Executive Vice President and General Counsel of
M & F Worldwide since 1996. Mr. Schwartz has been
Executive Vice Chairman and Chief Administrative Officer of
MacAndrews & Forbes Holdings Inc. and various
affiliates since October 2007 and has been Executive Vice
President and General Counsel of MacAndrews & Forbes
Holdings Inc. and various affiliates since 1993 and was Senior
Vice President of MacAndrews & Forbes Holdings Inc.
and various affiliates from 1989 to 1993. Mr. Schwartz is
also a Director of the following organizations which are
required to file reports under the Securities Exchange Act of
1934: Scientific Games Corporation, Revlon Consumer Products
Corporation, Revlon Inc. and M & F Worldwide.
Code of
Ethics
Harland Clarke Holdings does not have a separate code of ethics,
because we are a wholly-owned subsidiary of M & F
Worldwide. All of our employees, including our principal
executive officer, principal financial officer and principal
accounting officer are subject to the M & F Worldwide
Code of Business Conduct. The Code is available on M &
F Worldwides website at www.mandfworldwide.com.
Board of
Directors
Harland Clarke Holdings is an indirect wholly-owned subsidiary
of M & F Worldwide. Our board of directors is
currently composed of three individuals, Charles T. Dawson, Paul
G. Savas and Barry F. Schwartz. We believe this structure
effectively combines the involvement of our parent,
M & F Worldwide, and our CEO in the oversight of the
Companys operations. The Boards role in the
Companys risk oversight process includes receiving
periodic reports from members of senior management on areas of
material risk to the Company, including operational, financial,
legal and regulatory, and strategic and reputational risks.
52
The Company does not have a formal policy on diversity in
identifying board nominees. Further, the Board is not required
to have a nominating committee, because we are a wholly-owned
subsidiary of M & F Worldwide. The exact number of
members of our board is to be determined from time to time by
resolution of a majority of our full board of directors.
Board
Committees
We do not have standing audit, nominating or compensation
committees because we are a wholly owned subsidiary of
M & F Worldwide. M & F Worldwides
Audit Committee serves as our audit committee. The Audit
Committee operates under a written charter which is available on
M & F Worldwides website at
www.mandfworldwide.com. The board of directors of M &
F Worldwide has determined that each of the members of the Audit
Committee is independent within the meaning of the
NYSE listing standards applicable to audit committee members.
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Item 11.
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Executive
Compensation
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Compensation
Discussion and Analysis
Organizational
Structure
Harland Clarke Holdings Corp. (Harland Clarke
Holdings or the Company) is organized along
the following three business segments: Harland Clarke Corp.
(Harland Clarke), Harland Financial Solutions, Inc.
(Harland Financial Solutions), and Scantron
Corporation (Scantron).
Named
Executive Officers
Our 2009 named executive officers (NEOs), which
include some former executive officers, are:
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Mr. Charles T. Dawson, President and CEO of the Company;
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Mr. Peter A. Fera, Jr., CFO of the Company;
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Mr. James D. Singleton, President and COO of Harland Clarke;
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Mr. Raju M. Shivdasani, President of Harland Financial
Solutions;
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Mr. William D. Hansen, President of Scantron, since
July 13, 2009;
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Mr. David W. Porter, former President of Scantron from
March 16, 2009 to June 1, 2009; and
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Mr. Jeffrey D. Heggedahl, President and CEO of Scantron,
from May 2, 2007 to February 17, 2009.
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Compensation
Decision-Makers
Compensation
Committee
The M & F Worldwide Corp. (M & F
Worldwide) Compensation Committee serves as our
Compensation Committee.
The Compensation Committee and management of M & F
Worldwide supervised the design and drafting of the long term
incentive compensation plans for each NEO. Mr. Dawson
reviews his recommendations on base pay, long-term incentive
plans and Adjusted EBITDA for Compensation Purposes targets with
the management of M & F Worldwide, and the
Compensation Committee, where applicable. The Compensation
Committee of M & F Worldwide reviews and approves
major changes to NEO compensation and the design, structure and
amounts of compensation and incentive plans. The Adjusted EBITDA
for Compensation Purposes targets are the annual performance
measures on which our businesses are measured.
Role
of Executive Officers in the Compensation Process
Mr. Dawson recommends business performance targets and
objectives to management of M & F Worldwide and to the
Compensation Committee, where applicable, in his role as CEO. He
further evaluates
53
the performances of and recommends compensation for the
executive officers reporting to him which includes all NEOs
other than himself for 2009. Targets are set consistent with
annual budgets presented to the Compensation Committee and the
Board of Directors of M & F Worldwide. The Company has
a strong history of achieving performance at and above target
levels and is confident it can achieve its targets if its
management team satisfies individual and collective performance
objectives. (For further information, refer to the discussion on
Performance Targets included below.)
The President of each of our business segments determines the
compensation of the senior executives reporting directly to him
after consultation with internal human resource leaders with
specialized expertise in compensation matters. Generally,
business segments establish compensation levels near the
midpoint of the market and adjust for performance and
experience, as appropriate.
Compensation
Consultants and Benchmarking
While the Company subscribes to compensation surveys provided by
Mercer Consulting, a compensation consultant, it does not
generally conduct any formal compensation benchmarking. In 2009,
the Compensation Committee did not rely on compensation
consultants or benchmarking to establish compensation for the
NEOs.
Compensation
Philosophy
The objectives of the Companys compensation programs are
to enable the Company to attract, retain, and motivate key
talent and to reward achievement of short term and long term
strategic business objectives and financial goals.
The material principles underlying the Companys executive
compensation policies and decisions include recognizing that
quality talent is attracted and retained with quality pay
packages and that our executives recognize through their pay
structure that their personal success with us is subject to and
conditioned on the success of our business segments. We set pay
in a way we think best drives our executives to push the growth
of our three principal business segments, Harland Clarke,
Harland Financial Solutions and Scantron.
We use cash compensation, not equity compensation. We find a
cash compensation system is easy to understand. It also avoids
the volatility in equity grants and avoids shareholder dilution.
We pay at a level that we believe compensates for the absence of
equity.
Compensation can increase or decrease materially in the event of
a change in scope of position responsibilities, in light of
individual
and/or
Company performance, and in response to business need. We
generally do not take one element of pay into account when
setting another pay element for the same executive, but we have
designed target total compensation opportunities to be
competitive. We do calculate bonus as a percentage of base pay
as we explain below. We view base plus bonus as an
executives core pay, and we deliberately set the mix of
base and bonus based on the responsibility the executive has for
our financial performance.
54
Material
Compensation Elements
Overview
of Compensation Components
Our executive compensation program includes the following
elements:
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Pay Element
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What the Pay Element Rewards
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Purpose of the Pay Element
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Base Salary
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Recognized leadership skills
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Provides base level of monthly income
not subject to performance risk
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Experience and expertise in the
position
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Makes overall pay package more
competitive
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Demonstrated prior achievement of
Company and personal goals
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Annual Executive Bonus Plan
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Executives contributions towards
our achievement of annual performance targets
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Focuses executive on achievement of
annual goal most important to the Company and investors
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Recognizes executives direct
responsibility for our annual performance targets
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Exposes executive to risk of not
receiving pay or receiving diminished pay if Company
underperforms
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Gives executive direct motivation to
help Company achieve annual performance targets with significant
upside for achieving exceptional results
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Long-Term Incentive Compensation Plan
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Achievement of sustained growth
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Keeps executive focused on long term
growth of the Company
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Achievement of cumulative performance
targets over a 3-year period
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Keeps executive personally invested in
the implementation of the Companys long term growth plan
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Executive Employment Contract
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Continued service with the Company
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Keeps executive focused on job and
performance
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401(k) and Deferred Compensation Plan
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Long-term service with the Company
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Helps executive prepare for retirement
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Provides retention incentive
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Makes overall pay package more
competitive
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Additional Benefits and Perquisites
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Continued service with the Company
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Makes overall pay package more
competitive
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Payments in-kind may foster added
Company loyalty in a way added cash pay does not
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Termination Benefits
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Continued service in circumstances
under which executives job is at risk
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Keeps executive focused on job and
performance in best interest of Company even if executive works
himself or herself out of a job
|
Elements
of Compensation
Base
Salary
Mr. Dawson determines an NEOs recommended base pay by
evaluating the NEOs individual leadership competencies,
achievement of personal goals in support of the Company
objectives and position-critical skills.
55
Management of M & F Worldwide conducts this evaluation
together with Mr. Dawson, and, where appropriate, discusses
it with the NEO. Management of M & F Worldwide
recommends a pay level to the Compensation Committee in the case
of major changes to compensation or changes in the design or
structure of a compensation plan. The Compensation Committee
then decides the base pay level, where applicable.
We feel that a substantial portion of an executives core
pay (base and bonus) should be subject to the risk of not being
paid if that executive is partially responsible for our
financial performance. The analysis of how much direct
responsibility our executives have for our performance targets
determines how much of the executives core pay should be
at risk.
The
Annual Executive Bonus Plan
The amount of bonus paid to our NEOs is tied directly to
the Companys performance and the NEOs individual
performance. The Company wants our annual bonus program to
properly reward our NEOs for their individual performances and
contributions to our Company. Each NEOs bonus targets were
set based on the performance of the principal business segment
for which the NEO is responsible. These Adjusted EBITDA for
Compensation Purposes targets vary slightly for each of our
business segments, reflecting the appropriate adjustments we
make to financial performance. We discuss these Adjusted EBITDA
for Compensation Purposes targets in more detail in
Adjusted EBITDA for Compensation Purposes Targets as a
Performance Measure below.
We base the bonus plan on achievement of the annual Adjusted
EBITDA for Compensation Purposes target for each business
segment. As illustrated in the chart below, the amount of bonus
opportunity is tied to a percentage of salary increasing
incrementally as performance against goal increases
incrementally. If at least 90% of target is not achieved, then
no bonus will be paid. The differences in percentages of Base
Salary for Bonus are due to differences in responsibility, size
of the relevant business segment, and compensation provided
under legacy John H. Harland incentive plans. The bonuses were
designed to be compliant with the performance-based exception of
Section 162(m) of the Internal Revenue Code (the
Code). Each NEO earned a bonus from the Company
during 2008 and 2009 which was paid on March 13, 2009, and
is anticipated to be paid on March 12, 2010, respectively.
The following chart sets forth the base salary, bonus potential
and actual bonus paid for 2008 and anticipated to be paid for
2009 for each of our NEOs with respect to the annual bonus plan:
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Adjusted
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EBITDA for
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Actual 2009
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Base Salary
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Compensation
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Bonus as
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Actual 2008
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Bonus to be
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NEO
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for 2009
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Purposes Target %
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a % of Base Salary
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Bonus Paid
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Paid in 2010
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Charles T. Dawson
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$
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1,000,000
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90-145.1+
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90-175
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$
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1,250,000
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$
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1,250,000
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Peter A. Fera, Jr.
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$
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450,000
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90-145.1+
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90-150
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$
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450,000
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$
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450,000
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James D. Singleton
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$
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500,000
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90-145.1+
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90-150
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$
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500,000
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$
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500,000
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Raju M. Shivdasani
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$
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375,000
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90-125.1+
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52-80
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$
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240,000
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$
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225,000
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William D. Hansen
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$
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425,000
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90-145.1+
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65-112.50
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$
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N/A
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$
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150,205
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David W. Porter
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$
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350,000
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90-145.1+
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54-90
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$
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220,500
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$
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91,825
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Jeffrey D. Heggedahl
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$
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600,000
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90-125.1+
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65-100
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$
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450,000
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$
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51,288
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Adjusted
EBITDA for Compensation Purposes Targets as a Performance
Measure
The Company believes that Adjusted EBITDA for Compensation
Purposes targets are the best measure of its performance.
Adjusted EBITDA for Compensation Purposes is a non-GAAP measure
representing EBITDA (net income before interest
expense-net,
income taxes, depreciation and amortization) adjusted to reflect
the impact of those items the Company does not consider
indicative of its ongoing performance such as restructuring
costs, certain non-operational items, group management fees,
acquisition-related expenses, certain stand-alone costs, and
other non-cash adjustments relevant to each segment. These
Adjusted EBITDA for Compensation Purposes targets are very
similar to measures of covenant compliance under the
Companys
56
debt agreements, and securities analysts often use similar
measures to evaluate the performance of the Company.
Performance
Targets (Adjusted EBITDA for Compensation Purposes
Targets)
The LTIP has Adjusted EBITDA for Compensation Purposes targets
based on both consolidated and segment performance, whereas the
bonus is based solely on the relevant segment Adjusted EBITDA
for Compensation Purposes targets. The 2009 and 2008
consolidated Adjusted EBITDA for Compensation Purposes targets
were $498.9 million and $470.7 million, respectively.
The 2009 and 2008 segment Adjusted EBITDA for Compensation
Purposes performance targets for the Company were as follows:
Harland Clarke $358.1 million and $352.0 million,
Harland Financial Solutions $76.5 million and
$68.7 million, and Scantron $76.7 million and
$62.3 million, respectively. The Company exceeded
consolidated targets in 2009 and 2008. The segment targets were
exceeded in 2008, and exceeded in all segments except for
Scantron in 2009.
The 2008
M & F Worldwide Long Term Incentive Compensation Plan
(the LTIP)
The LTIP is a three year cash-based plan tied to multiyear
Company and business segment performance, effective
January 1, 2008, covering fiscal years 2008 through 2010.
All pay-outs to the executives will be made, assuming the
cumulative performance threshold is met, at the end of the three
year cycle. While the Company expects the Adjusted EBITDA for
Compensation Purposes targets under the LTIP to be met, the
Company is not certain it will achieve or exceed the Adjusted
EBITDA for Compensation Purposes targets. All of the NEOs
participated in the LTIP in 2009. We consider the best approach
is to (a) establish Adjusted EBITDA for Compensation
Purposes targets within 90 days of the beginning of each
year the plan is in effect which demonstrate benefit to
shareholders of M & F Worldwide, and
(b) compensate executives only if those Adjusted EBITDA for
Compensation Purposes targets are achieved on a cumulative basis
over a three year period, thus providing a clear indication of
sustained performance. If the executive is terminated without
cause, he would receive a pro rata payment in respect of the
time elapsed, only if Adjusted EBITDA for Compensation Purposes
targets are achieved, and the payments, if any, would be paid
out at the end of the three year cycle. No payouts will be made
if actual three year performance is below 90% of the cumulative
Adjusted EBITDA for Compensation Purposes targets. If
performance is between 90% and 100% of cumulative Adjusted
EBITDA for Compensation Purposes target, the LTIP will pay out a
ratable amount between 50% and 100%. The LTIP participants will
also share in 2.3% and 2.7%, respectively, of the cumulative
three year excess over target, up to a maximum of 120% of
cumulative performance over target for business segment
performance and consolidated performance. Adjusted EBITDA for
Compensation Purposes targets under the LTIP are bifurcated,
granting awards with respect to each executive based 50% on
performance of the executives individual business segment
and 50% on consolidated performance. For 2009 only,
Mr. Hansens Adjusted EBITDA for Compensation Purposes
target is based solely on consolidated performance. The
bifurcated structure is appropriate because there are three
separate and distinct business segments, each with their own
challenges, risks and opportunities, but there remains the
opportunity for the business segments to assist each other in
their individual growth. The maximum payout amount to all
participants in the LTIP approved by the Board of Directors of
M & F Worldwide at the end of the three-year cycle and
assuming full utilization of the authorized LTIP pool is
$16.5 million in the aggregate. The current anticipated
payout amount to all participants in the LTIP at the end of the
three-year cycle, assuming 100% of the Adjusted EBITDA for
Compensation Purposes target is achieved, and based on the
current list of participants in the LTIP, is $13.1 million.
The payout amount to our current NEOs at the end of the
three-year cycle, assuming 100% of the Adjusted EBITDA for
Compensation Purposes target is achieved, is approximately
$8.2 million.
Post
Employment Compensation
Payments to be made to executives in connection with termination
without cause are in the form of severance and the temporary
continuation of other benefits that are set forth in an
individuals employment agreement. We want our executives
to make business decisions that put the Companys interests
before their own. We encourage them to feel comfortable making
difficult decisions for us which might not otherwise be
57
in their own long-term best interests by offering severance
which would generally replace the income they would have
received for the one to two years following their termination of
employment if we terminate them without cause.
We do not offer change in control protection, and we do not
provide tax
gross-ups if
our NEOs are subject to the so-called golden parachute
excise tax, a special tax under section 4999 of the
Code on unusually large payments (in comparison to historic
compensation) made in connection with a change in control.
In the event of termination with cause, post employment
compensation is forfeited.
Other
Benefits and Perquisites
Other benefits and perquisites are a minor part of executive
compensation offered in order to provide a competitive total
compensation and benefits package. Executive officers
participate in benefit plans available to all employees and on
the same terms as similarly situated employees, such as group
medical insurance and participation in and matching through the
Company-sponsored 401(k) plan. Executive officers also receive
benefits available to other officers such as a monthly car
allowance, life insurance, annual physicals and a cell phone.
Some executive officers are also provided private country club
membership. Mr. Dawson is the only NEO that is provided
with a leased company car rather than a car allowance.
Mr. Singleton is permitted to travel first class, and
Mr. Dawson is permitted to travel first class or by
chartered aircraft.
Tax
Considerations Relating to Executive Compensation
Section 162(m)
of the Internal Revenue Code
The Compensation Committees general policy is that
compensation should qualify to be tax deductible to the Company
for federal income tax purposes. Under Section 162(m) of
the Code, compensation paid to certain members of senior
management in excess of $1 million per year is not
deductible unless the compensation is
performance-based as described in the regulations
under Section 162(m) of the Code. Compensation is generally
performance-based if it is determined using
pre-established objective formulas and criteria approved by
stockholders. The compensation awards under our annual bonus
program and the LTIP are generally designed to be tax deductible
to us under the performance-based compensation exception to
Section 162(m) of the Code, if and to the extent we become
subject to Section 162(m) of the Code.
Report
of the Board of Directors
We have reviewed and discussed the foregoing Compensation
Discussion and Analysis with management. Based on our review and
discussion with management, we have recommended to the Board of
Directors that the Compensation Discussion and Analysis be
included in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2009.
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Submitted by:
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Charles T. Dawson
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Paul G. Savas
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Barry F. Schwartz, Chairman
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58
SUMMARY
COMPENSATION TABLE FOR FISCAL YEAR 2009
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Nonqualified
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Non-Equity
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Deferred
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Incentive Plan
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Compensation
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All Other
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Salary
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Bonus
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Compensation
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Earnings
|
|
Compensation
|
|
Total
|
Name and Principal Position
|
|
Year
|
|
($)(i)
|
|
($)
|
|
($)(v)
|
|
($)(vi)
|
|
($)(vii)
|
|
($)
|
|
Charles T. Dawson
President & Chief
Executive Officer
|
|
|
2009
|
|
|
|
1,038,462
|
|
|
|
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
166,914
|
|
|
|
2,455,376
|
|
|
|
|
2008
|
|
|
|
993,654
|
|
|
|
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
248,682
|
|
|
|
2,492,336
|
|
|
|
|
2007
|
|
|
|
840,192
|
|
|
|
|
|
|
|
5,085,508
|
|
|
|
40
|
|
|
|
151,820
|
|
|
|
6,077,560
|
|
Peter A. Fera, Jr.
Executive Vice President &
Chief Financial Officer
|
|
|
2009
|
|
|
|
467,308
|
|
|
|
|
|
|
|
450,000
|
|
|
|
|
|
|
|
54,674
|
|
|
|
971,982
|
|
|
|
|
2008
|
|
|
|
445,769
|
|
|
|
|
|
|
|
450,000
|
|
|
|
|
|
|
|
63,937
|
|
|
|
959,706
|
|
|
|
|
2007
|
|
|
|
348,077
|
|
|
|
|
|
|
|
1,115,738
|
|
|
|
5
|
|
|
|
47,228
|
|
|
|
1,511,048
|
|
James D. Singleton
President of Harland Clarke
|
|
|
2009
|
|
|
|
519,231
|
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
65,333
|
|
|
|
1,084,564
|
|
|
|
|
2008
|
|
|
|
493,654
|
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
71,999
|
|
|
|
1,065,653
|
|
Raju M. Shivdasani
President of Harland
Financial Solutions
|
|
|
2009
|
|
|
|
389,423
|
|
|
|
|
|
|
|
255,075
|
|
|
|
|
|
|
|
40,200
|
|
|
|
684,698
|
|
|
|
|
2008
|
|
|
|
375,000
|
|
|
|
|
|
|
|
270,075
|
|
|
|
|
|
|
|
31,347
|
|
|
|
676,422
|
|
William D. Hansen
(ii)
President of Scantron
|
|
|
2009
|
|
|
|
196,154
|
|
|
|
|
|
|
|
150,205
|
|
|
|
|
|
|
|
14,927
|
|
|
|
361,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David W.
Porter(ii)
(iii)
Former President of Scantron
|
|
|
2009
|
|
|
|
250,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290,311
|
|
|
|
540,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey D.
Heggedahl(ii)
Former President of Scantron
|
|
|
2009
|
|
|
|
96,923
|
|
|
|
|
|
|
|
105,263
|
|
|
|
|
|
|
|
595,698
|
|
|
|
797,884
|
|
|
|
|
2008
|
|
|
|
565,385
|
|
|
|
|
|
|
|
555,263
|
|
|
|
|
|
|
|
91,281
|
|
|
|
1,211,929
|
|
|
|
|
2007
|
|
|
|
326,384
|
|
|
|
1,079,568
|
(iv)
|
|
|
252,404
|
|
|
|
|
|
|
|
134,480
|
|
|
|
1,792,836
|
|
|
|
|
(i)
|
|
Fiscal 2009 contained twenty seven
pay periods instead of the standard twenty six, therefore actual
pay is slightly more than the annual rate.
|
|
(ii)
|
|
Mr. Hansen has been the
President of Scantron since July 13, 2009 with a base pay
of $425,000. Mr. Porter was President from March 16,
2009 until June 1, 2009, and also held an executive
position in Harland Clarke from January 1, 2009 to
March 15, 2009. Mr. Heggedahl was President of
Scantron from May 2, 2007 until February 17, 2009.
|
|
(iii)
|
|
Mr. Porters salary
includes a one-time transitional services payment of $87,500.
|
|
|
|
(iv)
|
|
Mr. Heggedahl received a
payment equal to three times his base salary at the time of the
Harland acquisition which was paid in May 2007 pursuant to his
previous employment agreement in effect with The John H. Harland
Company.
|
|
|
|
(v)
|
|
The compensation in this column for
2009 consists of amounts earned during 2009, and anticipated to
be paid by March 12, 2010, under the Annual Executive Bonus
Plan. Additionally, on May 8, 2009, Messrs. Shivdasani
and Heggedahl each received payments under the legacy John H.
Harland 2007 Long-Term Cash Incentive Plan. Such amounts are
included in this table and are as follows: Mr. Shivdasani,
$30,075; and Mr. Heggedahl, $105,263. An additional $30,075
will be paid to Mr. Shivdasani under the legacy John H.
Harland 2007 Long-Term Cash Incentive Plan on each of the two
anniversaries of April 25, 2009, subject to
Mr. Shivdasanis continued employment on each of the
payout dates.
|
|
|
|
With respect to Messrs. Dawson
and Fera, this column for 2007 also consists of amounts paid out
in connection with the early termination and payout of the 2005
M & F Long Term Incentive Compensation Plan, which
amounts are as follows: Mr. Dawson, $4,184,474, and
Mr. Fera, $836,894.
|
|
|
|
In addition, Messrs. Porter
and Heggedahl, as a result of their terminations of employment,
and as required by their respective employment agreements,
Messrs. Porter and Heggedahl will receive payments of
$91,825 and $51,288, respectively, anticipated to be paid by
March 12, 2010, with respect to the pro-rata annual bonus
for 2009, provided they continue to comply with the
post-employment restrictive covenants and other provisions of
their agreements. This amount is not included in the column for
2009. In addition, Mr. Porter was paid a bonus of $220,500
on March 12, 2009, which was earned in 2008, as a result of
his former executive position with Harland Clarke. This amount
is not included in the column for 2009.
|
|
|
|
(vi)
|
|
Represents the above-market
interest, if any, credited under our Benefits Equalization Plan
(the BEP). We determined the above-market interest
credited by determining the difference between the interest on
BEP accounts calculated using the actual rate used in the plan,
and 120% of the applicable federal long-term rate, with
quarterly compounding for January of the applicable year, as
prescribed under section 1274(d) of the Internal Revenue
Code. Interest rates credited to the BEP accounts were 3.5%,
5.0%, and 6.0% for 2009, 2008, and 2007, respectively.
|
59
|
|
|
(vii)
|
|
See details of Other Compensation
in the All Other Compensation table below:
|
All Other
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Life
|
|
|
Contributions to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
& Exec
|
|
|
401(k) plan and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Country
|
|
|
AD&D
|
|
|
Supplemental
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Car
|
|
|
Relocation
|
|
|
Club
|
|
|
Insurance
|
|
|
Excess Benefit
|
|
|
Tax
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
|
|
|
Costs
|
|
|
Fees
|
|
|
Premiums
|
|
|
Plan
|
|
|
Gross-Up
|
|
|
Compensation
|
|
|
Severance
|
|
|
Total
|
|
Name
|
|
Year
|
|
|
($)(i)
|
|
|
($)
|
|
|
($)(ii)
|
|
|
($)(iii)
|
|
|
($)(iv)
|
|
|
($)(v)
|
|
|
($)(vi)
|
|
|
$(vii)
|
|
|
($)
|
|
|
Charles T. Dawson
|
|
|
2009
|
|
|
|
33,501
|
|
|
|
|
|
|
|
5,765
|
|
|
|
2,365
|
|
|
|
92,191
|
|
|
|
22,437
|
|
|
|
10,655
|
|
|
|
|
|
|
|
166,914
|
|
Peter A. Fera, Jr.
|
|
|
2009
|
|
|
|
5,940
|
|
|
|
|
|
|
|
4,051
|
|
|
|
651
|
|
|
|
36,692
|
|
|
|
1,941
|
|
|
|
5,399
|
|
|
|
|
|
|
|
54,674
|
|
James D. Singleton
|
|
|
2009
|
|
|
|
7,960
|
|
|
|
|
|
|
|
5,340
|
|
|
|
651
|
|
|
|
40,769
|
|
|
|
3,444
|
|
|
|
7,169
|
|
|
|
|
|
|
|
65,333
|
|
Raju M. Shivdasani
|
|
|
2009
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
4,542
|
|
|
|
25,177
|
|
|
|
3,819
|
|
|
|
2,662
|
|
|
|
|
|
|
|
40,200
|
|
William D. Hansen
|
|
|
2009
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,055
|
|
|
|
1,569
|
|
|
|
3,303
|
|
|
|
|
|
|
|
14,927
|
|
David W. Porter
|
|
|
2009
|
|
|
|
2,970
|
|
|
|
|
|
|
|
|
|
|
|
168
|
|
|
|
16,195
|
|
|
|
4,645
|
|
|
|
64,410
|
|
|
|
201,923
|
|
|
|
290,311
|
|
Jeffrey D. Heggedahl
|
|
|
2009
|
|
|
|
990
|
|
|
|
|
|
|
|
|
|
|
|
531
|
|
|
|
24,769
|
|
|
|
335
|
|
|
|
107,535
|
|
|
|
461,538
|
|
|
|
595,698
|
|
|
|
|
(i)
|
|
Comprised of (1) car allowance
in the case of Messrs. Fera, Singleton, Shivdasani, Hansen,
Porter, and Heggedahl; and (2) the aggregate incremental
cost to the Company of the leased vehicle in the case of
Mr. Dawson, which is calculated as the total cost of the
lease payments on the car, the insurance relating to the car,
gasoline used in the car, and cleaning and maintenance of the
car. Messrs. Fera, Singleton, Shivdasani, and Hansen are
eligible to receive a pre-set amount per month as a car
allowance.
|
|
(ii)
|
|
The Company reimburses each
executives monthly country club dues.
|
|
(iii)
|
|
Amounts include (1) executive
life premiums and (2) executive AD&D premiums.
|
|
(iv)
|
|
Consists of (1) employer
contributions to the 401(k) plan of $9,800 for each NEO except
Mr. Hansen, due to his employment for a partial year; and
(2) employer contributions to a supplemental non-qualified
excess benefit plan, the Benefits Equalization Plan described
below and in the Nonqualified Deferred Compensation Table, in
the following amounts: Mr. Dawson $82,391, Mr. Fera
$26,892, Mr. Singleton $30,969, Mr. Shivdasani
$15,377, Mr. Porter $6,395, and Mr. Heggedahl $14,969.
|
|
(v)
|
|
Consists of (1) the tax
gross-up on
the personal use of a company vehicle by Mr. Dawson of
$16,326 and gross-up on spousal travel of $6,111; (2) the
tax gross-up on the Executive long term disability for
Messrs. Shivdasani and Heggedahl; and (3) the tax
gross-up on the COBRA subsidy for Mr. Porter and
(4) the tax gross-up for the spousal travel for
Messrs. Fera, Singleton, Shivdasani, and Hansen.
|
|
(vi)
|
|
Consists of (1) spousal travel
for Messrs. Dawson, Fera, Singleton, Shivdasani and Hansen;
(2) outplacement services of $30,000, unused vacation of
$18,005, COBRA subsidy of $12,916, and reimbursement for
Minnesota tax withholding of $3,489 for Mr. Porter; and
(3) unused vacation of $72,314, outplacement services of
$30,000, and a one time payment of $5,221 in lieu of COBRA for
Mr. Heggedahl.
|
|
|
|
(vii)
|
|
Consists of severance paid in 2009.
Additional severance under their respective agreements of
$323,077 for Mr. Porter and $738,462 for Mr. Heggedahl
remains payable, payment of which is contingent on the
executives continued adherence to certain post employment
restrictive covenants and obligations.
|
The elements of NEO compensation are based upon the applicable
employment contract, each NEOs LTIP agreement, Company
policy regarding employee benefit plan participation (401(k)
benefits, welfare and group insurance benefits), car allowance,
cell phone use, or application of past practice. Specifically,
the salaries are set under the terms of the respective
employment contracts. During 2009 each of our NEOs had an
employment contract in effect. The material terms of these
employment contracts during 2009 are detailed below under
Employment Contracts. Bonus plans for each of our
NEOs are outlined within their respective employment
contract and LTIP agreement. Participation in the 401(k) and our
nonqualified deferred compensation plan, the Benefits
Equalization Plan, is pursuant to the plan documents. All other
compensation is provided pursuant to written Company policy or
practice according to their respective positions.
Employment
Contracts
Mr. Dawson
On February 13, 2008, Harland Clarke Holdings entered into
an employment agreement with Mr. Dawson, effective as of
January 1, 2008, which superseded his prior employment
agreement with Harland Clarke Holdings dated as of May 29,
2007. This employment agreement, whereby Mr. Dawson is
employed as President and Chief
60
Executive Officer of Harland Clarke Holdings and Chief Executive
Officer of the Harland Clarke Business (as defined in the
employment agreement), will continue until December 31,
2013, pursuant to an extension amendment dated February 2,
2010. The current term is subject to earlier termination as
described in the Potential Payments upon Termination or
Change-in-Control
section below. Under this employment agreement,
Mr. Dawsons annual base salary is $1,000,000 and he
is entitled to receive annual bonuses based on the attainment of
a certain percentage of the Harland Clarke Business Adjusted
EBITDA for Compensation Purposes target. Mr. Dawsons
annual bonus is 125% of his base salary if 100% of target is
attained and increases ratably up to a maximum of 175% of his
base salary if 145.1% of the target is attained. Pursuant to
this agreement, Mr. Dawson participates in the LTIP, for
which he is eligible to receive a portion of the LTIP bonus pool
attributed to the Harland Clarke business and a portion of the
LTIP bonus pool attributed to the Company. In 2008,
Mr. Dawson became President and Chief Executive Officer of
Harland Clarke Holdings. As a result of his increased
responsibilities, he was granted an additional portion of the
LTIP bonus pool that is based solely on consolidated
performance. Mr. Dawson also receives other standard
officer benefits.
Mr. Fera
On February 13, 2008, Harland Clarke Holdings entered into
an employment agreement with Mr. Fera, effective as of
January 1, 2008, which superseded his prior employment
agreement with Harland Clarke Holdings dated May 2, 2007.
This employment agreement, whereby Mr. Fera is employed as
Chief Financial Officer of Harland Clarke Holdings and Executive
Vice President and Chief Financial Officer of the Harland Clarke
Business, will continue until December 31, 2013, pursuant
to an extension amendment dated February 2, 2010. The
current term is subject to earlier termination as described in
the Potential Payments upon Termination or
Change-in-Control
section below. Under this employment agreement,
Mr. Feras annual base salary is $450,000 and he is
entitled to receive annual bonuses based on the attainment of a
certain percentage of the Harland Clarke Business Adjusted
EBITDA for Compensation Purposes target. Mr. Feras
annual bonus is 100% of his base salary if 100% of target is
attained and increases ratably up to a maximum of 150% of his
base salary if 145.1% of the target is attained. Pursuant to
this agreement, Mr. Fera participates in the LTIP, for
which he is eligible to receive a portion of the LTIP bonus pool
attributable to the Harland Clarke Business and a portion of the
LTIP bonus pool attributed to the Company, and he also receives
other standard officer benefits.
Mr. Singleton
On February 7, 2008, Harland Clarke Holdings entered into
an employment agreement with Mr. Singleton, effective as of
January 1, 2008, which superseded his prior employment
agreement with Harland Clarke Holdings dated May 2, 2007.
This employment agreement, whereby Mr. Singleton is
employed as Chief Operating Officer and President of Harland
Clarke will continue until December 31, 2013, pursuant to
an extension amendment dated February 7, 2010. The current
term is subject to earlier termination as described in the
Potential Payments upon Termination or
Change-in-Control
section below. Under this employment agreement,
Mr. Singletons annual base salary is $500,000 and he
is entitled to receive annual bonuses based on the attainment of
a certain percentage of the Harland Clarke Business Adjusted
EBITDA for Compensation Purposes target.
Mr. Singletons annual bonus is 100% of his base
salary if 100% of target is attained and increases ratably up to
a maximum of 150% of his base salary if 145.1% of the target is
attained. Pursuant to this agreement, Mr. Singleton
participates in the LTIP, for which he is eligible to receive a
portion of the LTIP bonus pool attributable to the Harland
Clarke Business and a portion of the LTIP bonus pool attributed
to the Company, and he also receives other standard officer
benefits.
Mr. Shivdasani
Effective August 31, 2009, Harland Financial Solutions and
Harland Clarke Holdings amended the employment agreement with
Mr. Shivdasani to provide that Mr. Shivdasani is
employed as President of Harland Financial Solutions until
December 31, 2010, subject to earlier termination as
described in the Potential Payments upon Termination or
Change-in-Control
section below. Mr. Shivdasanis annual base salary is
$375,000 in 2009 and increased to $425,000 effective
January 1, 2010 in light of his increased responsibilities
as President of Harland Financial Solutions. He is entitled to
receive annual bonuses based on
61
the attainment of a certain percentage of the Harland Financial
Solutions Adjusted EBITDA for Compensation Purposes target.
Mr. Shivdasanis bonus for 2009 is 60% of his base
salary if 100% of target is attained and increases ratably up to
a maximum of 80% of his base salary if 125.1% of the target is
attained. Mr. Shivdasanis annual bonus target for
2010 increased to 75% of his base salary if 100% of target is
attained and increases ratably up to a maximum of 112.5% of his
base salary if 145.1% of target is obtained, in light of his
increased responsibilities as President of Harland Financial
Solutions. Mr. Shivdasani is also entitled to receive a
portion of the LTIP attributable to the Harland Financial
Solutions business and a portion of the LTIP bonus pool
attributed to the Company, and he also receives other standard
officer benefits.
Mr. Hansen
On June 24, 2009, Harland Clarke Holdings and Scantron
entered into an employment agreement with Mr. Hansen,
effective as of July 13, 2009. This employment agreement,
whereby Mr. Hansen is employed as President of Scantron,
will continue until December 31, 2012, subject to earlier
termination as described in the Potential Payments upon
Termination or
Change-in-Control
section below. Under this employment agreement,
Mr. Hansens annual base salary is $425,000 and he is
entitled to receive a bonus for 2009 based on the attainment of
a certain percentage of the Companys Adjusted EBITDA for
Compensation Purposes target. Mr. Hansens annual
bonus for 2009 is 75% of his base salary if 100% of target is
attained and increases ratably up to a maximum of 112.5% if
145.1% of target is obtained. Thereafter, Mr. Hansen is
entitled to receive annual bonuses based on the attainment of a
certain percentage of the Scantron Adjusted EBITDA for
Compensation Purposes target. Mr. Hansens annual
bonus for 2010 is 75% of his base salary if target is attained
and increases ratably up to a maximum of 112.5% if 145.1% of
target is obtained. Pursuant to this agreement, Mr. Hansen
participates in the LTIP, for which he is eligible to receive a
portion of the LTIP attributable to the Scantron business and a
portion of the LTIP bonus pool attributed to the Company, and he
also receives other standard officer benefits.
Former
Executive Officers
Mr. Porter
On April 28, 2009, Harland Clarke Holdings and Scantron
entered into an agreement with Mr. Porter effective as of
March 16, 2009. This employment agreement, whereby
Mr. Porter served as President of Scantron, was terminated
June 1, 2009, upon Mr. Porters resignation.
Under this employment agreement, Mr. Porters annual
base salary was $350,000 and he was entitled to receive annual
bonuses based on the attainment of a certain percentage of the
Harland Clarke Business Adjusted EBITDA for Compensation
Purposes target in the first year and a certain percentage of
the Scantron Adjusted EBITDA for Compensation Purposes target
thereafter. Pursuant to this agreement, Mr. Porter is also
entitled to receive a portion of the LTIP attributable to the
Harland Clarke business during 2009 and the Scantron business
thereafter, and a portion of the LTIP bonus pool attributed to
the Company, in each case, pro rata for the periods he was
actually employed by the Company and provided that the targets
are actually achieved. Mr. Porter also received other
standard officer benefits. Mr. Porter resigned his
employment with the Company and Scantron effective June 1,
2009.
Mr. Heggedahl
On May 5, 2008, Harland Clarke Holdings and Scantron
entered into an agreement with Mr. Heggedahl effective as
of January 1, 2008, which superseded his prior employment
agreement with Harland Clarke Holdings dated as of May 29,
2007. This employment agreement, whereby Mr. Heggedahl
served as President and Chief Executive Officer of Scantron, was
terminated February 17, 2009, upon
Mr. Heggedahls resignation. Under this employment
agreement, Mr. Heggedahls annual base salary was
$600,000 and he was entitled to receive annual bonuses based on
the attainment of a certain percentage of the Scantron Adjusted
EBITDA for Compensation Purposes target. Pursuant to this
agreement, Mr. Heggedahl is entitled to receive a portion
of the LTIP attributable to the Scantron business during his
employment and a portion of the LTIP bonus pool attributed to
the Company, in each case, pro rata for the periods he was
actually employed by the Company and provided that the targets
are actually achieved. Mr. Heggedahl also received other
standard officer benefits.
62
Mr. Heggedahl resigned his employment with the Company and
Scantron and as a director of the Company effective
February 17, 2009.
GRANTS OF
PLAN-BASED AWARDS
FOR FISCAL YEAR 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Threshold
|
|
Target
|
|
Maximum(iv)
|
Name
|
|
Award
Type(i),(ii)
|
|
($)
|
|
($)
|
|
($)
|
|
Charles T. Dawson
|
|
Annual Bonus
|
|
|
900,000
|
|
|
|
|
1,250,000
|
|
|
|
1,750,000
|
|
|
|
2008-2010
Segment
LTIP
|
|
|
787,500
|
|
|
|
|
1,575,000
|
|
|
|
|
|
|
|
2008-2010
Consolidated
LTIP
|
|
|
787,500
|
|
|
|
|
1,575,000
|
|
|
|
|
|
|
|
2008-2010
Consolidated
LTIP (iii)
|
|
|
300,000
|
|
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter A. Fera, Jr.
|
|
Annual Bonus
|
|
|
405,000
|
|
|
|
|
450,000
|
|
|
|
675,000
|
|
|
|
2008-2010
Segment
LTIP
|
|
|
247,500
|
|
|
|
|
495,000
|
|
|
|
|
|
|
|
2008-2010
Consolidated
LTIP
|
|
|
247,500
|
|
|
|
|
495,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James D. Singleton
|
|
Annual Bonus
|
|
|
450,000
|
|
|
|
|
500,000
|
|
|
|
750,000
|
|
|
|
2008-2010
Segment
LTIP
|
|
|
322,500
|
|
|
|
|
645,000
|
|
|
|
|
|
|
|
2008-2010
Consolidated
LTIP
|
|
|
322,500
|
|
|
|
|
645,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raju M. Shivdasani
|
|
2009 Bonus
|
|
|
195,000
|
|
|
|
|
225,000
|
|
|
|
300,000
|
|
|
|
Annual Bonus
after 2009
|
|
|
276,250
|
|
|
|
|
318,750
|
|
|
|
478,125
|
|
|
|
2008-2010
Segment
LTIP
|
|
|
281,250
|
|
|
|
|
562,500
|
|
|
|
|
|
|
|
2008-2010
Consolidated
LTIP
|
|
|
281,250
|
|
|
|
|
562,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William D. Hansen
|
|
2009 Bonus
|
|
|
130,178
|
|
|
|
|
150,205
|
|
|
|
225,308
|
|
|
|
Annual Bonus
after 2009
|
|
|
276,250
|
|
|
|
|
318,750
|
|
|
|
478,125
|
|
|
|
2008-2010
Segment
LTIP
|
|
|
106,250
|
|
|
|
|
212,500
|
|
|
|
|
|
|
|
2008-2010
Consolidated
LTIP
|
|
|
206,389
|
|
|
|
|
412,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David W. Porter
|
|
2009 Bonus
|
|
|
78,707
|
|
|
|
|
91,825
|
|
|
|
131,178
|
|
|
|
2008-2010
Segment
LTIP
|
|
|
53,131
|
|
|
|
|
106,261
|
|
|
|
|
|
|
|
2008-2010
Consolidated
LTIP
|
|
|
53,131
|
|
|
|
|
106,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey D. Heggedahl
|
|
Annual Bonus
|
|
|
51,288
|
|
|
|
|
59,178
|
|
|
|
78,904
|
|
|
|
2008-2010
Segment
LTIP
|
|
|
169,982
|
|
|
|
|
339,963
|
|
|
|
|
|
|
|
2008-2010
Consolidated
LTIP
|
|
|
169,982
|
|
|
|
|
339,963
|
|
|
|
|
|
|
|
|
(i)
|
|
The amounts listed as Annual Bonus
represent the threshold, target and maximum amount which may be
payable to each NEO pursuant to the annual executive bonus plan,
as described in more detail above under Elements of
Compensation The Annual Executive Bonus Plan.
|
63
|
|
|
(ii)
|
|
The amounts listed as LTIP
represent the threshold and target amount which may be payable
in 2011 to each NEO at the end of the three year performance
period
(2008-2010)
pursuant to the LTIP, as described in more detail above under
Elements of Compensation The 2008
M & F Worldwide Long Term Incentive Compensation Plan
(the LTIP). The first row labeled LTIP represents
the amount of the LTIP attributable to the performance of each
NEOs individual business segment at the end of the three
year performance period and the second row represents the amount
attributable to consolidated performance at the end of the three
year performance period.
|
|
(iii)
|
|
Mr. Dawson received an
additional grant under the LTIP which represents the amount
attributable to consolidated performance at the end of the three
year performance period as a result of increased
responsibilities for the Company after taking the additional
position of President and Chief Executive Officer of Harland
Clarke Holdings.
|
|
(iv)
|
|
The LTIP, which was designed to
meet the requirements of Section 162(m) of the Internal
Revenue Code was approved by the shareholders of M & F
Worldwide in 2008 for an aggregate maximum of
$16.5 million. Under the terms of the LTIP, the maximum
Payout to any participant is $10 million. The actual payout
to any participant is expected to be substantially lower than
the maximum potential payout, which was provided for purposes of
Section 162(m) of the Internal Revenue Code.
Mr. Porter and Mr. Heggedahl, as a result of their
termination, and in accordance with their agreements have a
minimum LTIP award payment in 2011 of $0 and $0, respectively,
and a maximum LTIP award payment in 2011 of $106,261 and
$446,224, respectively.
|
NONQUALIFIED
DEFERRED COMPENSATION TABLE FOR FISCAL YEAR 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
Registrant
|
|
Aggregate
|
|
Aggregate
|
|
Aggregate
|
|
|
Contributions
|
|
Contributions
|
|
Earnings
|
|
Withdrawals/
|
|
Balance
|
|
|
in Last FY
|
|
in Last FY
|
|
in Last FY
|
|
Distributions
|
|
at Last FYE
|
Name
|
|
($)
|
|
($)(i)
|
|
($)
|
|
($)(ii)
|
|
($)(iii)
|
|
Charles T. Dawson
|
|
|
|
|
|
|
82,391
|
|
|
|
17,583
|
|
|
|
|
|
|
|
529,795
|
|
Peter A. Fera, Jr.
|
|
|
|
|
|
|
26,892
|
|
|
|
3,578
|
|
|
|
|
|
|
|
111,625
|
|
James D. Singleton
|
|
|
|
|
|
|
30,969
|
|
|
|
3,894
|
|
|
|
|
|
|
|
121,640
|
|
Raju M. Shivdasani
|
|
|
|
|
|
|
15,377
|
|
|
|
882
|
|
|
|
|
|
|
|
31,706
|
|
David W. Porter
|
|
|
|
|
|
|
6,395
|
|
|
|
1,256
|
|
|
|
|
|
|
|
37,579
|
|
Jeffrey D. Heggedahl
|
|
|
|
|
|
|
14,969
|
|
|
|
762
|
|
|
|
(44,080
|
)
|
|
|
|
|
|
|
|
(i) |
|
The amounts reported are included as part of All Other
Compensation in the Summary Compensation Table. |
|
(ii) |
|
Mr. Heggedahls balance was paid out on
September 11, 2009. |
|
(iii) |
|
Reflects the total balance of the executives account as of
the end of the Companys 2009 fiscal year. |
Material
Features of the Deferred Compensation Plan
Our deferred compensation plan is a non-elective, nonqualified
deferred compensation plan known as the Benefits Equalization
Plan, or BEP. It serves as a supplemental benefit program for
employees whose Company contributions to the 401(k) plan are
limited due to IRS annual qualified plan compensation limits.
All employees whose eligible earnings are greater than the IRS
qualified plan compensation limit are automatically eligible for
this benefit.
Employees may not defer income into this plan. We do not match
contributions under our tax-qualified 401(k) plan in respect of
pay above the tax-qualified plan compensation limits. Instead,
we credit a notional contribution in respect of pay above the
tax-qualified plan limits to the employees BEP account.
The BEP is an unfunded deferred compensation plan. Interest is
compounded quarterly and credited to each participants
account based upon the
10-Year
U.S. Treasury Bond yield as in effect on the first business
day of the plan year rounded to the next higher one-half
percent, plus one percent. For plan year 2009, the rate was
3.5%. This methodology of applying interest is based on the
language outlined in the BEP. Interest rates are provided
annually by Mercer.
Distributions are allowed only at termination, retirement,
death, or disability and are paid in a single lump sum on the
first day of the seventh month following the occurrence of such
a qualifying event.
64
Potential
Payments upon Termination or
Change-in-Control
Each of our NEOs is entitled to certain payments and benefits in
the event of termination of his employment. These payments and
benefits are set forth in each of our NEOs respective
employment agreements, described herein. In the case of each
employment agreement, the terms of these arrangements were set
through the course of arms-length negotiations with each of the
NEOs.
Mr. Dawson will be entitled to continued payment of his
base salary respectively for a period of two years after
termination in the event he is terminated without cause or
resigns for good reason.
Each of Messrs. Fera, Singleton, Shivdasani and Hansen will
be entitled to continued payment of his base salary respectively
for a period of 18 months after termination in the event he
is terminated without cause or resigns for good reason.
In the case of termination without cause, or due to death or
disability, or in the event of resignation for good reason,
each of our NEOs would be entitled to receive: (i) a
pro rata annual bonus for the year in which termination
occurred, if it would have otherwise been payable but for the
termination; (ii) any earned but unpaid annual bonus for
the year prior to the year in which termination occurred; and
(iii) a pro rata amount payable, if any, under the LTIP in
accordance with its terms, in each case, paid at the time and in
the manner the bonus or LTIP amount, as applicable, is paid to
other executives.
In addition, in the case of termination of the employment of an
NEO without cause, if the executive resigns for good reason, the
executive will be entitled to receive:
|
|
|
|
|
continued participation in applicable welfare benefit plans for
12 months after termination; and
|
|
|
|
employer-subsidized welfare plan benefits for a period of
12 months after termination.
|
If the employment of any of our NEOs is terminated for cause,
further compensation is forfeited, except for accrued and unpaid
base salary. In our NEOs employment agreements,
cause is generally defined as neglect of duties,
continued incompetence, unsatisfactory attendance, conviction of
any felony, embezzlement, disloyalty, defalcation, usurpation of
a Company opportunity, violation of rules, instructions, or
requirements regarding conduct of employees, willful misconduct
or breach of fiduciary obligation owed to the Company, breach of
employment agreement, discriminatory or sexually harassing
behavior, any act that has a material adverse effect upon the
reputation or public confidence in the Company, material
insubordination, or drug or alcohol use while working or
representing the Company.
Pursuant to the terms of the employment agreements of each of
our NEOs, good reason means, without the advance written consent
of the executive: (i) a reduction in the executives
base salary; or (ii) a material and continuing reduction in
the executives responsibilities, in each case which the
Company fails to cure within 30 days of receiving notice
from the executive of such an event.
In order to receive any of the payments or benefits described
above which are payable upon termination of employment, the NEO
must execute an irrevocable release of claims in favor of the
Company.
Each NEO is bound by a two-year non-competition covenant as well
as a two-year non-solicitation covenant following termination of
his employment. Breach of either the non-competition or the
non-solicitation covenants will result in a cessation of salary
continuation and premium rates under the group health benefits.
If the executives employment term is not renewed and the
executives employment is terminated after the end of the
term, other than for cause or disability, the NEO will be
subject to a minimum of a one-year non-competition covenant and
a one-year non-solicitation covenant.
None of our NEOs will receive any additional payments or
benefits in the event there is a change in control of the
Company, or his employment is terminated following a change in
control of the Company.
65
The following table sets forth payments which will be made to
our NEOs in the event each is terminated without cause, or he
resigns for good reason. This table excludes pro rata payments,
if any, under the LTIP as described under Potential
Payments upon Termination or
Changes-in-Control
above.
TERMINATION
WITHOUT CAUSE OR RESIGNATION FOR GOOD REASON
AS OF DECEMBER 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
|
|
|
|
|
|
|
|
|
|
|
Health/
|
|
Annual
|
|
|
|
Deferred
|
|
|
|
|
Separation
|
|
|
|
Welfare
|
|
Bonus
|
|
Outplacement
|
|
Compensation
|
|
|
Name &
|
|
Pay(i)
|
|
Vacation(ii)
|
|
Plans(iii)
|
|
Plan(iv)
|
|
Assistance(v)
|
|
Plan
Balance(vi)
|
|
Total
|
Principal Position
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Charles T. Dawson,
President & CEO
|
|
|
2,000,000
|
|
|
|
11,077
|
|
|
|
9,728
|
|
|
|
1,250,000
|
|
|
|
30,000
|
|
|
|
529,795
|
|
|
|
3,830,600
|
|
Peter A. Fera, Jr.
EVP & CFO
|
|
|
675,000
|
|
|
|
|
|
|
|
12,044
|
|
|
|
450,000
|
|
|
|
30,000
|
|
|
|
111,625
|
|
|
|
1,278,669
|
|
James D. Singleton,
President of Harland Clarke
|
|
|
750,000
|
|
|
|
|
|
|
|
12,044
|
|
|
|
500,000
|
|
|
|
30,000
|
|
|
|
121,640
|
|
|
|
1,413,684
|
|
Raju M. Shivdasani,
President of Harland Financial Solutions
|
|
|
562,500
|
|
|
|
|
|
|
|
9,973
|
|
|
|
225,000
|
|
|
|
30,000
|
|
|
|
31,706
|
|
|
|
859,179
|
|
William D. Hansen,
President of Scantron
|
|
|
637,500
|
|
|
|
|
|
|
|
11,524
|
|
|
|
318,750
|
|
|
|
30,000
|
|
|
|
|
|
|
|
997,774
|
|
|
|
|
(i)
|
|
For each NEO, upon termination of
the executive without cause or resignation for good reason (each
as defined in each employment agreement), the executive is
entitled to receive continued payment of base salary for the
following periods: 24 months in the case of
Messrs. Dawson; and 18 months in the case of
Messrs. Fera, Singleton, Shivdasani, and Hansen.
|
|
(ii)
|
|
Upon termination, the executive is
entitled to his earned and unused vacation for the current year.
Effective January 1, 2008, we established a policy pursuant
to which up to 40 hours of vacation may be carried over
from year to year. Mr. Dawson is also entitled to his
balance of frozen vacation of $11,077.
|
|
(iii)
|
|
For each NEO, upon termination of
the executive without cause, or resignation for good reason, the
executive is entitled to continued participation in applicable
welfare benefit plans for 12 months after the termination
and continued contribution by the Company to the employer
portion of the employee premiums of welfare benefit plans for
12 months after the termination. The employer portion
reflects employer cost for 2009 based on the employees
enrollment in dental, medical, and vision plans as of
December 31, 2009.
|
|
|
|
(iv)
|
|
For each NEO, upon termination of
the executive without cause, due to death or disability, or in
the event the NEO resigns for good reason, the executive is
entitled to receive a prorated annual bonus for the year in
which the termination occurred if the executive would have been
eligible to receive such bonus hereunder (including due to
satisfaction of the Company of performance milestones) had the
executive been employed at the time such annual bonus is
normally paid. The amounts provided in this column assume that
the bonus is paid at a level at which 100% of the target is
achieved.
|
|
(v)
|
|
Upon termination, each executive is
entitled to standard outplacement assistance for the key
executive level of up to $30,000 which would be paid to a
mutually agreed provider of outplacement services for a
12-month
outplacement program.
|
|
(vi)
|
|
Upon termination, retirement,
death, or disability, the executives total balance in the
BEP is to be paid in a single lump sum on the first day of the
seventh month following the occurrence of such an event. These
amounts reflect the executives account balance as of
December 31, 2009.
|
Mr. Porter resigned from his employment effective
June 1, 2009. In accordance with his employment agreement,
he is entitled to receive severance payments in continuing
installments over an eighteen month period, provided he complies
with the restrictive covenants and other provisions of his
employment agreement. He is also eligible for prorated bonus,
outplacement services, COBRA and benefit subsidies and payment
of his deferred compensation balance, provided he complies with
the restrictive covenants and other provisions of his employment
agreement.
Mr. Heggedahl resigned from his employment effective
February 17, 2009. In accordance with his employment
agreement, he is entitled to receive severance payments in
continuing installments over a two year period, provided he
complies with the restrictive covenants and other provisions of
his employment agreement. He is also eligible for prorated
bonus, outplacement services, COBRA and benefit subsidies and
payment of his deferred compensation balance, provided he
complies with the restrictive covenants and other provisions of
his employment agreement.
66
DIRECTORS
COMPENSATION TABLE FOR FISCAL YEAR 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
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Pension Value
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and Nonqualified
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Non-Equity
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Deferred
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Fees Earned
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Stock
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Option
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Incentive Plan
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Compensation
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All Other
|
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Name
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or Paid in Cash
|
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Awards
|
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Awards
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Compensation
|
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Earnings
|
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Compensation
|
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Total
|
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Barry F.
Schwartz(i)
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Paul G.
Savas(i)
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Charles T.
Dawson(ii)
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Jeffrey D.
Heggedahl(ii)
|
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(i) |
|
Messrs. Schwartz and Savas received no compensation
directly or indirectly from the Company. They provided services
to the Company under the terms of a Second Amended and Restated
Management Services Agreement between M & F Worldwide
and MacAndrews & Forbes. Pursuant to the Second
Amended and Restated Management Services Agreement,
M & F Worldwide paid to MacAndrews & Forbes
a fee of $2.5 million per calendar quarter, beginning
May 1, 2007. The total amount paid to
MacAndrews & Forbes in 2009, 2008 and 2007 pursuant to
the Second Amended and Restated Management Services Agreement
was $10.0 million, $10.0 million and
$8.3 million. In addition, M & F Worldwide paid
to MacAndrews & Forbes fees of $2.0 million and
$10.0 million in 2008 and 2007, respectively, for services
related to sourcing, analyzing, negotiating and executing the
Data Management Acquisition and the Harland Acquisition,
respectively. |
|
(ii) |
|
Messrs. Dawson and Heggedahl did not receive any
compensation for their service as directors in 2009, 2008 or
2007. Mr. Heggedahl resigned as a director and an employee
effective February 17, 2009. |
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
M & F Worldwide beneficially owns all the outstanding
shares of our common stock. None of our executive officers or
directors beneficially owns any of our common stock. The
following table sets forth the total number of shares of
M & F Worldwides common stock that each
director, NEO or person known to us to be the beneficial owner
of more than 5% of M & F Worldwides outstanding
common stock beneficially owned as of February 25, 2010,
and the percent of such common stock so owned. M & F
Worldwides common stock is M & F
Worldwides only outstanding voting stock.
Ownership for this purpose is beneficial
ownership as determined under the rules of the SEC, and
such information is not necessarily indicative of beneficial
ownership for any other purpose. Under these rules, a person
beneficially owns a share if the person has sole or shared
voting power or investment power with respect to the share or
the person has the right to acquire the share within
60 days through the exercise of any option, warrant or
right, through
67
conversion of any security or under the automatic termination of
any power of attorney or revocation of trust, discretionary
account or similar arrangement.
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Percent of
|
Name of Beneficial Owner
|
|
Beneficially Owned
|
|
Outstanding Shares
|
|
MFW Holdings One LLC
35 East 62 St., New York, NY 10065
|
|
|
7,248,000
|
(1)
|
|
|
37.5
|
%
|
Dimensional Fund Advisors LP
Palisades West, Building One
6300 Bee Cave Road, Austin, TX 78746
|
|
|
1,646,912
|
(2)
|
|
|
8.5
|
%
|
MFW Holdings Two LLC
35 East 62 St., New York, NY 10065
|
|
|
1,012,666
|
(1)
|
|
|
5.2
|
%
|
Ronald O. Perelman
|
|
|
133,334
|
(1)
|
|
|
1.0
|
%
|
Barry F. Schwartz
|
|
|
5,000
|
|
|
|
0.0
|
%
|
Charles T. Dawson
|
|
|
|
|
|
|
0.0
|
%
|
Paul G. Savas
|
|
|
1,000
|
|
|
|
0.0
|
%
|
James D. Singleton
|
|
|
|
|
|
|
0.0
|
%
|
Raju M. Shivdasani
|
|
|
|
|
|
|
0.0
|
%
|
All directors and executive officers as a group (8 persons)
|
|
|
8,400,000
|
(3)
|
|
|
43.4
|
%
|
|
|
|
(1) |
|
All of such shares of common stock are beneficially owned by
Ronald O. Perelman. MFW Holdings One LLC and MFW Holdings Two
LLC are wholly owned subsidiaries of MacAndrews &
Forbes Holdings Inc., of which Mr. Perelman owns 100%. In
addition, MacAndrews & Forbes Holdings Inc. may be
deemed to share beneficial ownership of the
8,194,000 shares of common stock beneficially owned by MFW
Holdings One LLC and MFW Holdings Two LLC and the
133,334 shares of common stock deemed beneficially owned by
Mr. Perelman as a result of Mr. Perelmans grant
of restricted stock (an aggregate of 8,400,000 shares of
common stock, representing approximately 43.4% of the common
stock outstanding or deemed outstanding under the rules of the
SEC), by virtue of MacAndrews & Forbes Holdings
Inc.s ownership of 100% of the common stock of MFW
Holdings One LLC and MFW Holdings Two LLC and
Mr. Perelmans 100% ownership of
MacAndrews & Forbes Holdings Inc.s common stock.
The shares so owned and shares of intermediate holding companies
are, or may from time to time be, pledged to secure obligations
of MacAndrews & Forbes Holdings Inc. or its affiliates. |
|
(2) |
|
Beneficial ownership is based on a statement on
Schedule 13G filed by Dimensional Fund Advisors LP on
February 8, 2010. |
|
(3) |
|
Includes shares of common stock indirectly owned by
Mr. Perelman through MacAndrews & Forbes Holdings
Inc. |
|
|
Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
Related
Person Transactions Policy
As a wholly owned subsidiary of M & F Worldwide, we
are subject to M & F Worldwides Code of Business
Conduct and Ethics (the Code), which covers
transactions and other activities by employees of M &
F Worldwide and its subsidiaries (including our directors and
officers) that give rise to conflicts of interest. The conflicts
of interest policy in the Code limits or prohibits, among other
things, transactions between the employee and M & F
Worldwide and transactions by the employee with (and employment
with or substantial investments in) an enterprise that is a
present or potential supplier, customer or competitor, or that
engages or may engage in any other business with M & F
Worldwide. In addition, the policy also prohibits employees from
appropriating for personal benefit business opportunities that
should be first offered to M & F Worldwide. The Code
also limits similar transactions by family members of employees.
Any waivers of the Code must be approved by either the Board of
Directors or the Audit Committee of M & F Worldwide.
As a Delaware corporation, we are also subject to the
requirement for disinterested director or shareholder approval
68
of transactions by us with our directors and officers, as set
forth in Section 144 of the Delaware General Corporation
Law.
All of the transactions reported under Item 13 of this
Annual Report on
Form 10-K
that occurred during our last completed fiscal year were not
subject to the Code because they were not transactions involving
conflicts of interest covered by the Code. All of the reported
transactions were approved by our Board of Directors, and all
such transactions entered into after the date of the Indenture
governing our Senior Notes complied with the limitations on
affiliate transactions contained in that Indenture.
Management
Services Agreement
During 2009, 2008 and 2007, certain executive officers of
M & F Worldwide were executives of
MacAndrews & Forbes. M & F Worldwide did not
compensate such executive officers, but, in 2009, 2008 and 2007
M & F Worldwide paid to MacAndrews & Forbes
$10 million, $10 million and $8.33 million,
respectively, for the value of the services provided by such
officers to M & F Worldwide pursuant to a management
services agreement. Under the terms of this management services
agreement, MacAndrews & Forbes provides the services
of M & F Worldwides Chief Executive Officer and
Chief Financial Officer, as well as other management, advisory,
transactional, corporate finance, legal, risk management, tax
and accounting services. On May 24, 2006, M & F
Worldwide and MacAndrews & Forbes entered into the
Amended Management Services Agreement to reflect the increased
scope of the management services provided by
MacAndrews & Forbes to M & F Worldwide and
the increased size of M & F Worldwide after the
acquisition of Clarke American. Under the Amended Management
Services Agreement, M & F Worldwide paid to
MacAndrews & Forbes a pro rata portion of an annual
fee of $5.0 million in respect of the period of 2007 prior
to May 1, 2007.
On June 20, 2007, M & F Worldwide and
MacAndrews & Forbes entered into the Second Amended
and Restated Management Services Agreement to reflect the
increased scope of the management services provided by
MacAndrews & Forbes to M & F Worldwide and
the increased size of M & F Worldwide after the
Harland Acquisition. Under the Second Amended and Restated
Management Services Agreement, M & F Worldwide paid to
MacAndrews & Forbes a pro rata portion of an annual
fee of $10.0 million, paid quarterly, beginning as of
May 1, 2007.
The Second Amended and Restated Management Services Agreement
automatically renewed on January 1, 2010 and extended for a
one-year renewal period terminating on December 31, 2010
unless either party gives the other party written notice at
least 90 days prior to the end of the renewal period. The
Second Amended and Restated Management Services Agreement will
also terminate in the event that MacAndrews & Forbes
Inc. or its affiliates no longer in the aggregate retain
beneficial ownership of 10% or more of the outstanding common
stock of M & F Worldwide. The Second Amended and
Restated Management Services Agreement also contains customary
indemnities covering MacAndrews & Forbes Inc. and its
affiliates and personnel.
M & F Worldwide paid $10.0 million to MacAndrews
and Forbes in the second quarter of 2007 for services related to
sourcing, analyzing, negotiating and executing the Harland
Acquisition. In addition, in February 2008, M & F
Worldwide purchased all of the membership interests of Data
Management LLC from Pearson Inc. in the Data Management
Acquisition. M & F Worldwide paid $2.0 million to
MacAndrews & Forbes for services related to sourcing,
analyzing, negotiating and executing the Data Management
Acquisition.
Insurance
We participate in MacAndrews & Forbes Holdings
Inc.s directors and officers insurance
program, which covers M & F Worldwide as well as
MacAndrews & Forbes Holdings Inc. and certain of its
other affiliates. The limits of coverage are available on
aggregate losses to any or all of the participating companies
and their respective directors and officers. We bear an
allocation of the premiums for such coverage, which we believe
is more favorable than the premiums we could secure under stand
alone coverage. The Company paid MacAndrews & Forbes
Holdings Inc. $0.1 million and $0.3 million in 2009
and 2008, respectively, in respect of such insurance coverage.
69
Tax
Sharing Agreement
The Company, M & F Worldwide and another subsidiary of
M & F Worldwide entered into a tax sharing agreement
in 2005 whereby M & F Worldwide files consolidated
federal income tax returns on our and our affiliated
subsidiaries behalf, as well as on behalf of certain other
subsidiaries of M & F Worldwide. Under the tax sharing
agreement, we make periodic payments to M & F
Worldwide. These payments are based on the applicable federal
income tax liability that we and our affiliated subsidiaries
would have had for each taxable period if we had not been
included in the M & F Worldwide consolidated group.
Similar provisions apply with respect to any foreign, state or
local income or franchise tax returns filed by any M &
F Worldwide consolidated, combined or unitary group for each
year that we or any of our subsidiaries are included in any such
group for foreign, state or local tax purposes. During 2009,
2008 and 2007, the Company made payments totaling
$79.4 million, $57.4 million and $5.3 million,
respectively to M & F Worldwide pursuant to the terms
of the tax sharing agreement.
To the extent that we have losses for tax purposes, the tax
sharing agreement permits us to carry those losses back to
periods beginning on or after December 15, 2005 and forward
for so long as we are included in the affiliated group of which
M & F Worldwide is the common parent (in both cases,
subject to federal, state and local rules on limitation and
expiration of net operating losses) to reduce the amount of the
payments we otherwise would be required to make to M &
F Worldwide in years in which it has current income for tax
purposes. If the loss is carried back to the previous period,
M & F Worldwide shall pay us an amount equal to the
decrease of the taxes we would have benefited as a result of the
carry back.
Allocations
As a wholly owned subsidiary of M & F Worldwide, we
receive certain financial, administrative and risk management
oversight from M & F Worldwide. These fees are
allocations of shared service costs from our parent and are
included in selling, general and administrative expenses in the
consolidated statements of operations. The Company recorded
$2.7 million, $2.7 million and $2.1 million
during the years ended December 31, 2009, 2008 and 2007,
respectively, related to such fees.
Director
Independence
Because we are not listed on any exchange, we are not subject to
any listing standards for director independence. Under the NYSE
listing standards, however, none of our directors are
independent because each of our directors is either one of our
officers or an officer of M & F Worldwide.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The M & F Worldwide Audit Committee selected
Ernst & Young LLP as the independent auditors for its
subsidiaries, including Harland Clarke Holdings, for the years
ended December 31, 2009, 2008 and 2007.
Audit Fees. The aggregate fees and expenses
that Ernst & Young LLP billed to us for professional
services rendered for the audits of our financial statements and
reviews of the financial statements included in our quarterly
reports on
Form 10-Q
were $2.3 million, $3.1 million and $3.4 million
for 2009, 2008 and 2007, respectively. Audit services include
fees associated with the annual audit and reviews of our 2009
quarterly reports on
Form 10-Q.
Audit-Related Fees. The aggregate fees and
expenses that Ernst & Young LLP billed to us for
audit-related services rendered in 2009, 2008 and 2007 were
$0.3 million, $0.1 million and $0.8 million,
respectively. Audit-related services include SAS 70 reports on
internal controls, due diligence and consulting services
performed for the Harland Acquisition.
70
Tax Fees. The aggregate fees and expenses that
Ernst & Young LLP billed us for assistance with
property and income taxes were $0.1 million,
$0.2 million and $0.1 million during 2009, 2008 and
2007, respectively.
All Other Fees. No such fees were incurred by
us in 2009, 2008 and 2007.
The Audit Committee of M & F Worldwide considered
whether any audit-related and non-audit service that
Ernst & Young LLP provided were comparable with
maintaining the auditors independence from management and
Harland Clarke Holdings. It has been the policy of M &
F Worldwides Audit Committee to approve in advance the
plan of audit services to be provided and an estimate of the
cost for such audit services. M & F Worldwides
Audit Committee has also adopted a policy of approving in
advance for each calendar year a plan of the expected services
and a related budget, submitted by management, for audit-related
services, tax services and other services that Harland Clarke
Holdings expects the auditors to render during the year.
Throughout the year, M & F Worldwides Audit
Committee is provided with updates on the services provided and
the expected fees associated with each service. Any expenditure
in excess of the approval limits for approved services, and any
engagement of the auditors to render services in addition to
those previously approved, requires advance approval by
M & F Worldwides Audit Committee. M &
F Worldwides Audit Committee approved the audit plan, all
of the fees disclosed above and the non-audit services that
Harland Clarke Holdings expects Ernst & Young LLP to
provide in 2009.
71
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) (1 and 2) Financial statements and financial
statement schedule.
See Index to Consolidated Financial Statements and Financial
Statement Schedules, which appears on
page F-1
herein. All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable and therefore have been omitted.
(3) Exhibits.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1
|
|
Stock Purchase Agreement by and between M & F
Worldwide Corp. and Honeywell International Inc., dated
October 31, 2005 (incorporated by reference to
Exhibit 2.1 of M & F Worldwide Corp.s
Current Report on
Form 8-K
dated October 31, 2005).
|
|
2
|
.2
|
|
Membership Interest Purchase Agreement by and among
M & F Worldwide Corp., NCS Pearson Inc. and Pearson
Inc., dated as of February 13, 2008 (incorporated by
reference to Exhibit 2.1 of M & F Worldwide
Corp.s Current Report on
Form 8-K,
dated February 14, 2008).
|
|
2
|
.3
|
|
Agreement and Plan of Merger by and among John H. Harland
Company, M & F Worldwide Corp. and H Acquisition
Corp., dated as of December 19, 2006 (incorporated by
reference to Exhibit 2.1 of M & F Worldwide
Corp.s Current Report on
Form 8-K,
dated December 20, 2006).
|
|
3
|
.1
|
|
Certificate of Incorporation of Harland Clarke Holdings Corp.,
as amended (incorporated by reference to Exhibit 3.1(i) of
Harland Clarke Holdings Corp.s Registration Statement on
Form S-4,
Commission File
No. 333-133253).
|
|
3
|
.2
|
|
By-laws of Harland Clarke Holdings Corp. (incorporated by
reference to Exhibit 3.1(ii) of Harland Clarke Holdings
Corp.s Registration Statement on
Form S-4,
Commission File
No. 333-133253).
|
|
4
|
.1
|
|
Indenture dated as of May 1, 2007 among Harland Clarke
Holdings Corp., the co-issuers and guarantors party thereto and
Wells Fargo Bank, N.A., as trustee. (incorporated by reference
to Exhibit 4.1 to Harland Clarke Holdings Corp.
Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
|
4
|
.2
|
|
Registration Rights Agreement (relating to the initial notes)
dated as of May 1, 2007 by and among Harland Clarke
Holdings Corp., the Guarantors (listed therein), Credit Suisse
Securities (USA) LLC, Bear, Stearns & Co., Inc.,
Citigroup Global Markets Inc. and J.P. Morgan Securities
Inc. (incorporated by reference to Exhibit 4.4 to Harland
Clarke Holdings Corp. Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
|
4
|
.3
|
|
Credit Agreement, dated as of April 4, 2007 among Harland
Clarke Holdings Corp., the Subsidiary Borrowers (listed
therein), the Lenders (listed therein) and Credit Suisse, Cayman
Islands Branch, as administrative agent. (incorporated by
reference to Exhibit 4.5 to Harland Clarke Holdings Corp.
Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
|
4
|
.4
|
|
First Amendment to Credit Agreement, dated as of May 4,
2007, by and among Harland Clarke Holdings Corp., the lender
parties (listed therein) and Credit Suisse, Cayman Islands
Branch, as administrative and collateral agent. (incorporated by
reference to Exhibit 4.6 to Harland Clarke Holdings Corp.
Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
|
4
|
.5
|
|
Guarantee and Collateral Agreement, dated as of May 1,
2007, by and among Harland Clarke Holdings Corp. and certain
subsidiaries in favor of Credit Suisse, Cayman Islands Branch.
(incorporated by reference to Exhibit 4.7 to Harland Clarke
Holdings Corp. Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
|
4
|
.6
|
|
Assumption Agreement, dated as of May 1, 2007 by and among
Harland Clarke Corp., Harland Checks and Services, Inc.,
Scantron Corporation, Harland Financial Solutions, Inc., HFS
Core Systems, Inc., Centralia Holding Corp. and John H. Harland
Company of Puerto Rico in favor of Credit Suisse, Cayman Islands
Branch, as administrative and collateral agent. (incorporated by
reference to Exhibit 4.8 to Harland Clarke Holdings Corp.
Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
72
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
4
|
.7
|
|
Intellectual Property Security Agreement, dated as of
May 1, 2007, by and among B(2)Direct, Inc., Checks in the
Mail, Inc. and Clarke American Checks, Inc., the Grantors, in
favor of Credit Suisse, Cayman Islands Branch, as administrative
and collateral agent. (incorporated by reference to
Exhibit 4.9 to Harland Clarke Holdings Corp. Registration
Statement on
Form S-4,
Commission File
No. 333-143717).
|
|
4
|
.8
|
|
Intellectual Property Security Agreement, dated as of
May 1, 2007, by and among Harland Clarke Corp., Harland
Checks and Services, Inc., Scantron Corporation, Harland
Financial Solutions, Inc. and HFS Core Systems, Inc., the
Grantors, in favor of Credit Suisse, Cayman Islands Branch, as
administrative and collateral agent. (incorporated by reference
to Exhibit 4.10 to Harland Clarke Holdings Corp.
Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
|
4
|
.9
|
|
Joinder Agreement, dated as of May 1, 2007, by and among
B(2)Direct, Inc., Checks in the Mail, Inc., Clarke American
Checks, Inc., New CS, Inc., New SCSFH, Inc., H Acquisition
Corp., New SCH, Inc., New SFH, Inc. and Credit Suisse, Cayman
Islands Branch. (incorporated by reference to Exhibit 4.11
to Harland Clarke Holdings Corp. Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
|
4
|
.10
|
|
Joinder Agreement, dated as of May 1, 2007, by and among
Harland Clarke Corp., Harland Checks and Services, Inc.,
Scantron Corporation, Harland Financial Solutions, Inc., HFS
Core Systems, Inc. and Credit Suisse, Cayman Islands Branch.
(incorporated by reference to Exhibit 4.12 to Harland
Clarke Holdings Corp. Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
|
4
|
.11
|
|
Deed to Secure Debt by Harland Clarke Corp. to Credit Suisse,
Cayman Islands Branch (5096 Panola Industrial Blvd, Decatur,
Georgia and
2933-2939
Miller Road, Decatur, Georgia). (incorporated by reference to
Exhibit 4.14 to Harland Clarke Holdings Corp. Registration
Statement on
Form S-4,
Commission File
No. 333-143717).
|
|
4
|
.12
|
|
Deed of Trust, Security Agreement, Assignment of Rents and
Leases and Fixture Filing by Scantron Corporation in favor of
First American Title Insurance Company, as trustee for the
benefit of Credit Suisse, Cayman Islands Branch (2020 South 156
Circle, Omaha, Nebraska). (incorporated by reference to
Exhibit 4.15 to Harland Clarke Holdings Corp. Registration
Statement on
Form S-4,
Commission File
No. 333-143717).
|
|
4
|
.13
|
|
Mortgage by Clarke American Checks, Inc. to Credit Suisse,
Cayman Islands Branch (124 Metropolitan Avenue, Salina, New
York). (incorporated by reference to Exhibit 4.16 to
Harland Clarke Holdings Corp. Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
|
4
|
.14
|
|
Deed of Trust, Security Agreement, Assignment of Rents and
Leases and Fixture Filing by Checks In The Mail Inc. in favor of
Peter Graf, Esq., as trustee for the benefit of Credit
Suisse, Cayman Islands Branch (2435 Goodwin Lane, New Braunfels,
Texas). (incorporated by reference to Exhibit 4.18 to
Harland Clarke Holdings Corp. Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
|
4
|
.15
|
|
Deed of Trust, Security Agreement, Assignment of Rents and
Leases and Fixture Filing by Clarke American Checks, Inc. in
favor of Peter Graf, Esq., as trustee for the benefit of
Credit Suisse, Cayman Islands Branch (5734 Farinon Drive,
San Antonio, Texas). (incorporated by reference to
Exhibit 4.19 to Harland Clarke Holdings Corp. Registration
Statement on
Form S-4,
Commission File
No. 333-143717).
|
|
4
|
.16
|
|
Deed of Trust, Security Agreement, Assignment of Rents and
Leases and Fixture Filing by Harland Clarke Corp. in favor of
First American Title Insurance Agency, LLC, as trustee for
the benefit of Credit Suisse, Cayman Islands Branch
(4867-4883 West
Harold Gatty Road, Salt Lake City, Utah). (incorporated by
reference to Exhibit 4.20 to Harland Clarke Holdings Corp.
Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
|
10
|
.1
|
|
Tax Sharing Agreement, dated as of December 15, 2005, by
and among M & F Worldwide Corp., Harland Clarke
Holdings Corp. and PCT International Holdings Inc. (incorporated
by reference to Exhibit 10.15 of M & F Worldwide
Corp.s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2005).
|
|
10
|
.2+
|
|
M & F Worldwide Corp. 2005 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.1 to M &
F Worldwide Corp.s
Form 8-K
filed on May 24, 2006).
|
73
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.3+
|
|
M & F Worldwide Corp. 2005 Long Term Incentive
Plan Form of Award Agreement for Participating
Executives of Clarke American Corp. (incorporated by reference
to Exhibit 10.2 to M & F Worldwide Corp.s
Form 8-K
filed on May 24, 2006).
|
|
10
|
.4+
|
|
M & F Worldwide Corp. 2008 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.15 to
M & F Worldwide Corp.s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007).
|
|
10
|
.5+
|
|
Amendment No. 1 to the M & F Worldwide Corp. 2008
Long Term Incentive Plan, dated as of December 31, 2008
(incorporated by reference to Exhibit 10.2 to M &
F Worldwide Corp.s Current Report on
Form 8-K
filed on January 7, 2009).
|
|
10
|
.6+
|
|
M & F Worldwide Corp. 2008 Long Term Incentive
Plan Award Agreement for Participating Executives
(incorporated by reference to Exhibit 10.16 to
M & F Worldwide Corp.s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007).
|
|
10
|
.7+
|
|
Employment Agreement, dated as of February 13, 2008,
between Harland Clarke Holdings Corp. and Charles T. Dawson
(incorporated by reference to Exhibit 10.1 to Harland
Clarke Holdings Corp.s Current Report on
Form 8-K
filed on February 15, 2008).
|
|
10
|
.8+
|
|
Amendment, dated as of December 31, 2008, to the Employment
Agreement, dated as of February 13, 2008, between Harland
Clarke Holdings Corp. and Charles T. Dawson (incorporated by
reference to Exhibit 10.2 to M & F Worldwide
Corp.s Current Report on
Form 8-K
filed on January 7, 2009).
|
|
10
|
.9+
|
|
Employment Agreement dated February 13, 2008 between
Harland Clarke Corp. and Peter A. Fera, Jr. (incorporated by
reference to Exhibit 10.2 to Harland Clarke Holdings
Corp.s Current Report on
Form 8-K
filed on February 15, 2008).
|
|
10
|
.10+
|
|
Amendment, dated as of December 31, 2008, to the Employment
Agreement, dated as of February 13, 2008, between Harland
Clarke Corp. and Peter A. Fera, Jr. (incorporated by reference
to Exhibit 10.3 to Harland Clarke Holdings Corp.s
Current Report on
Form 8-K
filed on January 7, 2009).
|
|
10
|
.11+
|
|
Employment Agreement dated as of May 29, 2007 among Harland
Clarke Holdings Corp., Harland Financial Solutions and John
OMalley (incorporated by reference to Exhibit 10.2 to
M & F Worldwide Corp.s Current Report on
Form 8-K
filed on June 1, 2007).
|
|
10
|
.12+
|
|
Employment Agreement, dated as of May 5, 2008, among
Harland Clarke Holdings Corp., Scantron Corporation and Jeffrey
Heggedahl.
|
|
10
|
.13+
|
|
Amendment, dated as of December 31, 2008, to the Employment
Agreement, dated as of May 5, 2008, among Harland Clarke
Holdings Corp., Scantron Corporation and Jeffrey Heggedahl
(incorporated by reference to Exhibit 10.4 to Harland
Clarke Holdings Corp.s Current Report on
Form 8-K
filed on January 7, 2009).
|
|
10
|
.14+
|
|
Employment Agreement, dated as of February 7, 2008, between
Harland Clarke Holdings Corp. and Daniel Singleton.
|
|
10
|
.15+
|
|
Employment Agreement, dated as of May 5, 2008, between
Harland Clarke Holdings Corp., Harland Financial Solutions and
Raju M. Shivdasani.
|
|
10
|
.16+
|
|
Employment Agreement, dated as of May 5, 2008, between
Harland Clarke Holdings Corp., Harland Financial Solutions and
A. O. Clemons, Jr.
|
|
10
|
.17
|
|
Second Amended and Restated Management Services Agreement, dated
as of June 30, 2007, by and between MacAndrews &
Forbes Inc. and M & F Worldwide Corp. (incorporated by
reference to Exhibit 10.1 to M & F Worldwide
Corp.s Current Report on
Form 8-K
dated June 25, 2007).
|
|
10
|
.18+
|
|
Amendment, dated as of December 31, 2008, to the Employment
Agreement, dated as of February 7, 2008, between Harland
Clarke Holdings Corp. and Daniel Singleton.
|
|
10
|
.19+
|
|
Amendment, dated as of December 31, 2008, to the Employment
Agreement, dated as of May 5, 2008, among Harland Clarke
Holdings Corp., Harland Financial Solutions and Raju Shivdasani.
|
|
10
|
.20+
|
|
Amendment, dated as of December 31, 2008, to the Employment
Agreement, dated as of May 5, 2008, among Harland Clarke
Holdings Corp., Harland Financial Solutions and A. O. Clemons,
Jr.
|
74
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.21+*
|
|
Amendment, dated as of February 2, 2010, to the Employment
Agreement, dated as of February 13, 2008, between Harland
Clarke Holdings Corp. and Charles T. Dawson.
|
|
10
|
.22+*
|
|
Amendment, dated as of February 14, 2010, to the Employment
Agreement, dated as of February 7, 2008, between Harland
Clarke Holdings Corp. and Daniel Singleton.
|
|
10
|
.23+*
|
|
Amendment, dated as of February 2, 2010, to the Employment
Agreement, dated as of February 13, 2008, between Harland
Clarke Holdings Corp. and Peter A. Fera, Jr.
|
|
10
|
.24+*
|
|
Amendment, dated as of February 22, 2010, to the Employment
Agreement, dated as of May 5, 2008, among Harland Clarke
Holdings Corp., Harland Financial Solutions and Raju Shivdasani.
|
|
21
|
.1*
|
|
Subsidiaries of Harland Clarke Holdings Corp.
|
|
31
|
.1*
|
|
Certification of Charles T. Dawson, Chief Executive Officer,
dated February 26, 2010.
|
|
31
|
.2*
|
|
Certification of Peter A. Fera, Jr., Chief Financial Officer,
dated February 26, 2010
|
|
|
|
* |
|
Filed herewith. |
|
+ |
|
Denotes management contract or compensatory plan or arrangement
required to be filed as an exhibit hereto. |
75
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.
|
|
|
|
|
HARLAND CLARKE HOLDINGS CORP.
|
|
|
|
|
|
|
Dated: February 26, 2010
|
|
By: /s/ Charles
T. Dawson
|
|
|
Charles T. Dawson President, Chief Executive Officer and Director (Principal Executive Officer)
|
|
|
|
|
|
|
Dated: February 26, 2010
|
|
By: /s/ Peter
A. Fera, Jr.
|
|
|
Peter A. Fera, Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer)
|
|
|
|
|
|
|
Dated: February 26, 2010
|
|
|
|
|
J. Michael Riley
Vice President and Controller
(Principal Accounting Officer)
|
76
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.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Charles
T. Dawson
Charles
T. Dawson
|
|
President, Chief Executive Officer and Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ Paul
G. Savas
Paul
G. Savas
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ Barry
F. Schwartz
Barry
F. Schwartz
|
|
Director
|
|
February 26, 2010
|
77
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 2009
The following consolidated financial statements of Harland
Clarke Holdings Corp. and Subsidiaries are included in
Item 8:
As of December 31, 2009 and 2008 and for the years ended
December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
Pages
|
|
|
|
|
|
|
|
|
|
F-1
|
|
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
|
|
|
F-6
|
|
|
|
|
|
|
|
|
|
F-43
|
|
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable and, therefore, have been omitted.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholder of
Harland Clarke Holdings Corp.
We have audited the accompanying consolidated balance sheets of
Harland Clarke Holdings Corp. and Subsidiaries as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2009. Our audits also included the financial
statement schedule II listed in the Index at
Item 15(a). These financial statements and schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Harland Clarke Holdings Corp. and
Subsidiaries internal control over financial reporting.
Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the
Harland Clarke Holdings Corp. and Subsidiaries internal
control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Harland Clarke Holdings Corp. and
Subsidiaries at December 31, 2009 and 2008 and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2009, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set
forth therein.
/s/ Ernst & Young LLP
San Antonio, Texas
February 26, 2010
F-1
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
63.9
|
|
|
$
|
64.6
|
|
Accounts receivable (net of allowances of $3.0 and $2.8 at
December 31, 2009 and 2008)
|
|
|
119.7
|
|
|
|
128.8
|
|
Investments in marketable securities
|
|
|
24.6
|
|
|
|
|
|
Inventories
|
|
|
32.5
|
|
|
|
38.4
|
|
Income taxes receivable
|
|
|
13.5
|
|
|
|
8.0
|
|
Deferred tax assets
|
|
|
18.6
|
|
|
|
21.0
|
|
Prepaid expenses and other current assets
|
|
|
66.1
|
|
|
|
42.6
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
338.9
|
|
|
|
303.4
|
|
Property, plant and equipment, net
|
|
|
161.1
|
|
|
|
177.6
|
|
Goodwill
|
|
|
1,473.2
|
|
|
|
1,465.5
|
|
Other intangible assets, net
|
|
|
1,187.9
|
|
|
|
1,328.3
|
|
Contract acquisition payments, net
|
|
|
28.6
|
|
|
|
39.8
|
|
Other assets
|
|
|
62.3
|
|
|
|
77.2
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,252.0
|
|
|
$
|
3,391.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
33.9
|
|
|
$
|
54.4
|
|
Deferred revenues
|
|
|
116.1
|
|
|
|
103.8
|
|
Current maturities of long-term debt
|
|
|
19.5
|
|
|
|
19.8
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Salaries, wages and employee benefits
|
|
|
52.6
|
|
|
|
68.4
|
|
Income and other taxes payable
|
|
|
15.4
|
|
|
|
13.9
|
|
Customer incentives
|
|
|
23.5
|
|
|
|
25.7
|
|
Payable to parent
|
|
|
|
|
|
|
0.7
|
|
Other current liabilities
|
|
|
30.8
|
|
|
|
54.7
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
291.8
|
|
|
|
341.4
|
|
Long-term debt
|
|
|
2,219.3
|
|
|
|
2,370.8
|
|
Deferred tax liabilities
|
|
|
415.3
|
|
|
|
435.7
|
|
Other liabilities
|
|
|
79.6
|
|
|
|
77.6
|
|
Commitment and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock 200 shares authorized; par value
$0.01; 100 shares issued and outstanding at
December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
157.0
|
|
|
|
157.0
|
|
Retained earnings
|
|
|
98.0
|
|
|
|
27.2
|
|
Accumulated other comprehensive (loss) income, net of taxes:
|
|
|
|
|
|
|
|
|
Derivative fair-value adjustments
|
|
|
(8.6
|
)
|
|
|
(16.8
|
)
|
Currency translation adjustments
|
|
|
0.3
|
|
|
|
(0.4
|
)
|
Funded status of benefit plans
|
|
|
(1.6
|
)
|
|
|
(0.7
|
)
|
Unrealized gains on investments, net
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive loss, net of taxes
|
|
|
(9.0
|
)
|
|
|
(17.9
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
246.0
|
|
|
|
166.3
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
3,252.0
|
|
|
$
|
3,391.8
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Product revenues, net
|
|
$
|
1,417.8
|
|
|
$
|
1,491.8
|
|
|
$
|
1,199.3
|
|
Service revenues, net
|
|
|
294.5
|
|
|
|
302.8
|
|
|
|
170.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
1,712.3
|
|
|
|
1,794.6
|
|
|
|
1,369.9
|
|
Cost of products sold
|
|
|
846.6
|
|
|
|
910.4
|
|
|
|
753.1
|
|
Cost of services provided
|
|
|
151.1
|
|
|
|
156.5
|
|
|
|
80.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
997.7
|
|
|
|
1,066.9
|
|
|
|
833.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
714.6
|
|
|
|
727.7
|
|
|
|
536.1
|
|
Selling, general and administrative expenses
|
|
|
387.4
|
|
|
|
445.9
|
|
|
|
333.2
|
|
Asset impairment charges
|
|
|
44.4
|
|
|
|
2.4
|
|
|
|
3.1
|
|
Restructuring costs
|
|
|
32.5
|
|
|
|
14.6
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
250.3
|
|
|
|
264.8
|
|
|
|
194.2
|
|
Interest income
|
|
|
1.0
|
|
|
|
2.2
|
|
|
|
6.0
|
|
Interest expense
|
|
|
(136.9
|
)
|
|
|
(186.4
|
)
|
|
|
(165.9
|
)
|
Gain (loss) on early extinguishment of debt
|
|
|
65.0
|
|
|
|
|
|
|
|
(54.6
|
)
|
Other income (expense), net
|
|
|
0.1
|
|
|
|
(0.4
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
179.5
|
|
|
|
80.2
|
|
|
|
(20.8
|
)
|
Provision (benefit) for income taxes
|
|
|
67.4
|
|
|
|
33.0
|
|
|
|
(5.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
112.1
|
|
|
$
|
47.2
|
|
|
$
|
(15.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares of
|
|
|
Additional
|
|
|
Retained
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
(Loss) Income
|
|
|
Total
|
|
|
Balance, December 31, 2006
|
|
|
100
|
|
|
$
|
202.5
|
|
|
$
|
16.7
|
|
|
$
|
0.1
|
|
|
$
|
219.3
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(15.4
|
)
|
|
|
|
|
|
|
(15.4
|
)
|
Foreign currency translation adjustments, net of taxes of $0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.7
|
|
|
|
1.7
|
|
Derivative fair-value adjustment, net of taxes of $8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14.1
|
)
|
|
|
(14.1
|
)
|
Change in unrecognized amounts included in postretirement
obligations, net of taxes of $0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
|
|
0.8
|
|
Unrealized losses on investments, net of taxes of $0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
(0.5
|
)
|
Reclassification for investment write-down included in net
income, net of taxes of $0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend paid to parent
|
|
|
|
|
|
|
|
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
100
|
|
|
$
|
202.5
|
|
|
$
|
(0.5
|
)
|
|
$
|
(11.5
|
)
|
|
$
|
190.5
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
47.2
|
|
|
|
|
|
|
|
47.2
|
|
Foreign currency translation adjustments, net of taxes of $0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.1
|
)
|
|
|
(2.1
|
)
|
Derivative fair-value adjustment, net of taxes of $2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.7
|
)
|
|
|
(2.7
|
)
|
Change in unrecognized amounts included in postretirement
obligations, net of taxes of $0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
(1.6
|
)
|
Unrealized losses on investments, net of taxes of $0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
(0.5
|
)
|
Reclassification for investment write-downs included in net
income, net of taxes of $0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend paid to parent
|
|
|
|
|
|
|
(45.5
|
)
|
|
|
(19.5
|
)
|
|
|
|
|
|
|
(65.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
100
|
|
|
$
|
157.0
|
|
|
$
|
27.2
|
|
|
$
|
(17.9
|
)
|
|
$
|
166.3
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
112.1
|
|
|
|
|
|
|
|
112.1
|
|
Foreign currency translation adjustments, net of taxes of $0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
0.7
|
|
Derivative fair-value adjustment, net of taxes of $5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.2
|
|
|
|
8.2
|
|
Change in unrecognized amounts included in postretirement
obligations, net of taxes of $0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
(0.9
|
)
|
Unrealized gains on investments, net of taxes of $0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend paid to parent
|
|
|
|
|
|
|
|
|
|
|
(41.3
|
)
|
|
|
|
|
|
|
(41.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
100
|
|
|
$
|
157.0
|
|
|
$
|
98.0
|
|
|
$
|
(9.0
|
)
|
|
$
|
246.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
112.1
|
|
|
$
|
47.2
|
|
|
$
|
(15.4
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
57.9
|
|
|
|
66.6
|
|
|
|
58.5
|
|
Amortization of intangible assets
|
|
|
104.2
|
|
|
|
97.9
|
|
|
|
67.7
|
|
Amortization of deferred financing fees and original discount
|
|
|
7.3
|
|
|
|
7.8
|
|
|
|
7.0
|
|
(Gain) loss on early extinguishment of debt
|
|
|
(65.0
|
)
|
|
|
|
|
|
|
54.6
|
|
Deferred income taxes
|
|
|
(23.2
|
)
|
|
|
(31.9
|
)
|
|
|
(7.6
|
)
|
Asset impairments
|
|
|
44.4
|
|
|
|
2.4
|
|
|
|
3.1
|
|
Changes in operating assets and liabilities, net of effect of
businesses acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
11.8
|
|
|
|
(13.1
|
)
|
|
|
3.5
|
|
Inventories
|
|
|
6.0
|
|
|
|
0.6
|
|
|
|
4.9
|
|
Prepaid expenses and other assets
|
|
|
(19.3
|
)
|
|
|
1.9
|
|
|
|
(11.6
|
)
|
Contract acquisition payments, net
|
|
|
11.2
|
|
|
|
11.8
|
|
|
|
20.6
|
|
Accounts payable and accrued liabilities
|
|
|
(54.4
|
)
|
|
|
(14.4
|
)
|
|
|
1.8
|
|
Deferred revenues
|
|
|
11.1
|
|
|
|
11.2
|
|
|
|
12.1
|
|
Income and other taxes
|
|
|
(3.5
|
)
|
|
|
12.7
|
|
|
|
7.0
|
|
Payable to parent
|
|
|
(0.7
|
)
|
|
|
(1.4
|
)
|
|
|
2.1
|
|
Other, net
|
|
|
5.4
|
|
|
|
1.4
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
205.3
|
|
|
|
200.7
|
|
|
|
209.9
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of businesses, net of cash acquired
|
|
|
(11.4
|
)
|
|
|
(234.4
|
)
|
|
|
(1,453.2
|
)
|
Investment in marketable securities
|
|
|
(24.6
|
)
|
|
|
|
|
|
|
|
|
Investment in related party notes receivable
|
|
|
|
|
|
|
(14.4
|
)
|
|
|
|
|
Net repayments of related party notes receivable
|
|
|
5.2
|
|
|
|
1.8
|
|
|
|
|
|
Proceeds from sale of property, plant and equipment
|
|
|
0.7
|
|
|
|
5.7
|
|
|
|
3.3
|
|
Capital expenditures
|
|
|
(42.2
|
)
|
|
|
(48.2
|
)
|
|
|
(25.5
|
)
|
Capitalized interest
|
|
|
(0.3
|
)
|
|
|
(0.7
|
)
|
|
|
(0.4
|
)
|
Other, net
|
|
|
(4.2
|
)
|
|
|
(0.6
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(76.8
|
)
|
|
|
(290.8
|
)
|
|
|
(1,476.5
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend to parent
|
|
|
(41.3
|
)
|
|
|
(65.0
|
)
|
|
|
(1.8
|
)
|
Issuance of notes
|
|
|
|
|
|
|
|
|
|
|
615.0
|
|
Redemption of notes
|
|
|
(67.6
|
)
|
|
|
|
|
|
|
(175.0
|
)
|
Borrowings on credit agreements
|
|
|
|
|
|
|
62.0
|
|
|
|
1,800.0
|
|
Repayments of credit agreements and other borrowings
|
|
|
(20.3
|
)
|
|
|
(82.0
|
)
|
|
|
(664.6
|
)
|
Premiums, penalties and consent payments related to
extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(41.2
|
)
|
Debt issuance cost
|
|
|
|
|
|
|
|
|
|
|
(56.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(129.2
|
)
|
|
|
(85.0
|
)
|
|
|
1,475.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(0.7
|
)
|
|
|
(175.1
|
)
|
|
|
209.2
|
|
Cash and cash equivalents at beginning of period
|
|
|
64.6
|
|
|
|
239.7
|
|
|
|
30.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
63.9
|
|
|
$
|
64.6
|
|
|
$
|
239.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net of amounts capitalized
|
|
$
|
138.0
|
|
|
$
|
171.2
|
|
|
$
|
152.5
|
|
Income taxes, net of refunds
|
|
|
95.5
|
|
|
|
54.9
|
|
|
|
(4.3
|
)
|
See Notes to Consolidated Financial Statements
F-5
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in millions)
|
|
1.
|
Description
of the Business and Basis of Presentation
|
Harland Clarke Holdings Corp. (Harland Clarke
Holdings and, together with its subsidiaries, the
Company) is a holding company that conducts its
operations through its direct and indirect wholly owned
operating subsidiaries and was incorporated in Delaware on
October 19, 2005. On December 15, 2005, CA Investment
Corp., an indirect wholly owned subsidiary of M & F
Worldwide Corp. (M & F Worldwide)
purchased 100% of the capital stock of Novar USA Inc.
(Novar) (the Clarke American
Acquisition) and was renamed Clarke American Corp.
(Clarke American) which was the successor by merger
to Novar, which indirectly wholly owned the operating
subsidiaries of the Clarke American business. On May 1,
2007, the Company completed the acquisition of John H. Harland
Company (Harland), and a subsidiary of the Company
was merged with and into Harland, with Harland continuing after
the merger as the surviving corporation and as a wholly owned
subsidiary of the Company (the Harland Acquisition)
(see Note 3). After the closing of the Harland Acquisition,
the Company changed its name on May 2, 2007 from Clarke
American to Harland Clarke Holdings.
During December 2009, Harland Clarke Corp., a wholly owned
subsidiary of the Company, acquired in separate transactions
SubscriberMail and Protocol Integrated Marketing Services
(Protocol IMS), a division of Protocol Global
Solutions, for aggregate consideration of $12.9, subject to
achievement of certain revenue targets in 2010 and 2011. The
aggregate consideration of $12.9 includes contingent
consideration of $1.8 for SubscriberMail upon the achievement of
revenue targets, with a maximum contingent consideration of $2.0
if the targets are met (see Note 3). SubscriberMail is a
leading email marketing service provider that offers patented
tools to develop and deliver professional email communications.
Protocol IMS focuses on direct marketing services with solutions
that include B2B strategic services, B2C strategic services,
database marketing and analytics, outbound B2B teleservices and
production and fulfillment.
In December 2008, Harland Clarke Corp. acquired Transaction
Holdings Inc. (Transaction Holdings) for total cash
consideration of $8.2 (the Transaction Holdings
Acquisition) (see Note 3). Transaction Holdings
produces personal and business checks, payment coupon books and
promotional checks and provides direct marketing services to
financial institutions as well as individual consumers and small
businesses.
In February 2008, the Companys wholly owned subsidiary,
Scantron Corporation, purchased all of the limited liability
membership interests of Data Management I LLC (Data
Management) from NCS Pearson for $218.7 in cash after
giving effect to working capital adjustments of $1.6 (the
Data Management Acquisition) (see Note 3). Data
Management designs, manufactures and services scannable data
collection products, including printed forms, scanning equipment
and related software, and provides survey consulting and
tracking services, including medical device tracking, as well as
field maintenance services to corporate and governmental clients.
The Company has organized its business and corporate structure
along the following three business segments: Harland Clarke,
Harland Financial Solutions and Scantron.
The Harland Clarke segment offers checks and related products,
forms and treasury supplies, and related delivery and fraud
prevention services to financial services, retail and software
providers. It also provides direct marketing services to their
clients including direct marketing campaigns, direct mail,
database marketing, telemarketing and
e-mail
marketing. In addition, the Harland Clarke segment provides
check-related delivery and fraud prevention services,
stationery, business cards and other business and home office
products to consumers and small businesses.
The Harland Financial Solutions segment provides technology
products and services to financial services clients worldwide
including lending and mortgage compliance and origination
applications, risk management solutions, business intelligence
solutions, Internet and mobile banking applications, branch
automation solutions and core processing systems.
F-6
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
The Scantron segment provides data management solutions and
related services to educational, commercial, healthcare and
governmental entities worldwide including testing and assessment
solutions, patient information collection and tracking, and
survey services. Scantrons solutions combine a variety of
data collection, analysis, and management tools including
software, scanning equipment, forms and related field
maintenance services.
The consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries after the
elimination of all material intercompany accounts and
transactions. The Company has consolidated the results of
operations and accounts of businesses acquired from the date of
acquisition.
The Company and each of its existing subsidiaries other than
unrestricted subsidiaries and certain immaterial subsidiaries
are guarantors and may also be co-issuers under the 2015 Senior
Notes (as hereinafter defined) (see Note 11). Harland
Clarke Holdings is a holding company, and has no independent
assets at December 31, 2009, and no operations. The
guarantees and the obligations of the subsidiaries of the
Company are full and unconditional and joint and several, and
any subsidiaries of the Company other than the subsidiary
guarantors and obligors are not significant.
Subsequent
Events
The Company has considered subsequent events through
February 26, 2010, the date of issuance, in preparing the
consolidated financial statements and notes thereto.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Use of
Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
Revenue
Recognition
The Company recognizes product and service revenue when
persuasive evidence of a non-cancelable arrangement exists,
products have been shipped
and/or
services have been rendered, the price is fixed or determinable,
collectibility is reasonably assured, legal title and economic
risk is transferred to the customer and an economic exchange has
taken place. Revenues are recorded net of any applicable
discounts, contract acquisition payments amortization, accrued
incentives and allowances for sales returns. Deferred revenues
represent amounts billed to the customer in excess of amounts
earned.
Revenues for direct response marketing services are recognized
from the Companys fixed price direct mail and marketing
contracts based on the proportional performance method for
specific projects.
For multiple-element software arrangements, total revenue is
allocated to each element based on the fair value method or the
residual method when applicable. Under the fair value method,
the total revenue is allocated among the elements based upon the
relative fair value of each element as determined through
vendor-specific objective evidence (the price of a bundled
element when sold separately). Under the residual method, the
fair value of the undelivered maintenance, training and other
service elements, as determined based on vendor-specific
objective evidence is deferred and the remaining (residual)
arrangement is recognized as revenue at the time of delivery.
Maintenance fees are deferred and recognized ratably over the
maintenance period, which is usually twelve months. Training
revenue is recognized as the services are performed.
F-7
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
Revenue from licensing of software under usage-based contracts
is recognized ratably over the term of the agreement or on an
actual usage basis. Revenue from licensing of software under
limited term license agreements is recognized ratably over the
term of the agreement.
For software that is installed and integrated by the Company or
customer, license revenue is recognized upon shipment assuming
functionality has already been proven and there are no
significant customization services. For software that is
installed, integrated and customized by the Company, revenue is
recognized on a
percentage-of-completion
basis as the services are performed using an input method based
on labor hours. Estimates of efforts to complete a project are
used in the
percentage-of-completion
calculation. Due to the uncertainties inherent in these
estimates, actual results could differ from those estimates.
Revenue from arrangements that are subject to substantive
customer acceptance provisions is deferred until the acceptance
conditions have been met.
Revenue from outsourced data processing services and other
transaction processing services is recognized in the month the
transactions are processed or the services are rendered.
The contractual terms of software sales do not provide for
product returns or allowances. However, on occasion the Company
may allow for returns or allowances primarily in the case of a
new product release. Provisions for estimated returns and sales
allowances are established by the Company concurrently with the
recognition of revenue and are based on a variety of factors
including actual return and sales allowance history and
projected economic conditions.
Service revenues are comprised of revenues derived from software
maintenance agreements, card services, field maintenance
services, core processing service bureau deliverables,
analytical services, consulting services, training services,
survey services and certain contact center services.
Customer
Incentives
The Companys Harland Clarke segment has contracts with
certain clients that provide both fixed and volume-based
rebates. These rebates are recorded as a reduction of revenues
to which they apply and as accrued liabilities.
Shipping
and Handling
Revenue received from shipping and handling fees is reflected in
product revenues, net in the accompanying consolidated
statements of operations. Costs related to shipping and handling
are included in cost of products sold.
Cash
and Cash Equivalents
The Company considers all cash on hand, money market funds and
other highly liquid debt instruments with a maturity, when
purchased, of three months or less to be cash and cash
equivalents.
Investments
The Company has investments which consist of corporate equity
securities and United States treasury securities which are
classified as
available-for-sale
securities and are stated at fair value with unrealized gains
and losses on such investments reflected net of tax, as other
comprehensive income (loss). Realized gains and losses on
investments are included in other income (expense), net in the
accompanying consolidated statements of operations. The cost of
securities sold is based on the specific identification method.
The United States treasury securities are classified as current
and included in investments in marketable securities in the
accompanying consolidated balance sheets. The corporate equity
securities are classified as noncurrent and are included in
other assets in the accompanying consolidated balance sheets.
See Note 14.
F-8
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
If the market value of an investment declines below its cost,
the Company evaluates whether the decline is temporary, or other
than temporary. The Company considers several factors in
determining whether a decline is temporary including the length
of time market value has been below cost, the magnitude of the
decline, financial prospects of the issuer or business and the
Companys intention to hold the security. If a decline in
market value of an investment is determined to be other than
temporary, a charge to earnings is recorded for the loss and a
new cost basis in the investment is established.
Accounts
Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount
and do not bear interest. The allowance for doubtful accounts is
the Companys best estimate of the amount of probable
losses in its existing accounts receivable based on historical
losses and current economic conditions. Account balances are
charged against the allowance when the Company believes it is
probable the receivable will not be recovered. The Company does
not have any off-balance sheet credit exposure related to its
customers.
Inventories
The Company states inventories at the lower of cost or market
value. The Company determines cost by average costing or the
first-in,
first-out method.
Contract
Acquisition Payments
Certain contracts with customers of the Companys Harland
Clarke segment involve upfront payments to the customer. These
payments are capitalized and amortized on a straight-line basis
as a reduction of revenue over the life of the related contract
and are generally refundable from the customer on a prorated
basis if the contract is canceled prior to the contract
termination date. When such a termination occurs, the amounts
repaid are offset against any unamortized contract acquisition
payment balance related to the terminating customer, with any
resulting excess reported as an increase in revenue. The Company
recorded revenue related to these contract terminations of $0.8,
$2.2 and $1.7 in 2009, 2008 and 2007, respectively.
Advertising
Advertising costs, which are recorded predominately in selling,
general and administrative expenses, consist mainly of marketing
new and existing products, re-branding existing products and
launching new initiatives throughout the Company.
Direct-response advertising is capitalized and amortized over
its expected period of future benefit, while all other
advertising costs are expensed as incurred. Direct-response
advertising consists primarily of inserts that include order
coupons for products offered by Checks In The Mail, a division
of the Companys Harland Clarke segment, which are
amortized for a period up to 18 months. These costs are
amortized following their distribution, and are charged to match
the advertising expense with the related revenue streams.
At December 31, 2009 and 2008, the Company had prepaid
advertising costs of $3.4 and $3.8, respectively, which are
included in prepaid expenses and other current assets in the
accompanying consolidated balance sheets. The Companys
advertising expense was $22.0, $23.7 and $19.3 for 2009, 2008
and 2007, respectively.
Property,
Plant and Equipment
The Company states property, plant and equipment at cost.
Maintenance and repairs are charged to expense as incurred.
Additions, improvements and replacements that extend the asset
life are capitalized. Depreciation is provided on a
straight-line basis over the estimated useful lives of such
assets. The Company
F-9
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
amortizes leasehold improvements over the shorter of the useful
life of the related asset or the lease term. Certain leases also
contain tenant improvement allowances, which are recorded as a
leasehold improvement and deferred rent and amortized over the
lease term. The Company eliminates cost and accumulated
depreciation applicable to assets retired or otherwise disposed
of from the accounts and reflects any gain or loss on such
disposition in operating results. As further discussed below,
the Company capitalizes the qualifying costs incurred during the
development stage on software to be sold, leased or otherwise
marketed, internally developed software and software obtained
for internal use and amortizes the costs over the estimated
useful life of the software. The Company capitalizes interest on
qualified long-term projects and depreciates it over the life of
the related asset.
The useful lives for computing depreciation are as follows:
|
|
|
Machinery and equipment
|
|
3 15 years
|
Computer software and hardware
|
|
3 5 years
|
Leasehold improvements
|
|
1 20 years
|
Buildings and improvements
|
|
20 30 years
|
Furniture, fixtures and transportation equipment
|
|
5 8 years
|
Software
and Other Development Costs
The Company expenses research and development expenditures as
incurred, including expenditures related to the development of
software products that do not qualify for capitalization. The
amounts expensed totaled $15.4, $17.7 and $12.6 during 2009,
2008 and 2007, respectively, and were primarily costs incurred
related to the development of software.
Software development costs incurred prior to the establishment
of technological feasibility are expensed as incurred. Software
development costs incurred after establishing the technological
feasibility of the subject software product and before its
availability for sale are capitalized and are included in other
intangible assets, net on the accompanying consolidated balance
sheets. Capitalized software development costs are amortized on
a
product-by-product
basis using the estimated economic life of the product on a
straight-line basis over three years with related amortization
expense in cost of goods sold on the accompanying consolidated
statements of operations. Unamortized software development costs
in excess of estimated net realizable value from a particular
product are written down to their estimated net realizable value.
The Company capitalizes costs to develop or obtain computer
software for internal use once the preliminary project stage has
been completed, management commits to funding the project and it
is probable that the project will be completed and the software
will be used to perform the function intended. Capitalized costs
include only (1) external direct costs of materials and
services consumed in developing or obtaining internal-use
software, (2) payroll and payroll-related costs for
employees who are directly associated with and who devote time
to the internal-use software project and (3) interest costs
incurred, when significant, while developing internal-use
software. Capitalization of costs ceases when the project is
substantially complete and ready for its intended use and are
included in property, plant and equipment, net on the
accompanying consolidated balance sheets.
Goodwill
and Acquired Intangible Assets
Goodwill represents the excess of consideration transferred over
the fair value of identifiable net assets acquired. Acquired
intangibles are recorded at fair value as of the date acquired.
Goodwill and other intangibles determined to have an indefinite
life are not amortized, but are tested for impairment annually
in the fourth quarter, or when events or changes in
circumstances indicate that the assets might be impaired, such
as a significant adverse change in the business climate.
F-10
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
The goodwill impairment test is a two-step process, which
requires management to make judgments in determining what
assumptions to use in the calculation. The first step of the
process consists of estimating the fair value of the
Companys reporting units. In 2009, the Company reduced the
number of reporting units from five to four as a result of an
organizational realignment and the integration of two former
reporting units into a single reporting unit. Certain of the
Companys reporting units are the same as its reportable
segments and certain reporting units are one level below the
reportable segment, which is at the operating segment level.
The Company utilizes both the income and market approaches to
estimate the fair value of the reporting units. The income
approach involves discounting future estimated cash flows. The
discount rate used is the value-weighted average of the
reporting units estimated cost of equity and debt
(cost of capital) derived using, both known and
estimated, customary market metrics. The Company performs
sensitivity tests with respect to growth rates and discount
rates used in the income approach. In applying the market
approach, valuation multiples are derived from historical and
projected operating data of selected guideline companies;
evaluated and adjusted, if necessary, based on the strengths and
weaknesses of the reporting unit relative to the selected
guideline companies; and applied to the appropriate historical
and/or
projected operating data of the reporting unit to arrive at an
indication of fair value. The Company weights the results of the
income and market approaches equally, except where guideline
companies are not similar enough to provide a reasonable value
using the market approach. When that occurs, the market approach
is weighted less than the income approach. The results of the
Companys tests indicated no goodwill impairment as the
estimated fair values were greater than the carrying values.
If the estimated fair value of a reporting unit is less than the
carrying value, a second step is performed to compute the amount
of the impairment by determining an implied fair
value of goodwill. The determination of the Companys
implied fair value requires the Company to allocate
the estimated fair value of the reporting unit to the assets and
liabilities of the reporting unit. Any unallocated fair value
represents the implied fair value of goodwill, which
is compared to the corresponding carrying value.
The Company measures impairment of its indefinite-lived
tradenames and trademarks based on the
relief-from-royalty-method. Under the relief-from-royalty method
of the income approach, the value of an intangible asset is
determined by quantifying the cost savings a company enjoys by
owning, as opposed to licensing, the intangible asset.
Assumptions about royalty rates are based on the rates at which
similar tradenames and trademarks are licensed in the
marketplace. The Company also re-evaluates the useful life of
these assets to determine whether events and circumstances
continue to support an indefinite useful life.
The annual impairment evaluations for goodwill and
indefinite-lived intangible assets involve significant estimates
made by management. The discounted cash flow analyses require
various judgmental assumptions about sales, operating margins,
growth rates and discount rates. Assumptions about sales,
operating margins and growth rates are based on the
Companys budgets, business plans, economic projections,
anticipated future cash flows and marketplace data. Changes in
estimates could have a material impact in the carrying amount of
goodwill and indefinite-lived intangible assets in future
periods.
Intangible assets that are deemed to have a finite life are
evaluated for impairment as discussed below in Long-Lived
Assets.
Costs to renew or extend the term of a recognized intangible
asset are expensed as incurred and are not significant.
Long-Lived
Assets
When events or changes in circumstances indicate that the
carrying amount of a long-lived asset other than goodwill and
indefinite-lived intangible assets may not be recoverable, the
Company assesses the recoverability of such asset based on
estimates of future undiscounted cash flows compared to net book
value.
F-11
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
If the future undiscounted cash flow estimates are less than net
book value, net book value would then be reduced to estimated
fair value, which generally approximates discounted cash flows.
The Company also evaluates the amortization periods of assets to
determine whether events or circumstances warrant revised
estimates of useful lives. Assets held for sale are carried at
the lower of carrying amount or fair value, less estimated costs
to sell such assets.
Income
and Other Taxes
The Company computes income taxes under the liability method.
Under the liability method, the Company generally determines
deferred income taxes based on the differences between the
financial statement and tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the
differences are expected to reverse. The Company records net
deferred tax assets when it is more likely than not that it will
realize the tax benefits.
The Company records any tax assessed by a governmental authority
that is both imposed on and concurrent with a specific
revenue-producing transaction between a seller and a customer,
which may include, but is not limited to, sales, use, value
added, and some excise taxes, on a net basis in the accompanying
consolidated statements of operations.
Pensions
and Other Postretirement Benefits
The Company has defined benefit postretirement plans and defined
contribution 401(k) plans, which cover certain current and
former employees of the Company who meet eligibility
requirements.
The Company recognizes in its balance sheet the funded status of
its defined benefit postretirement benefit plans, measured as
the difference between the fair value of the plan assets and the
benefit obligation and recognizes changes in the funded status
of a defined benefit postretirement benefit plan within
accumulated comprehensive income (loss), net of tax, to the
extent such changes are not recognized in earnings as components
of periodic net benefit cost (see Note 10).
Translation
of Foreign Currencies
The functional currency for each of the Companys foreign
subsidiaries is its local currency. The Company translates all
assets and liabilities denominated in foreign functional
currencies into United States dollars at rates of exchange in
effect at the balance sheet date and statement of operations
items at the average rates of exchange prevailing during the
period. The Company records translation gains and losses as a
component of accumulated other comprehensive income (loss) in
the stockholders equity section of the Companys
balance sheets. Gains and losses resulting from transactions in
other than functional currencies are reflected in operating
results, except for transactions of a long-term nature. The
Company considers undistributed earnings of certain foreign
subsidiaries to be permanently invested. As a result, no income
taxes have been provided on these undistributed earnings or on
the foreign currency translation adjustments recorded as a part
of other comprehensive income (loss).
Self-Insurance
The Company is self-insured for certain workers
compensation and group medical costs. Provisions for losses
expected under these programs are recorded based on the
Companys estimates of the aggregate liabilities for the
claims incurred. Payments for estimated claims beyond one year
have been discounted. As of December 31, 2009 and 2008, the
combined liabilities for self-insured workers compensation and
group medical were $10.5 and $10.9, respectively.
F-12
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
Derivative
Financial Instruments
The Company uses derivative financial instruments to manage
interest rate risk related to a portion of its long-term debt.
The Company recognizes all derivatives at fair value as either
assets or liabilities in the consolidated balance sheets and
changes in the fair values of such instruments are recognized in
earnings unless specific hedge accounting criteria are met. If
specific cash flow hedge accounting criteria are met, the
Company recognizes the changes in fair value of these
instruments in other comprehensive income (loss) until the
underlying debt instrument being hedged is settled or the
Company determines that the specific hedge accounting criteria
are no longer met.
On the date the interest rate derivative contract is entered
into, the Company designates the derivative as either a fair
value hedge or a cash flow hedge. The Company formally documents
the relationship between hedging instruments and the hedged
items, as well as its risk-management objectives and strategy
for undertaking various hedge transactions. The Company links
all hedges that are designated as fair value hedges to specific
assets or liabilities on the balance sheet or to specific firm
commitments. The Company links all hedges that are designated as
cash flow hedges to forecasted transactions or to liabilities on
the balance sheet. The Company also assesses, both at the
inception of the hedge and on an on-going basis, whether the
derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of
hedged items. If an existing derivative were to become not
highly effective as a hedge, the Company would discontinue hedge
accounting prospectively. See the section captioned
Recently Adopted Accounting Guidance below regarding
amended accounting guidance for derivative instruments and
hedging activities which the Company adopted during 2009.
Deferred
Financing Fees
Deferred financing fees are being amortized to interest expense
using the effective interest method over the term of the
respective financing agreements. Unamortized balances are
reflected in other assets in the accompanying consolidated
balance sheets and were $32.1 and $43.6 as of December 31,
2009 and 2008, respectively.
Restructuring
Charges
The Company has restructuring costs related primarily to
facility consolidations and workforce rationalization. A portion
of these costs relate to plans to exit activities acquired from
Harland, Data Management and Transaction Holdings (see
Note 3) and have been included in purchase accounting
in accordance with accounting guidance for business combinations
that was in effect until January 1, 2009. The remaining
costs relate to other exit activities and primarily consist of
employee termination benefits which are accrued when it is
probable that a liability has been incurred and the amount of
the liability is reasonably estimable. In addition to employee
termination benefits, other restructuring costs include, but are
not limited to, equipment moves, training and travel, which are
expensed as incurred. Additional restructuring charges related
to the Companys existing operations will be incurred as
the Company completes its restructuring plans.
Reclassifications
Certain amounts in previously issued financial statements have
been reclassified to conform to the 2009 presentation. These
reclassifications had no effect on previously reported net
income (loss).
Specifically, asset impairment charges are presented as a line
item on the consolidated statements of operations. In 2008 and
2007, asset impairment charges were classified in either cost of
products sold, selling, general and administrative expenses or
in restructuring costs. The asset impairment reclassifications
for 2008 reduced cost of products sold by $0.5, selling, general
and administrative expenses by $0.9 and restructuring costs by
$1.0. The asset impairment reclassification for 2007 reduced
selling, general and administrative
F-13
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
expenses by $3.1. Asset impairment related reclassifications
were also made in the consolidated statements of cash flows and
in Note 15.
Recently
Adopted Accounting Guidance
The Company adopted new accounting guidance for business
combinations on January 1, 2009. Under the new guidance, an
acquiring entity is required to recognize all the assets
acquired and liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions. The new
guidance changed the accounting treatment for certain specific
items, including acquisition costs, noncontrolling interests,
acquired contingent liabilities, in-process research and
development, restructuring costs associated with a business
combination, deferred tax valuation allowances changes, and
income tax uncertainties after the acquisition date. The new
guidance also includes a substantial number of new disclosure
requirements and its effect will vary for each acquisition.
The Company adopted new guidance for disclosures about
derivative instruments and hedging activities on January 1,
2009. The new guidance requires enhanced disclosures about the
effects of derivative instruments and hedging activities on an
entitys financial condition, financial performance and
cash flows. The new guidance increases disclosure requirements
but does not have an impact on the Companys consolidated
financial condition, results of operations or cash flows.
Effective April 1, 2009, the Company adopted new guidance
requiring disclosures about fair value of financial instruments
for interim reporting periods of publicly traded companies as
well as in annual financial statements (see Note 13). The
new guidance increases disclosure requirements but did not have
an impact on the Companys consolidated financial
condition, results of operations or cash flows.
Effective for the quarter ended June 30, 2009, the Company
adopted new guidance regarding subsequent events. The new
guidance introduces the concept of financial statements being
available to be issued and requires the disclosure of the date
through which an entity has evaluated subsequent events and the
basis for that date, that is, whether that date represents the
date the financial statements were issued or were available to
be issued. The new guidance did not result in significant
changes in the subsequent events that the Company
reports either through recognition or
disclosure in its financial statements.
Effective October 1, 2009, the Company adopted new guidance
for measuring liabilities at fair value. The new guidance
provides clarification that in circumstances in which a quoted
price in an active market for the identical liability is not
available, an entity is required to measure fair value using
certain valuation techniques. It also clarifies that an entity
is not required to adjust the fair value of a liability for the
existence of a restriction that prevents the transfer of the
liability. Adoption of the new guidance did not have a
significant impact on the Companys consolidated financial
condition, results of operations or cash flows.
Recently
Issued Accounting Guidance
In October 2009, the Financial Accounting Standards Board (the
FASB) issued new guidance for certain arrangements
that include software elements. The new guidance removes
non-software components of tangible products and software
components of tangible products that have software components
essential to the functionality of the tangible product from the
scope of software revenue recognition.
In October 2009, the FASB issued new guidance for
multiple-deliverable revenue arrangements. The new guidance
requires entities to allocate revenue in a multiple-deliverable
arrangement within the scope of the guidance using estimated
selling prices based on a selling price hierarchy. It also
eliminates the residual method of revenue allocation and
requires revenue to be allocated using the relative selling
price method. In addition, the new guidance significantly
expands qualitative and quantitative disclosure requirements for
multiple-deliverable arrangements.
F-14
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
The new guidance for certain arrangements that include software
elements and multiple-deliverable revenue arrangements is
effective for fiscal years beginning on or after June 15,
2010. The guidance may be applied retrospectively for all
periods presented, or prospectively to all arrangements entered
into or materially modified after the adoption date. Early
adoption is permitted provided that the guidance is
retroactively applied to the beginning of the year of adoption.
The Company is currently evaluating the impact of the new
guidance on its consolidated financial condition and results of
operations.
Acquisition
of Data Management
In February 2008, the Companys wholly owned subsidiary,
Scantron Corporation, purchased all of the limited liability
membership interests of Data Management for $218.7 in cash after
giving effect to working capital adjustments of $1.6. Data
Managements results of operations have been included in
the Companys operations since the date of the Data
Management Acquisition. Fees and expenses of $4.6 related to the
Data Management Acquisition were capitalized in the purchase
price. The capitalized fees and expenses include $2.0 paid to
MacAndrews & Forbes Holdings Inc. (which, as of
December 31, 2008, beneficially owned approximately 43.4%
of the outstanding M & F Worldwide common stock) for
its services related to sourcing, analyzing, negotiating and
executing the Data Management Acquisition (see Note 17).
The acquisition combined complementary products and services of
Scantron and Data Management, resulting in an expanded offering
of products and services to their respective customers. The
Company financed the Data Management Acquisition and related
fees and expenses with cash on hand.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the Data Management
Acquisition date:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
|
|
|
$
|
15.9
|
|
Inventories
|
|
|
|
|
|
|
7.5
|
|
Property, plant and equipment
|
|
|
|
|
|
|
25.5
|
|
Goodwill
|
|
|
|
|
|
|
116.2
|
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
65.4
|
|
|
|
|
|
Trademarks and tradenames
|
|
|
2.4
|
|
|
|
|
|
Patented technology and software
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
|
|
|
|
|
75.3
|
|
Other assets
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
|
|
|
|
241.0
|
|
Deferred revenues
|
|
|
|
|
|
|
7.6
|
|
Other liabilities
|
|
|
|
|
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
|
|
|
$
|
223.3
|
|
|
|
|
|
|
|
|
|
|
The above purchase price allocation is complete. Goodwill in the
amount of approximately $114.5 and intangible assets in the
amount of approximately $75.3 related to Data Management are
deductible for tax purposes. The principal factor affecting the
purchase price, which resulted in the recognition of goodwill,
was the fair value of the going-concern element of Data
Management, which included the assembled workforce and synergies
that were expected to be achieved.
As a result of the Data Management Acquisition, the Company
adopted formal plans to terminate certain employee functions and
exit duplicative facilities. The Company recorded $2.5 of
severance and severance-
F-15
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
related costs for the termination of certain Data Management
employees in the above purchase price allocation. See
Note 15 for additional disclosures regarding restructuring.
As part of the application of purchase accounting, inventory of
Data Management was increased by $0.4 due to a fair value
adjustment. The amount of the inventory fair value adjustment
was expensed as additional non-cash cost of products sold as the
related inventory was sold (of which $0.4 was expensed during
2008).
Also as part of the application of purchase accounting, deferred
revenue of Data Management was decreased by $1.4 due to a fair
value adjustment. This non-cash fair value adjustment resulted
in lower revenue being recognized over the related earnings
period (of which $0.2 was reflected as reduced revenues during
2009 and $1.0 was reflected as reduced revenues during 2008).
Pro
Forma Financial Information
The unaudited financial information in the table below
summarizes the results of operations of the Company, on a pro
forma basis, as though the Data Management Acquisition had
occurred as of the beginning of the period presented. The
unaudited pro forma financial information is presented for
informational purposes only and is not indicative of the results
of operations that would have been achieved if this transaction
had taken place at the beginning of the period presented, nor
does it purport to represent results of operations for future
periods.
|
|
|
|
|
|
|
Unaudited Pro Forma
|
|
|
Year Ended
|
|
|
December 31, 2008
|
|
Net revenues
|
|
$
|
1,811.9
|
|
Operating income
|
|
|
266.4
|
|
Net income
|
|
|
48.2
|
|
Depreciation and amortization (excluding amortization of
deferred financing fees)
|
|
|
166.2
|
|
In the pro forma information above, the results prior to the
Data Management Acquisition were adjusted to include the pro
forma impact of the adjustment of amortization of intangible
assets and depreciation of fixed assets based on the purchase
price allocation and to reflect the impact of income taxes with
respect to the pro forma adjustments, utilizing an estimated
effective tax rate of 39%.
The pro forma information also gives effect to certain
identified cost savings totaling $0.8 as if they had been
implemented in their entirety at the beginning of the period
presented. These cost savings pertain to the termination of
certain Data Management employees for which the related
liability was recognized in the purchase price allocation. There
can be no assurance that all of such cost savings will be
accomplished during any particular period, or at all.
The pro forma information does not include adjustments for
additional expected cost savings resulting from the termination
of certain of the Companys historical employees, the
closure of certain of the Companys historical facilities,
procurement savings or the elimination of certain duplicate
corporate costs to the extent not yet realized in the
Companys operating results. There can be no assurance that
all of such cost savings will be accomplished during any
particular period, or at all.
Acquisition
of Protocol IMS and SubscriberMail
During December 2009, Harland Clarke Corp., a wholly owned
subsidiary of the Company, acquired in separate transactions
100% of the equity of SubscriberMail and certain assets and
liabilities of Protocol IMS for an aggregate consideration of
$12.9, subject to achievement of certain revenue targets in 2010
and 2011. The aggregate consideration of $12.9 includes
contingent consideration of $1.8 for SubscriberMail upon the
F-16
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
achievement of revenue targets, with a maximum contingent
consideration of $2.0 if the targets are met. SubscriberMail,
which was acquired on December 31, 2009, is a leading email
marketing service provider that offers patented tools to develop
and deliver professional email communications. Protocol IMS
focuses on direct marketing services with solutions that include
B2B strategic services, B2C strategic services, database
marketing and analytics, outbound B2B teleservices and
production and fulfillment. Protocol IMS results of operations
have been included in the Companys operations since
December 4, 2009, the date of its acquisition. The
preliminary allocations of purchase price resulted in identified
intangible assets of $4.2 and goodwill of $7.2, which are
deductible for tax purposes.
The pro forma effects on the results of operations for these
acquisitions were not material and are not included in the pro
forma information presented above.
Acquisition
of Transaction Holdings
In December 2008, Harland Clarke Corp. acquired 100% of the
equity of Transaction Holdings for total cash consideration of
$8.2. Transaction Holdings produces personal and business
checks, payment coupon books and promotional checks and provides
direct marketing services to financial institutions as well as
individual consumers and small businesses. Transaction
Holdings results of operations have been included in the
Companys operations since the date of its acquisition. The
allocation of the purchase price is complete and resulted in
identified intangible assets of $9.0, goodwill of $2.8 and net
deferred tax liabilities of $2.8.
The pro forma effects on the results of operations for the
Transaction Holdings Acquisition were not material and are not
included in the pro forma information presented above.
Peldec
Assets Purchase
In August 2007, the Companys indirect wholly owned Irish
subsidiary, Harland Financial Solutions Worldwide Limited,
purchased certain intellectual property (the
Products) and operations related to software
products developed by Peldec Decision Systems Ltd.
(Peldec), an Israeli corporation, including related
contracts, documents, permits and agreements, and the assumption
of certain related liabilities and contractual obligations, for
aggregate consideration of $30.0. Peldecs results of
operations have been included in the Companys operations
since the date of its acquisition. Harland Financial Solutions,
Inc., a wholly owned subsidiary of the Company, had distributed
the Products since August 2005 pursuant to a reseller agreement
with Peldec.
Of the total consideration of $30.0, $14.0 was paid at closing,
$6.0 was paid on the first anniversary of the closing date, $5.0
was paid on the second anniversary of the closing date and $5.0
is due on the third anniversary of the closing date. The
time-based payments are treated as an incentive agreement and
are being recorded as compensation expense ratably over the
service period. Each time-based payment is subject to forfeiture
if certain key employees terminate employment prior to such
payment date for certain reasons. The time-based payments are
also subject to acceleration in certain instances, including a
change in control, as defined in the related agreements. Fees
and expenses of $0.4 were capitalized in the purchase price.
Allocation of the purchase price above resulted in identified
intangible assets of $7.2.
Acquisition
of Harland and Related Financing Transactions
On May 1, 2007, the Company purchased 100% of the
outstanding shares of Harland for $1,423.0 in cash. The
acquisition combined complementary products and services of
Harland and Clarke American to create a more effective and
efficient strategic partner to financial institutions.
Harlands results of operations have been included in the
Companys operations since May 1, 2007, the date of
the Harland Acquisition. Fees and expenses of $42.5 related to
the Harland Acquisition were capitalized in the purchase price.
The capitalized fees and expenses include $10.0 paid by
M & F Worldwide to MacAndrews & Forbes
Holdings
F-17
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
Inc. for services related to sourcing, analyzing, negotiating
and executing the Harland Acquisition (see Note 17). The
Company reimbursed M & F Worldwide for that payment
during 2007. The capitalized fees and expenses also include $3.0
paid by the Company to M & F Worldwide to reimburse it
for professional fees paid related to the Harland Acquisition.
The Company and certain of its subsidiaries borrowed the
following amounts on May 1, 2007 in order to fund the
purchase price for Harland, to repay debt under its previously
outstanding senior secured credit facilities, to repay its
previously outstanding 11.75% Senior Notes, to repay
Harlands existing indebtedness and to pay fees and
expenses (see Note 11):
|
|
|
|
|
$1,800.0 Senior Secured Term Loan
|
|
$
|
1,800.0
|
|
Senior Floating Rate Notes due 2015
|
|
|
305.0
|
|
9.50% Senior Fixed Rate Notes due 2015
|
|
|
310.0
|
|
|
|
|
|
|
|
|
$
|
2,415.0
|
|
|
|
|
|
|
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the Harland
Acquisition date:
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
$
|
23.8
|
|
Accounts receivable
|
|
|
|
|
|
|
84.4
|
|
Property, plant and equipment
|
|
|
|
|
|
|
125.6
|
|
Goodwill
|
|
|
|
|
|
|
992.7
|
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
675.2
|
|
|
|
|
|
Trademarks and tradenames
|
|
|
114.7
|
|
|
|
|
|
Patented technology
|
|
|
12.2
|
|
|
|
|
|
Software
|
|
|
50.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
|
|
|
|
|
852.9
|
|
Other assets
|
|
|
|
|
|
|
144.7
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
|
|
|
|
2,224.1
|
|
Deferred revenues
|
|
|
|
|
|
|
77.9
|
|
Long-term debt
|
|
|
|
|
|
|
229.1
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
267.0
|
|
Other liabilities
|
|
|
|
|
|
|
184.6
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
|
|
|
$
|
1,465.5
|
|
|
|
|
|
|
|
|
|
|
The above purchase price allocation is complete. Goodwill in the
amount of approximately $95.0 and intangible assets in the
amount of approximately $107.0 related to Harland are deductible
for tax purposes.
As a result of the Harland Acquisition, the Company adopted a
formal plan to terminate certain employees and exit duplicative
facilities. The Company recorded $19.7 of severance and
severance-related costs for the termination of certain Harland
employees and $2.8 of costs for the closure of certain Harland
facilities in the above purchase price allocation. See
Note 15 for additional disclosures regarding restructuring.
As part of the application of purchase accounting, inventory was
increased by $4.6 due to a fair value adjustment. The amount of
the inventory fair value adjustment was expensed as additional
non-cash cost of products sold as the fair-valued inventory was
sold (of which $4.4 was expensed during 2007).
F-18
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
Also as part of the application of purchase accounting, deferred
revenue was decreased by $15.0 due to a fair value adjustment.
This non-cash fair value adjustment resulted in lower revenue
being recognized over the related earnings period (of which
$0.2, $1.6 and $12.2 were reflected as reduced revenues during
2009, 2008 and 2007, respectively).
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Finished goods
|
|
$
|
9.8
|
|
|
$
|
13.3
|
|
Work-in-progress
|
|
|
9.5
|
|
|
|
9.5
|
|
Raw materials
|
|
|
13.2
|
|
|
|
15.6
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32.5
|
|
|
$
|
38.4
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Property,
Plant and Equipment
|
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Machinery and equipment
|
|
$
|
110.3
|
|
|
$
|
115.8
|
|
Computer software and hardware
|
|
|
134.0
|
|
|
|
102.1
|
|
Leasehold improvements
|
|
|
28.5
|
|
|
|
22.4
|
|
Buildings and improvements
|
|
|
33.6
|
|
|
|
36.8
|
|
Furniture, fixtures and transportation equipment
|
|
|
15.2
|
|
|
|
15.7
|
|
Land
|
|
|
10.1
|
|
|
|
10.8
|
|
Construction-in-progress
|
|
|
13.9
|
|
|
|
15.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
345.6
|
|
|
|
318.7
|
|
Accumulated depreciation
|
|
|
(184.5
|
)
|
|
|
(141.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
161.1
|
|
|
$
|
177.6
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $57.9, $66.6 and $58.5 for the years
ended December 31, 2009, 2008 and 2007, respectively, and
includes the depreciation of the Companys capital leases.
Capitalized lease equipment was $10.6 and $6.7 at
December 31, 2009 and 2008, respectively, and the related
accumulated depreciation was $5.9 and $4.5 at December 31,
2009 and 2008, respectively.
Construction-in-progress
mainly consists of investments in Harland Clarkes
information technology infrastructure, contact centers,
production bindery and delivery systems.
At December 31, 2009, assets held for sale consist of the
following Harland Clarke segment facilities:
|
|
|
|
|
|
|
Location
|
|
Former Use
|
|
Year Closed
|
|
Atlanta, GA
|
|
Operations support
|
|
|
2008
|
|
Atlanta, GA
|
|
Printing
|
|
|
2008
|
|
Greensboro, NC
|
|
Printing
|
|
|
2009
|
|
Syracuse, NY
|
|
Printing
|
|
|
2009
|
|
F-19
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
The Syracuse and Greensboro facilities were closed to better
utilize plant network capacity and maximize manufacturing and
distribution efficiencies. The Atlanta facilities were closed as
part of the Companys plan to exit duplicative facilities
related to the Harland Acquisition. Subsequent to the
classification of the Atlanta facilities as assets held for
sale, there have been significant changes in the real estate
market. The Company continues to make appropriate changes to its
marketing plan and believes these facilities will be sold within
twelve months. In January 2010, the Syracuse facility was sold
for its carrying value of $1.1.
Assets held for sale are included in prepaid expenses and other
current assets on the accompanying consolidated balance sheets
and consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Land
|
|
$
|
1.4
|
|
|
$
|
1.0
|
|
Buildings and improvements
|
|
|
3.5
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4.9
|
|
|
$
|
2.7
|
|
|
|
|
|
|
|
|
|
|
In 2008, the Company recorded $0.5 in impairments related to
print facilities held for sale which are included in asset
impairment charges in the accompanying consolidated statements
of operations. One of the facilities was subsequently sold for
its carrying value of $2.8. In 2008, the Company also recorded a
$0.2 impairment related to the operations support facility,
which is included in asset impairment charges in the
accompanying consolidated statements of operations.
|
|
7.
|
Goodwill
and Other Intangible Assets
|
The change in carrying amount of goodwill by business segment
for the years ended December 31, 2009 and 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harland
|
|
|
|
|
|
|
|
|
|
Harland
|
|
|
Financial
|
|
|
|
|
|
|
|
|
|
Clarke
|
|
|
Solutions
|
|
|
Scantron
|
|
|
Total
|
|
|
Balance as of December 31, 2007
|
|
$
|
768.4
|
|
|
$
|
425.9
|
|
|
$
|
152.6
|
|
|
$
|
1,346.9
|
|
Data Management acquisition
|
|
|
|
|
|
|
|
|
|
|
115.9
|
|
|
|
115.9
|
|
Transaction Holdings acquisition
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
2.8
|
|
Adjustments to goodwill
|
|
|
1.1
|
|
|
|
(0.5
|
)
|
|
|
(0.2
|
)
|
|
|
0.4
|
|
Effect of exchange rate changes
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
(0.1
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
772.3
|
|
|
|
425.0
|
|
|
|
268.2
|
|
|
|
1,465.5
|
|
Protocol IMS acquisition
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
SubscriberMail acquisition
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
6.3
|
|
Adjustments to goodwill
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
0.3
|
|
|
|
0.2
|
|
Effect of exchange rate changes
|
|
|
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
$
|
779.4
|
|
|
$
|
425.2
|
|
|
$
|
268.6
|
|
|
$
|
1,473.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
Useful lives, gross carrying amounts and accumulated
amortization for other intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
|
Useful Life
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
(in years)
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
3-30
|
|
|
$
|
1,233.4
|
|
|
$
|
1,230.6
|
|
|
$
|
260.5
|
|
|
$
|
170.2
|
|
Trademarks and tradenames
|
|
|
2-25
|
|
|
|
154.5
|
|
|
|
8.3
|
|
|
|
3.4
|
|
|
|
1.1
|
|
Software and other
|
|
|
2-10
|
|
|
|
65.1
|
|
|
|
60.6
|
|
|
|
28.2
|
|
|
|
18.2
|
|
Patents and patents pending
|
|
|
3-20
|
|
|
|
20.0
|
|
|
|
19.6
|
|
|
|
4.0
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,473.0
|
|
|
|
1,319.1
|
|
|
|
296.1
|
|
|
|
191.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and tradenames
|
|
|
|
|
|
|
11.0
|
|
|
|
201.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
|
|
|
|
$
|
1,484.0
|
|
|
$
|
1,520.1
|
|
|
$
|
296.1
|
|
|
$
|
191.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $104.2, $97.9 and $67.7 for the years
ended December 31, 2009, 2008 and 2007, respectively.
The weighted average amortization period for all amortizable
intangible assets recorded in connection with the businesses
acquired in 2009 was 7.1 years. The weighted average
amortization period for each major class of amortizable
intangible assets recorded in connection with the businesses
acquired in 2009 was as follows: customer
relationships 8.2 years, trademarks and
tradenames 8.1 years, software and
other 4.7 years and patents and patents
pending 3.0 years.
Estimated annual aggregate amortization expense for intangible
assets through December 31, 2014 is as follows:
|
|
|
|
|
2010
|
|
$
|
108.8
|
|
2011
|
|
|
101.8
|
|
2012
|
|
|
94.4
|
|
2013
|
|
|
84.5
|
|
2014
|
|
|
77.4
|
|
As a result of the 2009 annual impairment test for
indefinite-lived tradenames, the Company determined the fair
value of the Harland Clarke tradename was less than its carrying
value due to declines in revenues from check unit volumes that
are projected to decline at rates that are higher than recent
years and also due to the continuing economic downturn. As a
result of this impairment, the useful life of the Harland Clarke
tradename was reassessed and determined to no longer be
indefinite. Based on an analysis of future cash flows
attributable to the Harland Clarke tradename, the Company
determined the economic life for the Harland Clarke tradename is
25 years. A non-cash impairment charge of $44.2 ($33.4 for
the Harland Clarke segment, $10.6 for the Harland Financial
Solutions segment and $0.2 for the Scantron segment) was
recorded in the fourth quarter of 2009 based on the fair value
of the Harland Clarke tradename being less than its carrying
value and the reclassification of the useful life from an
indefinite life to a life of 25 years. This impairment
charge was included in asset impairment charges in the
accompanying consolidated statements of operations for 2009. The
charge did not affect consolidated cash flows, current
liquidity, capital resources or covenants under existing credit
facilities. The remaining balance of $145.8 for the Harland
Clarke tradename was reclassified from indefinite-lived
tradenames to amortized tradenames in the table of intangible
assets above. The Company began to amortize this intangible
asset on an undiscounted cash flow basis in the fourth quarter
F-21
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
of 2009 resulting in additional amortization expense of $1.3 in
2009. Amortization expense for this intangible asset is expected
to be $8.0 in 2010.
During 2008, the Company experienced further declines in
customer revenues from Alcott Routon operations and assessed the
customer relationship intangible asset for impairment. As a
result, the Company calculated the estimated fair value and
wrote off the customer relationship intangible asset, which was
in excess of fair value. The associated non-cash impairment
charge of $0.5 was included in asset impairment charges in the
accompanying consolidated statements of operations for 2008.
During 2007, the Company continued to experience greater revenue
attrition than expected from Alcott Routon operations within the
Harland Clarke segment. As a result, as well as
managements decision to change the business model for this
operation, the Company assessed whether portions of the related
acquired tradename and customer relationship intangible assets
were impaired. An analysis of the sum of the forecasted
undiscounted future cash flows based on then current
expectations indicated an impairment and the intangible assets
were written down to their estimated fair value at that time. As
a result, a non-cash impairment charge of $3.1 was recorded and
included in asset impairment charges in the accompanying
consolidated statements of operations for 2007.
Information pertaining to the Companys income (loss)
before income taxes and the applicable provision (benefit) for
income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
184.0
|
|
|
$
|
88.4
|
|
|
$
|
(16.4
|
)
|
Foreign
|
|
|
(4.5
|
)
|
|
|
(8.2
|
)
|
|
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) before income taxes
|
|
$
|
179.5
|
|
|
$
|
80.2
|
|
|
$
|
(20.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
76.0
|
|
|
$
|
58.1
|
|
|
$
|
|
|
State and local
|
|
|
14.5
|
|
|
|
6.7
|
|
|
|
2.2
|
|
Foreign
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90.6
|
|
|
|
64.9
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(20.8
|
)
|
|
|
(29.5
|
)
|
|
|
(5.9
|
)
|
State and local
|
|
|
(3.2
|
)
|
|
|
(0.9
|
)
|
|
|
(1.7
|
)
|
Foreign
|
|
|
0.8
|
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23.2
|
)
|
|
|
(31.9
|
)
|
|
|
(7.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
$
|
67.4
|
|
|
$
|
33.0
|
|
|
$
|
(5.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and income tax
purposes. Significant components of the Companys deferred
tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Prepaid advertising
|
|
$
|
(1.3
|
)
|
|
$
|
(1.5
|
)
|
Deferred revenues
|
|
|
6.8
|
|
|
|
6.6
|
|
Net operating loss carryforwards
|
|
|
0.3
|
|
|
|
0.8
|
|
Accrued expenses and other liabilities
|
|
|
14.7
|
|
|
|
17.5
|
|
|
|
|
|
|
|
|
|
|
Net current deferred tax asset
|
|
|
20.5
|
|
|
|
23.4
|
|
Valuation allowance
|
|
|
(1.9
|
)
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
18.6
|
|
|
|
21.0
|
|
Long-term:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
(7.7
|
)
|
|
|
(11.1
|
)
|
Postretirement benefits obligation
|
|
|
7.9
|
|
|
|
7.5
|
|
Deferred compensation
|
|
|
3.0
|
|
|
|
2.9
|
|
Intangible assets
|
|
|
(414.2
|
)
|
|
|
(459.5
|
)
|
Net operating loss carryforwards
|
|
|
5.1
|
|
|
|
5.6
|
|
Interest rate swap liability
|
|
|
3.1
|
|
|
|
10.2
|
|
Deferred gain on debt repurchases
|
|
|
(24.9
|
)
|
|
|
|
|
Other
|
|
|
15.5
|
|
|
|
12.3
|
|
|
|
|
|
|
|
|
|
|
Net long-term tax liability
|
|
|
(412.2
|
)
|
|
|
(432.1
|
)
|
Valuation allowance
|
|
|
(3.1
|
)
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(415.3
|
)
|
|
|
(435.7
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(396.7
|
)
|
|
$
|
(414.7
|
)
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the Company had domestic federal net
operating loss (NOL) carryforwards of $4.1, which
expire between 2021 and 2022. The federal NOL carryforwards
relate to an acquisition in 2004 and therefore are subject to
annual limitations under Internal Revenue Code Section 382,
which generally restricts the amount of a corporations
taxable income that can be offset by a taxpayers NOL
carryforwards in taxable years after a change in ownership has
occurred.
The Company had domestic state net operating loss carryforwards
totaling $0.8 (tax effected), with $0.5 expiring in
2011-2019
and the remainder expiring beyond 2019. In addition, the Company
had foreign net operating loss carryforwards of $13.3 for
Ireland, which have no expiration dates.
The Company has established a valuation allowance for certain
federal, state and foreign net operating loss and tax credit
carryforwards. Management believes that, based on a number of
factors, the available objective evidence creates uncertainty
regarding the utilization of these carryforwards. At
December 31, 2009, there was a valuation allowance of $5.0
for such items. The valuation allowance for deferred tax assets
decreased by $1.0 during 2009. The decrease in this allowance
was primarily due to a $2.7 reduction in domestic net operating
loss and tax credit carryforwards and a $1.7 increase relating
to losses in Ireland.
F-23
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
The effective tax rate varies from the current statutory federal
income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local taxes
|
|
|
3.4
|
%
|
|
|
3.9
|
%
|
|
|
0.5
|
%
|
Foreign rate differential
|
|
|
0.4
|
%
|
|
|
2.1
|
%
|
|
|
|
|
Foreign loss for which no benefit was recorded
|
|
|
1.0
|
%
|
|
|
|
|
|
|
(7.4
|
)%
|
Uncertain tax positions
|
|
|
(2.0
|
)%
|
|
|
|
|
|
|
|
|
Other
|
|
|
(0.3
|
)%
|
|
|
0.1
|
%
|
|
|
(2.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37.5
|
%
|
|
|
41.1
|
%
|
|
|
26.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company, M & F Worldwide and another subsidiary of
M & F Worldwide entered into a tax sharing agreement
in 2005 whereby M & F Worldwide files consolidated
federal income tax returns on the Companys behalf, as well
as on behalf of certain other subsidiaries of M & F
Worldwide. Under the tax sharing agreement, the Company makes
periodic payments to M & F Worldwide. These payments
are based on the applicable federal income tax liability that
the Company would have had for each taxable period if the
Company had not been included in the M & F Worldwide
consolidated group. Similar provisions apply with respect to any
foreign, state or local income or franchise tax returns filed by
any M & F Worldwide consolidated, combined or unitary
group for each year that the Company is included in any such
group for foreign, state or local tax purposes. During 2009,
2008 and 2007, the Company made net payments to M & F
Worldwide of $79.4, $57.4 and $5.3, respectively, under the tax
sharing agreement. At the end of 2009 and 2008, the Company had
net receivables of $8.3 and $6.0, respectively, relating to the
tax sharing agreements.
To the extent that the Company has losses for tax purposes, the
tax sharing agreement permits the Company to carry those losses
back to periods beginning on or after December 15, 2005,
and forward for so long as the Company is included in the
affiliated group of which M & F Worldwide is the
common parent (in both cases, subject to federal, state and
local rules on limitation and expiration of net operating
losses) to reduce the amount of the payments the Company
otherwise would be required to make to M & F Worldwide
in years in which it has current income for tax purposes. If the
loss is carried back to the previous period, M & F
Worldwide shall pay the Company an amount equal to the decrease
of the taxes the Company would have benefited as a result of the
carry back.
In connection with the Clarke American Acquisition, Honeywell
agreed to indemnify M & F Worldwide and its
affiliates, including the Company, for certain income tax
liabilities that arose prior to the acquisition of Clarke
American and M & F Worldwide has agreed to reimburse
to the Company an amount equal to 100% of any payment received
(unless M & F Worldwide incurs any such liabilities
directly).
F-24
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Balance at January 1
|
|
$
|
18.6
|
|
|
$
|
19.3
|
|
|
$
|
9.9
|
|
Additions from acquisitions
|
|
|
|
|
|
|
|
|
|
|
9.6
|
|
Additions based on tax positions related to the current year
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions for tax positions for prior years
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
Reductions for tax positions for prior years
|
|
|
(6.7
|
)
|
|
|
(0.7
|
)
|
|
|
(0.2
|
)
|
Settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
13.6
|
|
|
$
|
18.6
|
|
|
$
|
19.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the amounts reflected in the table above at December 31,
2009, there were $5.3 of tax benefits that, if recognized in
2009, would have reduced the Companys annual effective tax
rate. The Company had accrued interest and penalties of
approximately $6.9 and $6.1 as of December 31, 2009 and
2008, respectively. The Company records both accrued interest
and penalties related to income tax matters, which is not
significant, in the provision for income taxes in the
accompanying consolidated statements of operations. The Company
does not expect its unrecognized tax benefits to change
significantly over the next 12 months.
The Company is subject to taxation in the United States and
various state and foreign jurisdictions. The statute of
limitations for the Companys federal and state tax returns
for the tax years 2005 through 2008 generally remain open. In
addition, open tax years related to foreign jurisdictions remain
subject to examination but are not considered material.
The Internal Revenue Service previously commenced examinations
of Novar for the tax year 2005. The Internal Revenue Service
recently completed examinations of Harland for the tax years
2005 through May 1, 2007 and for Harlands amended tax
returns filed for claims of research and development credits
relating to tax years 2002 through 2005. In connection with
completion of the audits, Harland resolved its research and
development credit claims with the Internal Revenue Service.
This resulted in a $5.9 reduction of the accrual for the
Companys uncertain tax positions, of which $3.4 (inclusive
of interest) was recorded as a benefit in the tax provision for
the year ended December 31, 2009.
The Company, through its subsidiaries, sponsors certain defined
contribution benefit plans whereby it generally matches employee
contributions up to 4% of base wages. Contributions to the plans
totaled $14.5, $15.9 and $11.4 for the years ended
December 31, 2009, 2008 and 2007, respectively.
The Company has deferred compensation agreements with certain
former officers. The present value of the cash benefits payable
under these agreements was $6.5 and $6.4 at December 31,
2009 and 2008, respectively. Accretion expense recognized for
these agreements was not significant.
|
|
10.
|
Other
Postretirement Benefit Plans
|
The Company sponsors two unfunded postretirement defined benefit
plans that cover certain former salaried and non-salaried
employees. One plan provides healthcare benefits and the other
provides life insurance benefits. The medical plan is
contributory and contributions are adjusted annually based on
actual claims experience. For retirees who retired prior to
December 31, 2002 with twenty or more years of service at
December 31, 2000, the Company contributes approximately
50% of the cost of the medical plan. For all other retirees, the
Companys intent is that the retirees provide the majority
of the actual cost of the medical plan. The life insurance plan
is noncontributory for those employees that retired by
December 31, 2002.
F-25
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
As of December 31, 2009 and 2008, the accumulated
postretirement benefit obligation (APBO) was $18.9
and $17.5, respectively. For the years ended December 31,
2009, 2008 and 2007, the Company contributed $1.2, $1.5 and
$0.8, respectively, to these plans. The Company expects to
contribute $1.2 to these plans in 2010.
The following table presents the beginning and ending balances
of the APBO, the changes in the APBO, and reconciles the
plans status to the accrued postretirement healthcare and
life insurance liability reflected on the accompanying
consolidated balance sheets as of December 31, 2009 and
2008:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
APBO at beginning of year
|
|
$
|
17.5
|
|
|
$
|
15.6
|
|
Changes in APBO:
|
|
|
|
|
|
|
|
|
Interest cost
|
|
|
1.0
|
|
|
|
0.9
|
|
Benefits paid
|
|
|
(2.4
|
)
|
|
|
(2.7
|
)
|
Retiree contributions
|
|
|
1.1
|
|
|
|
1.2
|
|
Health benefits subsidy
|
|
|
0.1
|
|
|
|
|
|
Actuarial loss
|
|
|
1.6
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
APBO at end of year
|
|
$
|
18.9
|
|
|
$
|
17.5
|
|
|
|
|
|
|
|
|
|
|
Included in accrued salaries, wages and employee benefits
|
|
$
|
1.2
|
|
|
$
|
1.1
|
|
Included in other liabilities
|
|
|
17.7
|
|
|
|
16.4
|
|
|
|
|
|
|
|
|
|
|
APBO at end of year
|
|
$
|
18.9
|
|
|
$
|
17.5
|
|
|
|
|
|
|
|
|
|
|
The following table presents the changes in the fair value of
plan assets and the funded status for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
|
|
|
$
|
|
|
Employer contributions
|
|
|
1.2
|
|
|
|
1.5
|
|
Retiree contributions
|
|
|
1.1
|
|
|
|
1.2
|
|
Health benefits subsidy
|
|
|
0.1
|
|
|
|
|
|
Benefits paid
|
|
|
(2.4
|
)
|
|
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(18.9
|
)
|
|
$
|
(17.5
|
)
|
Unrecognized actuarial net loss
|
|
|
2.6
|
|
|
|
1.0
|
|
Cumulative (charge) to other comprehensive income
|
|
|
(2.6
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
(18.9
|
)
|
|
$
|
(17.5
|
)
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 and 2008, amounts recognized in
accumulated other comprehensive loss consist of:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Unrecognized actuarial net loss
|
|
$
|
2.6
|
|
|
$
|
1.0
|
|
|
|
|
|
|
|
|
|
|
F-26
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
Net periodic postretirement benefit costs for these plans were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Interest on accumulated postretirement benefit obligation
|
|
$
|
1.0
|
|
|
$
|
0.9
|
|
|
$
|
0.6
|
|
Net amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net postretirement benefit cost
|
|
|
1.0
|
|
|
|
0.9
|
|
|
|
0.6
|
|
Other changes in benefit obligations recognized in other
comprehensive loss (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized actuarial net loss (gain)
|
|
|
1.6
|
|
|
|
2.5
|
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other
comprehensive loss (income)
|
|
$
|
2.6
|
|
|
$
|
3.4
|
|
|
$
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average discount rates used to determine benefit
obligations as of December 31, 2009 and 2008 were 5.75% and
6.0%, respectively. The weighted average discount rates used to
determine the net periodic postretirement benefit cost for 2009
and 2008 were 6.0% and 5.75%, respectively. The annual
healthcare cost trend rates used for 2010 to determine benefit
obligations at December 31, 2009 were assumed to be 10.0%
for pre-65 age groups and 8.0% for post-65 age groups due to the
effects of Medicare. The estimated annual healthcare cost trend
rates grade down gradually to 4.75% at 2016 for post-65 age
groups and 4.75% at 2018 for pre-65 age groups. Participant
contributions are assumed to increase with healthcare cost trend
rates.
The healthcare cost trend rate assumptions, which are net of
participant contributions and subsidies, could have a
significant effect on amounts reported. A change in the assumed
trend rate of 1 percentage point would have the following
effects:
|
|
|
|
|
|
|
|
|
|
|
1 Percentage
|
|
1 Percentage
|
|
|
Point Increase
|
|
Point Decrease
|
|
Effect on total interest cost for 2009
|
|
$
|
0.1
|
|
|
$
|
(0.1
|
)
|
Effect on postretirement benefit obligation at December 31,
2009
|
|
|
1.3
|
|
|
|
(1.1
|
)
|
The following reflects the estimated future benefit payments,
net of estimated participant contributions and subsidies:
|
|
|
|
|
2010
|
|
$
|
1.2
|
|
2011
|
|
|
1.2
|
|
2012
|
|
|
1.2
|
|
2013
|
|
|
1.2
|
|
2014
|
|
|
1.2
|
|
2015-2019
|
|
|
6.3
|
|
During 2009, 2008, and 2007 there were no reclassification
adjustments or amortization of the actuarial (loss) gain. In
2010, amortization of accumulated actuarial loss that will be
included in net periodic postretirement benefit costs will not
be significant.
F-27
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
$1,900.0 Senior Secured Credit Facilities
|
|
$
|
1,755.0
|
|
|
$
|
1,773.0
|
|
Senior Floating Rate Notes due 2015
|
|
|
206.8
|
|
|
|
305.0
|
|
9.50% Senior Fixed Rate Notes due 2015
|
|
|
271.3
|
|
|
|
310.0
|
|
Capital lease obligations and other indebtedness
|
|
|
5.7
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,238.8
|
|
|
|
2,390.6
|
|
Less: current maturities
|
|
|
(19.5
|
)
|
|
|
(19.8
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current maturities
|
|
$
|
2,219.3
|
|
|
$
|
2,370.8
|
|
|
|
|
|
|
|
|
|
|
$1,900.0
Senior Secured Credit Facilities
On April 4, 2007, the Company and substantially all of its
subsidiaries as co-borrowers entered into a credit agreement
(the Credit Agreement). The Credit Agreement
provides for a $1,800.0 senior secured term loan (the Term
Loan), which was fully drawn at closing on May 1,
2007 and matures on June 30, 2014. The Company is required
to repay the Term Loan in equal quarterly installments in
aggregate annual amounts equal to 1% of the original principal
amount. In addition, the Credit Agreement requires that a
portion of the Companys excess cash flow be applied to
prepay amounts borrowed, as further described below. The Credit
Agreement also provides for a $100.0 revolving credit facility
(the Revolver) that matures on June 28, 2013.
The Revolver includes an up to $60.0 subfacility in the form of
letters of credit and an up to $30.0 subfacility in the form of
short-term swing line loans. The weighted average interest rate
on borrowings outstanding under the Term Loan was 2.7% at
December 31, 2009. As of December 31, 2009, there were
no outstanding borrowings under the Revolver and there was $87.5
available for borrowing (giving effect to the issuance of $12.5
of letters of credit).
Under certain circumstances, the Company is permitted to incur
additional term loan
and/or
revolving credit facility indebtedness in an aggregate principal
amount of up to $250.0. In addition, the terms of the Credit
Agreement and the 2015 Senior Notes (as defined below) allow the
Company to incur substantial additional debt.
Loans under the Credit Agreement bear at the Companys
option, interest at:
|
|
|
|
|
A rate per annum equal to the higher of (a) the prime rate
of Credit Suisse and (b) the Federal Funds rate plus 0.50%,
in each case plus an applicable margin of 1.50% per annum for
revolving loans and for term loans; or
|
|
|
|
A rate per annum equal to a reserve-adjusted LIBOR rate, plus an
applicable margin of 2.50% per annum for revolving loans and for
term loans.
|
The Credit Agreement has a commitment fee for the unused portion
of the Revolver and for issued letters of credit of 0.50% and
2.63%, respectively. Interest rate margins and commitment fees
under the Revolver are subject to reduction in increments based
upon the Company achieving certain consolidated leverage ratios.
The Company and each of its existing and future domestic
subsidiaries, other than unrestricted subsidiaries and certain
immaterial subsidiaries, are guarantors and may also be
co-borrowers under the Credit Agreement. In addition, the
Companys direct parent, CA Acquisition Holdings, Inc., is
a guarantor under the Credit Agreement. The senior secured
credit facilities are secured by a perfected first priority
security interest in substantially all of the Companys,
each of the co-borrowers and the guarantors tangible
and intangible
F-28
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
assets and equity interests (other than voting stock in excess
of 65.0% of the outstanding voting stock of each direct foreign
subsidiary and certain other excluded property).
The Credit Agreement contains customary affirmative and negative
covenants including, among other things, restrictions on
indebtedness, liens, mergers and consolidations, sales of
assets, loans, acquisitions, restricted payments, transactions
with affiliates, dividends and other payment restrictions
affecting subsidiaries and sale-leaseback transactions. The
Credit Agreement requires the Company to maintain a maximum
consolidated leverage ratio for the benefit of lenders under the
Revolver only. The Company has the right to prepay the Term Loan
at any time without premium or penalty, subject to certain
breakage costs, and the Company may also reduce any unutilized
portion of the Revolver at any time, in minimum principal
amounts set forth in the Credit Agreement. The Company is
required to prepay the Term Loan with 50% of excess cash flow
(as defined in the Credit Agreement, commencing in 2009 with
respect to fiscal year 2008, with certain reductions set forth
in the Credit Agreement, based on achievement and maintenance of
leverage ratios) and 100% of the net proceeds of certain
issuances, offerings or placements of debt obligations of the
Company or any of its subsidiaries (other than permitted debt).
No such excess cash flow payment was required to be paid in 2009
with respect to 2008 and no such excess cash flow payment is
required to be paid in 2010 with respect to 2009. Each such
prepayment will be applied first to the next eight unpaid
quarterly amortization installments on the term loans and second
to the remaining amortization installments on the term loans on
a pro rata basis.
The Credit Agreement also contains certain customary affirmative
covenants and events of default. Such events of default include,
but are not limited to: non-payment of amounts when due;
violation of covenants; material inaccuracy of representations
and warranties; cross default and cross acceleration with
respect to other material debt; bankruptcy and other insolvency
events; certain ERISA events; invalidity of guarantees or
security documents; and material judgments. Some of these events
of default allow for grace periods.
If a change of control (as defined in the Credit Agreement)
occurs, the Company will be required to make an offer to prepay
all outstanding term loans under the Credit Agreement at 101% of
the outstanding principal amount thereof plus accrued and unpaid
interest, and lenders holding a majority of the revolving credit
commitments may elect to terminate the revolving credit
commitments in full. The Company is also required to offer to
prepay outstanding term loans at 100% of the principal amount to
be prepaid, plus accrued and unpaid interest, with the proceeds
of certain asset sales under certain circumstances.
Under the terms of the Credit Agreement, the Company was
required to ensure that, until no earlier than May 1, 2009,
at least 40% of the aggregate principal amount of its long-term
indebtedness bears interest at a fixed rate, either by its terms
or through entering into hedging agreements within 180 days
of the effectiveness of the Credit Agreement. In order to comply
with this requirement, the Company entered into interest rate
derivative arrangements described in Note 12.
Senior
Notes due 2015
Additionally, in connection with the Harland Acquisition, on
May 1, 2007, the Company issued $305.0 aggregate principal
amount of Senior Floating Rate Notes due 2015 (the
Floating Rate Notes) and $310.0 aggregate principal
amount of 9.50% Senior Fixed Rate Notes due 2015 (the
Fixed Rate Notes and, together with the Floating
Rate Notes, the 2015 Senior Notes). The 2015 Senior
Notes mature on May 15, 2015. The Fixed Rate Notes bear
interest at a rate per annum of 9.50%, payable on May 15 and
November 15 of each year. The Floating Rate Notes bear interest
at a rate per annum equal to the Applicable LIBOR Rate (as
defined in the indenture governing the 2015 Senior Notes (the
Indenture)), subject to a floor of 1.25%, plus
4.75%, payable on February 15, May 15, August 15 and
November 15 of each year. The interest rate on the floating rate
notes was 6.0% at December 31, 2009. The Senior Notes are
unsecured and are therefore effectively subordinated to all of
the Companys senior secured indebtedness, including
outstanding borrowings
F-29
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
under the Credit Agreement. The Company and each of its existing
subsidiaries, other than unrestricted subsidiaries and certain
immaterial subsidiaries, are guarantors and may also be
co-issuers under the 2015 Senior Notes.
The Indenture contains customary restrictive covenants,
including, among other things, restrictions on the
Companys ability to incur additional debt, pay dividends
and make distributions, make certain investments, repurchase
stock, incur liens, enter into transactions with affiliates,
enter into sale and lease back transactions, merge or
consolidate and transfer or sell assets. The Company must offer
to repurchase all of the 2015 Senior Notes upon the occurrence
of a change of control, as defined in the Indenture,
at a purchase price equal to 101% of their aggregate principal
amount, plus accrued and unpaid interest. The Company must also
offer to repurchase the 2015 Senior Notes with the proceeds from
certain sales of assets, if it does not apply those proceeds
within a specified time period after the sale, at a purchase
price equal to 100% of their aggregate principal amount, plus
accrued and unpaid interest.
Prior
Credit Facilities
In December 2005, the Company, as Borrower, entered into senior
secured credit facilities (the Prior Credit
Facilities), which provided for a revolving credit
facility (the Prior Revolver) in the amount of $40.0
maturing on December 15, 2010 and a $440.0 term loan
maturing on December 15, 2011 (the Prior Term
Loan). The outstanding principal balance under the Prior
Credit Facilities of $393.7 was repaid on May 1, 2007 in
connection with the Harland Acquisition and related financing
transactions, along with accrued interest through the date of
repayment of $2.9 and prepayment penalties of $3.9.
The Prior Term Loan had an aggregate principal amount at
maturity of $440.0. The Company assumed $437.8 of net
obligations from its issuance, net of original discount of 0.5%.
The original discount was fully amortized as non-cash interest
expense over the life of the term loan facility using the
effective interest method.
Senior
Notes due 2013
In December 2005, the Company issued $175.0 principal amount of
11.75% Senior Notes due December 15, 2013 (the
2013 Senior Notes). All of these notes were either
repurchased in a tender offer that closed on May 3, 2007 or
redeemed on June 4, 2007 for total consideration of $220.1,
including prepayment premiums and consent payments totaling
$37.3 and accrued interest of $7.8.
Gain
on Early Extinguishment of Debt
During 2009, the Company extinguished debt with a total
principal amount of $136.9 by purchasing 2015 Senior Notes in
individually negotiated transactions for an aggregate purchase
price of $67.6, resulting in a gain of $65.0 after the write-off
of $4.3 of unamortized deferred financing fees related to the
extinguished debt.
Loss
on Early Extinguishment of Debt
During 2007, in connection with the extinguishment of the
Companys Prior Credit Facilities and the 2013 Senior
Notes, the Company recorded a total loss on early extinguishment
of debt of $54.6, consisting of the following: the $37.3
prepayment premiums and consent payments on the 2013 Senior
Notes, the $3.9 prepayment penalty on the Prior Credit
Facilities, a non-cash expense of $1.5 for the write-off of
unamortized
F-30
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
original discount on the Prior Credit Facilities, and a non-cash
expense of $11.9 for the write-off of unamortized deferred
financing fees related to the 2013 Senior Notes and the Prior
Credit Facilities.
Capital
Lease Obligations and Other Indebtedness
The Company has outstanding capital lease obligations and other
indebtedness with principal balances totaling $5.7 and $2.6 at
December 31, 2009 and 2008, respectively. These obligations
have imputed interest rates ranging from 5.7% to 9.6% and have
required payments, including interest of $1.8 in 2010, $1.6 in
2011, $1.1 in 2012 and 2013 and $0.8 in 2014. During 2009, a
subsidiary of the Company entered into a capital lease and other
indebtedness totaling $5.1 and, accordingly, such non-cash
transaction amounts have been excluded from the consolidated
statements of cash flows.
Annual
Maturities
Annual maturities of long-term debt during the next five years
are as follows:
|
|
|
|
|
2010
|
|
$
|
19.5
|
|
2011
|
|
|
19.3
|
|
2012
|
|
|
19.0
|
|
2013
|
|
|
19.0
|
|
2014
|
|
|
1,683.8
|
|
|
|
12.
|
Derivative
Financial Instruments
|
Interest
Rate Hedges
The Company uses hedge transactions, which are accounted for as
cash flow hedges, to limit the Companys risk on a portion
of its variable-rate debt.
During February 2006, the Company entered into interest rate
hedge transactions in the form of three-year interest rate swaps
with a total notional amount of $150.0, which became effective
on July 1, 2006. The hedges expired on June 30, 2009.
The hedges were designed to swap the underlying variable rate
for a fixed rate of 4.992%. On May 1, 2007, the
Companys prior credit facilities were repaid in full. The
Company redesignated the swaps as a hedge against the variable
interest rate on a portion of its Term Loan. The Company
amortized the fair value of the derivative liability of $0.4 as
of May 1, 2007 in interest expense in the consolidated
statements of operations over the remaining life of the
derivative contract using the straight-line method.
During June 2007, the Company entered into additional interest
rate derivative transactions in the form of a two-year interest
rate swap with a notional amount of $255.0 and a three-year
interest rate swap with a notional amount of $255.0, which
became effective on June 29, 2007. The two-year hedge,
which expired on June 30, 2009, swapped the underlying
variable rate for a fixed rate of 5.323% and the three-year
hedge swaps the underlying variable rate for a fixed rate of
5.362%. During August 2007, the Company entered into an
additional interest rate derivative transaction in the form of a
two-year interest rate swap with a notional amount of $250.0,
which became effective on September 28, 2007. The hedge,
which expired on September 28, 2009, swapped the underlying
variable rate for a fixed rate of 4.977%.
During June 2009, the Company entered into an interest rate
derivative transaction in the form of a three-year interest rate
swap with a notional amount of $350.0, which became effective on
June 30, 2009. This hedge swaps the underlying variable
rate for a fixed rate of 2.353%. During September 2009, the
Company entered into an additional interest rate derivative
transaction in the form of a three-year interest rate swap with
F-31
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
a notional amount of $250.0, which became effective on
September 30, 2009. This hedge swaps the underlying
variable rate for a fixed rate of 2.140%.
The following presents the fair values of these derivative
instruments and the classification in the consolidated balance
sheets.
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated
|
|
|
|
|
|
|
as Cash Flow
|
|
|
|
December 31,
|
Hedging Instruments:
|
|
Balance Sheet Classification
|
|
2009
|
|
2008
|
|
Interest rate swaps
|
|
Other current liabilities
|
|
$
|
6.3
|
|
|
$
|
13.8
|
|
|
|
Other liabilities
|
|
|
7.9
|
|
|
|
13.7
|
|
See Note 13 for information regarding the valuation of
these derivative instruments.
These derivative instruments had no ineffective portions during
2009 and 2008. Accordingly, no amounts were required to be
reclassified from accumulated other comprehensive loss to the
consolidated statements of operations due to ineffectiveness.
The following presents the effect of these derivative
instruments (effective portion) on other comprehensive income
and amounts reclassified from accumulated other comprehensive
loss into interest expense.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
Loss Reclassified from
|
|
|
|
|
Accumulated Other
|
Derivatives Designated
|
|
Loss Recognized in
|
|
Comprehensive Loss
|
as Cash Flow
|
|
Other Comprehensive
|
|
into Interest
|
Hedging Instruments:
|
|
Income
|
|
Expense
|
|
Interest rate swaps
|
|
$
|
18.3
|
|
|
$
|
31.6
|
|
The Company expects to reclassify approximately $18.7 into net
income as additional interest expense during the twelve months
ending December 31, 2010.
The following presents the balances and net changes in the
accumulated other comprehensive loss related to these derivative
instruments, net of income taxes.
|
|
|
|
|
Balances and Net Changes:
|
|
2009
|
|
|
Balance at the beginning of the period
|
|
$
|
16.8
|
|
Loss reclassified from accumulated other comprehensive loss into
interest expense, net of taxes of $12.2
|
|
|
(19.4
|
)
|
Net change in fair value of interest rate swaps, net of taxes of
$7.1
|
|
|
11.2
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
8.6
|
|
|
|
|
|
|
|
|
13.
|
Fair
Value Measurements
|
The Company measures fair value using a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair
value. These tiers include: Level 1, defined as observable
inputs such as quoted prices in active markets; Level 2,
defined as inputs other than quoted prices in active markets
that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs in which little or
no market data exists, therefore requiring an entity to develop
its own assumptions.
F-32
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
Nonrecurring
Fair Value Measurements
The following table presents the Companys nonrecurring
fair value measurements completed during 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
|
|
|
|
|
|
Impairment
|
|
|
2009
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Charges
|
|
Indefinite-lived trademarks and tradenames
|
|
$
|
156.8
|
|
|
|
|
|
|
|
|
|
|
$
|
156.8
|
|
|
$
|
44.2
|
|
Indefinite-lived trademarks and tradenames were measured for
impairment during the fourth quarter of 2009 as part of the
Companys annual measurements for impairment testing and
resulted in non-cash impairment charges totaling $44.2. The
charges consisted of $33.4 related to the Harland Clarke
segment, $10.6 related to the Harland Financial Solutions
segment and $0.2 related to the Scantron segment. The
impairments were primarily due to declines in revenues from
check unit volumes that are projected to decline at rates that
are higher than recent years and also due to the continuing
economic downturn. See Note 2 for more information on the
fair value measurement process for indefinite-lived trademarks
and tradenames.
Recurring
Fair Value Measurements
As of December 31, 2009, the Company held two types of
financial instruments subject to valuation on a recurring basis,
marketable securities and interest rate swaps. The marketable
securities are included in investments in marketable securities
and other assets in the accompanying consolidated balance
sheets. The interest rate swaps are included in current
liabilities and other liabilities in the accompanying
consolidated balance sheets. Fair values as of December 31,
2009 and 2008 are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Marketable securities
|
|
$
|
26.5
|
|
|
$
|
26.5
|
|
|
$
|
|
|
|
$
|
|
|
Liability for interest rate swaps
|
|
|
14.2
|
|
|
|
|
|
|
|
14.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Marketable securities
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
|
|
|
$
|
|
|
Liability for interest rate swaps
|
|
|
27.5
|
|
|
|
|
|
|
|
27.5
|
|
|
|
|
|
Fair value of interest rate swaps is based on forward-looking
interest rate curves as provided by the counterparties, adjusted
for the Companys credit risk. Marketable securities
consist of corporate equity securities and United States
treasury securities. Fair value of corporate equity securities
and United States treasury securities are based on quoted market
prices.
Fair
Value of Financial Instruments
Most of the Companys clients are in the financial services
and educational industries. The Company performs ongoing credit
evaluations of its clients and maintains allowances for
potential credit losses. The Company does not generally require
collateral. Actual losses and allowances have been within
managements expectations.
The carrying amounts for cash and cash equivalents, trade
accounts receivable, accounts payable and accrued liabilities
approximate fair value. The estimated fair value of long-term
debt is determined by Level 2 inputs and is based primarily
on quoted market prices for the same or similar issues as of the
measurement date. The estimated fair value of long-term debt at
December 31, 2009 and 2008 was approximately $1,912.5
F-33
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
and $1,096.3, respectively. The carrying value of long-term debt
at December 31, 2009 and 2008 was $2,238.8 and $2,390.6,
respectively.
|
|
14.
|
Marketable
Securities
|
The Companys marketable securities are classified as
available-for-sale
and are reported at their fair values (quoted market price),
which were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Balance at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States treasury securities
|
|
$
|
24.6
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
24.6
|
|
Equity securities
|
|
|
0.3
|
|
|
|
1.7
|
|
|
|
(0.1
|
)
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24.9
|
|
|
$
|
1.7
|
|
|
$
|
(0.1
|
)
|
|
$
|
26.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
0.3
|
|
|
$
|
0.1
|
|
|
$
|
(0.2
|
)
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company purchased United States treasury securities, which
mature in 2012, during the fourth quarter of 2009.
The following presents the gross unrealized losses and fair
values of the Companys investments in individual
securities that have been in a continuous unrealized position
deemed to be temporary for less than 12 months and for more
than 12 months, aggregated by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
More than 12 Months
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
At December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
At December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
$
|
|
|
|
$
|
|
|
In 2008 and 2007, the Company wrote-down an equity investment
due to an
other-than-temporary
decline in its market value in the amount of $0.8 and $0.8,
respectively. These write-downs are included in other income
(expense), net in the accompanying consolidated statements of
operations. The Company has determined that the gross unrealized
losses on its investments at December 31, 2009 are
temporary in nature. Accordingly, the Company does not consider
the investments to be
other-than-temporarily
impaired at December 31, 2009.
Harland
Clarke and Corporate
Prior to the Harland Acquisition, the Company developed a
restructuring plan for its checks and related products business,
which is now contained in the Harland Clarke segment, to
streamline and redesign the manufacturing plant and contact
center network in order to take advantage of high-capacity
technology and economies of scale, to redefine sales territories
and consolidate sales divisions, and to restructure the
segments corporate staff.
During the period January 1, 2007 through April 30,
2007, the Company established $1.5 in reserves with respect to
the checks and related products business related to the closure
of one contact center and one
F-34
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
printing plant. These facilities were closed in 2007 with
ongoing lease commitments through 2009. The total expenditures
for these closures were $3.2.
During the second quarter of 2007, as a result of the Harland
Acquisition, the Company adopted a plan to restructure the
Harland Clarke segment and Corporate, focused on improving
operating margins through consolidating facilities and reducing
duplicative expenses. The Companys plan primarily included
workforce rationalization, facility closures, consolidation of
certain redundant outsourcing and the reduction of consulting
and other professional services.
In the fourth quarter of 2008, the Company announced it would
consolidate certain printing operations, which included the
closing of two printing facilities in 2009 (consisting of one
owned facility and one leased facility). Due to this action, the
Company recorded an impairment charge of $1.0 to adjust the
carrying value of the owned facility to its estimated fair
value. This impairment charge is included in asset impairment
charges in the accompanying consolidated statements of
operations for 2008. The non-cash utilization of $1.0 and $1.1
in 2008 and 2007, respectively, in the following table includes
adjustments to the carrying value of other property, plant and
equipment.
In addition to restructuring liabilities recorded in the Harland
Acquisition purchase accounting, the Company also adopted plans
during 2008 and 2009 to realize additional cost savings in the
Harland Clarke segment by further consolidating printing plants,
contact centers and selling, general and administrative
functions. The Company also recorded restructuring liabilities
in connection with the Transaction Holdings Acquisition of $1.5
in 2008. The liabilities were reduced by $0.6 in 2009, which is
reflected as non-cash utilization in the table below.
The Company expensed $18.1 for severance and severance-related
costs and $7.6 for facilities closures and other costs during
the year ended December 31, 2009 and expensed $7.0 for
severance and severance-related costs and $1.3 for facilities
closures and other costs during the year ended December 31,
2008. The Company expects to incur in future periods an
additional $1.6 for costs related to these plans. Ongoing lease
commitments related to these plans continue through 2013.
F-35
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
The following table details the components of the Companys
restructuring accruals under its plans established since 2007
related to the Harland Clarke segment and Corporate for 2009,
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Established in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Purchase
|
|
|
|
|
|
|
|
|
Non-cash
|
|
|
Ending
|
|
|
|
Balance
|
|
|
Accounting
|
|
|
Expensed
|
|
|
Paid in Cash
|
|
|
Utilization
|
|
|
Balance
|
|
|
Year Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and severance-related
|
|
$
|
7.4
|
|
|
$
|
|
|
|
$
|
18.1
|
|
|
$
|
(23.0
|
)
|
|
$
|
|
|
|
$
|
2.5
|
|
Facilities closures and other costs
|
|
|
2.3
|
|
|
|
|
|
|
|
7.6
|
|
|
|
(2.8
|
)
|
|
|
(4.6
|
)
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9.7
|
|
|
$
|
|
|
|
$
|
25.7
|
|
|
$
|
(25.8
|
)
|
|
$
|
(4.6
|
)
|
|
$
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and severance-related
|
|
$
|
8.5
|
|
|
$
|
1.8
|
|
|
$
|
7.0
|
|
|
$
|
(9.9
|
)
|
|
$
|
|
|
|
$
|
7.4
|
|
Facilities closures and other costs
|
|
|
2.9
|
|
|
|
0.8
|
|
|
|
1.3
|
|
|
|
(1.7
|
)
|
|
|
(1.0
|
)
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11.4
|
|
|
$
|
2.6
|
|
|
$
|
8.3
|
|
|
$
|
(11.6
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and severance-related
|
|
$
|
1.7
|
|
|
$
|
13.0
|
|
|
$
|
2.9
|
|
|
$
|
(9.1
|
)
|
|
$
|
|
|
|
$
|
8.5
|
|
Facilities closures and other costs
|
|
|
1.0
|
|
|
|
1.4
|
|
|
|
2.7
|
|
|
|
(1.1
|
)
|
|
|
(1.1
|
)
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2.7
|
|
|
$
|
14.4
|
|
|
$
|
5.6
|
|
|
$
|
(10.2
|
)
|
|
$
|
(1.1
|
)
|
|
$
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the amounts disclosed in the table above, the
Company also incurred other expenses related to the facility
closures, including inventory write-offs, training, hiring and
travel.
Harland
Financial Solutions
During the second quarter of 2007, as a result of the Harland
Acquisition, the Company adopted a plan to restructure the
Harland Financial Solutions segment, focused on improving
operating margins primarily through consolidating facilities and
rationalizing the workforce.
During the second quarter of 2008, the Company implemented and
completed a plan to restructure certain selling, general and
administrative functions within the Harland Financial Solutions
segment. The plan focused on improving operating margins through
reducing selling, general and administrative expenses by
leveraging the Companys shared services capabilities.
During the first quarter of 2009, the Company initiated a
multi-year plan to reorganize certain operations and sales and
support functions within the Harland Financial Solutions
segment. The plan, which is expected to be completed by the end
of 2011, focuses on moving from a product-centric organization
to a functional organization in order to enhance customer
support.
The Company expensed $3.3 for severance and severance-related
costs and $0.5 for facilities closures and other costs during
the year ended December 31, 2009, and expensed $3.9 for
severance and severance-related costs during the year ended
December 31, 2008. The Company currently expects to incur
additional costs of $0.2 related to these plans, which is
subject to refinement as the reorganization progresses.
F-36
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
The following table details the Companys restructuring
accruals related to the Harland Financial Solutions segment for
2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Established in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Purchase
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
Balance
|
|
|
Accounting
|
|
|
Expensed
|
|
|
Paid in Cash
|
|
|
Balance
|
|
|
Year Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and severance-related
|
|
$
|
1.4
|
|
|
$
|
|
|
|
$
|
3.3
|
|
|
$
|
(3.7
|
)
|
|
$
|
1.0
|
|
Facilities and other costs
|
|
|
0.7
|
|
|
|
|
|
|
|
0.5
|
|
|
|
(1.1
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2.1
|
|
|
$
|
|
|
|
$
|
3.8
|
|
|
$
|
(4.8
|
)
|
|
$
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and severance-related
|
|
$
|
0.7
|
|
|
$
|
(0.1
|
)
|
|
$
|
3.9
|
|
|
$
|
(3.1
|
)
|
|
$
|
1.4
|
|
Facilities and other costs
|
|
|
1.7
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
(0.6
|
)
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2.4
|
|
|
$
|
(0.5
|
)
|
|
$
|
3.9
|
|
|
$
|
(3.7
|
)
|
|
$
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and severance-related
|
|
$
|
|
|
|
$
|
5.2
|
|
|
$
|
|
|
|
$
|
(4.5
|
)
|
|
$
|
0.7
|
|
Facilities and other costs
|
|
|
|
|
|
|
2.3
|
|
|
|
|
|
|
|
(0.6
|
)
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
7.5
|
|
|
$
|
|
|
|
$
|
(5.1
|
)
|
|
$
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scantron
During the first quarter of 2008, as a result of the Data
Management Acquisition, the Company adopted plans to restructure
the Scantron segment. These plans focused on improving operating
margins through consolidating manufacturing and printing
operations and reducing duplicative selling, general and
administrative expenses through workforce rationalization,
consolidation of certain redundant outsourcing and the reduction
of consulting and other professional services.
As discussed in Note 3, the Company recorded $2.5 of
severance and severance-related costs for the termination of
certain former Data Management employees in purchase accounting.
In addition to these restructuring liabilities recorded in
purchase accounting for the Data Management Acquisition, the
Company expensed $2.3 for severance and severance-related costs
and $0.1 of facilities and other costs for the consolidation of
certain printing operations during the year ended
December 31, 2008. The Company completed substantially all
of the planned employee terminations and consolidation of
printing and manufacturing operations related to the Data
Management Acquisition as of March 31, 2009.
The Company expensed $2.7 for severance and severance-related
costs related to further consolidation of operations and
elimination of certain selling, general and administrative
expenses, and $0.3 for facilities closures and other costs
during the year ended December 31, 2009.
F-37
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
The following table details the components of the Companys
restructuring accruals related to the Scantron segment for 2009
and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Established in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Purchase
|
|
|
|
|
|
|
|
|
Non-Cash
|
|
|
Ending
|
|
|
|
Balance
|
|
|
Accounting
|
|
|
Expensed
|
|
|
Paid in Cash
|
|
|
Utilization
|
|
|
Balance
|
|
|
Year Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and severance-related
|
|
$
|
1.0
|
|
|
$
|
|
|
|
$
|
2.7
|
|
|
$
|
(3.0
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
0.5
|
|
Facilities and other costs
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.0
|
|
|
$
|
|
|
|
$
|
3.0
|
|
|
$
|
(3.0
|
)
|
|
$
|
(0.5
|
)
|
|
$
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and severance-related
|
|
$
|
|
|
|
$
|
2.5
|
|
|
$
|
2.3
|
|
|
$
|
(3.8
|
)
|
|
$
|
|
|
|
$
|
1.0
|
|
Facilities and other costs
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
2.5
|
|
|
$
|
2.4
|
|
|
$
|
(3.9
|
)
|
|
$
|
|
|
|
$
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the amounts disclosed in the table above, the
Company also incurred other expenses related to the initiatives
including inventory write-offs, training, hiring, relocation and
travel.
Restructuring accruals for all of the segments plans are
reflected in other current liabilities and other liabilities in
the accompanying consolidated balance sheets. The Company
expects to pay the remaining severance, facilities and other
costs related to the segments restructuring plans through
2013.
|
|
16.
|
Commitments
and Contingencies
|
Lease
and Purchase Commitments
The Company leases property, equipment and vehicles under
operating leases that expire at various dates through 2020.
Certain leases contain renewal options for one- to five-year
periods. Rental payments are typically fixed over the initial
term of the lease and usually contain escalation factors for the
renewal term. At December 31, 2009, future minimum lease
payments under non-cancelable operating leases with terms of one
year or more are as follows:
|
|
|
|
|
2010
|
|
$
|
27.1
|
|
2011
|
|
|
25.2
|
|
2012
|
|
|
21.3
|
|
2013
|
|
|
16.6
|
|
2014
|
|
|
14.3
|
|
Thereafter
|
|
|
26.6
|
|
Minimum annual rental payments in the above table have not been
reduced by minimum sublease rentals of $0.7.
Total lease expense for all operating leases was $26.8, $24.6
and $20.7 for the years ended December 31, 2009, 2008 and
2007, respectively.
At December 31, 2009, the Company had obligations to
purchase approximately $17.9 of raw materials.
Honeywell
Indemnification
Certain of the intermediate holding companies of the predecessor
of the Company had issued guarantees on behalf of operating
companies formerly owned by these intermediate holding
companies, which operating
F-38
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
companies are not part of the Companys business. In the
stock purchase agreement executed in connection with the
acquisition of the Company by M & F Worldwide,
Honeywell agreed to use its commercially reasonable efforts to
assume, replace or terminate such guarantees and indemnify
M & F Worldwide and its affiliates, including the
Company and its subsidiaries, with respect to all liabilities
arising under such guarantees. See Note 8 for certain tax
matters indemnified by Honeywell.
Other
In June 2008, Kenneth Kitson, purportedly on behalf of himself
and a class of other alleged similarly situated commercial
borrowers from the Bank of Edwardsville, an Illinois-based
community bank (BOE), filed in an Illinois state
court an amended complaint that re-asserted previously filed
claims against BOE and added claims against Harland Financial
Solutions, Inc. (HFS). The amended complaint
alleged, among other things, that HFSs LaserPro
software permitted BOE to generate loan documents that were
deceptive and usurious in that they failed to disclose properly
the effect of the 365/360 method of calculating
interest. Following the removal of the action to the United
States District Court for the Southern District of Illinois, the
District Court entered an order granting with prejudice
HFSs motion to dismiss Mr. Kitsons claims. In
August 2009, Mr. Kitson, individually and as class
representative, and BOE agreed to settle and dismiss with
prejudice all remaining claims. Separately but concurrently,
BOEs warranty claim against HFS was settled, in exchange
for, among other things, payment by HFS of $0.2. The class
settlement agreement was approved by the District Court in
January 2010.
Other commercial borrowers that have obtained loans from other
banks in Illinois, Ohio and South Carolina have commenced
similar class actions against their banks using similar
theories. In some cases, the banks have made warranty claims
against HFS related to these class actions. Many of the class
actions and related warranty claims are at early stages, and
their likely progress is not yet clear. The Company has not
accepted any of the asserted warranty claims and does not
believe that any of these claims will result in material
liability for the Company, but there can be no assurance.
Various other legal proceedings, claims and investigations are
pending against the Company, including those relating to
commercial transactions, product liability, environmental,
safety and health matters, employment matters and other matters.
Most of these matters are covered by insurance, subject to
deductibles and maximum limits, and by third-party indemnities.
In the opinion of management, based upon the information
available at this time, the outcome of the matters referred to
above will not have a material adverse effect on the
Companys financial position or results of operations.
|
|
17.
|
Transactions
with Related Parties
|
The Company participates in MacAndrews & Forbes
Holdings Inc.s directors and officers insurance
program, which covers the Company as well as
MacAndrews & Forbes Holdings Inc. and its other
affiliates. MacAndrews & Forbes Holdings Inc. directly
and indirectly beneficially owned, as of December 31, 2009,
approximately 43.4% of outstanding common stock of M &
F Worldwide. The limits of coverage are available on aggregate
losses to any or all of the participating companies and their
respective directors and officers. The Company reimburses
MacAndrews & Forbes Holdings Inc. for its allocable
portion of the premiums for such coverage, which the Company
believes is more favorable than the premiums the Company could
secure were it to secure its own coverage. At December 31,
2009 and 2008, the Company recorded prepaid expenses of $0.4 and
$0.3, respectively, relating to the directors and officers
insurance program in the accompanying consolidated balance
sheets. The Company paid $0.1, $0.3 and $0.4 to
MacAndrews & Forbes Holdings Inc. in 2009, 2008 and
2007, respectively, under the insurance program.
F-39
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
Notes
Receivable
In 2008, the Company acquired the senior secured credit facility
and outstanding note of Delphax Technologies, Inc.
(Delphax), the supplier of Imaggia printing machines
and related supplies and service for the Harland Clarke segment.
The senior secured credit facility is comprised of a revolving
credit facility of up to $14.0 and a term loan of $0.5, subject
to borrowing limitations set forth therein, that mature in
September 2011. The senior secured credit facility is
collateralized by a perfected security interest in substantially
all of Delphaxs assets. The revolving facility has a
borrowing base calculated based on Delphaxs eligible
accounts receivable and inventory. The senior secured credit
facility has an interest rate equal to the sum of Wells Fargo
N.A. prime rate plus 2.5%, with accrued interest payable
quarterly. The note had an original principal amount of $7.0,
matures in September 2012 and originally bore interest at an
annual rate of 12%, payable quarterly either in cash, or in a
combination of cash and up to 25% Delphax stock. Contemporaneous
with the acquisition of the facility and note, the Company also
acquired 250,000 shares of Delphax common stock from the
previous holder of the Delphax note. In January 2010, the note
was restated to reduce the interest rate to 9%, payable solely
in cash, effective October 1, 2009, and to require the
repayment of $3.0 of principal in 2010.
The outstanding balance on the senior secured credit facility
and the note are included in other assets in the accompanying
consolidated balance sheets. During 2009, the Company received
$15.0 in payments and released $9.8 in draws on the revolver,
bringing the principal balance of the debt to $7.0 at
December 31, 2009. During 2008, the Company received $15.2
in payments and released $13.5 in draws on the revolver,
bringing the principal balance of the debt to $12.2 at
December 31, 2008. Interest income of $0.8 and $0.4 was
recorded in 2009 and 2008, respectively.
Other
The Company expensed $2.7, $2.7 and $2.1 during 2009, 2008 and
2007, respectively, for services provided to the Company by
M & F Worldwide. These amounts are reflected in
selling, general and administrative expenses.
In 2009 and 2008, the Company paid cash dividends of $41.3 and
$65.0, respectively, to M & F Worldwide as
permitted by restricted payment baskets within the
Companys debt agreements. In 2007, the Company paid a cash
dividend in the amount of $1.8 to M & F Worldwide to
cover certain public company related expenses.
As discussed in Note 3, the Company paid $2.0 in February
2008 to MacAndrews & Forbes Holdings Inc. for its
services related to sourcing, analyzing, negotiating and
executing the Data Management Acquisition.
M & F Worldwide paid $10.0 in June 2007 to
MacAndrews & Forbes Holdings Inc. for its service in
sourcing, analyzing, negotiating and executing the Harland
Acquisition. As discussed in Note 3, the Company reimbursed
M & F Worldwide for that payment during the third
quarter of 2007 and has included this fee in the purchase price
for the Harland Acquisition. As also discussed in Note 3,
the Company paid $3.0 to M & F Worldwide to reimburse
it for professional fees paid by M & F Worldwide
relating to the Harland Acquisition.
|
|
18.
|
Significant
Customers
|
The Companys top 20 clients accounted for approximately
31%, 31% and 33% of the Companys consolidated net revenues
during the years ended December 31, 2009, 2008 and 2007,
respectively, with sales to Bank of America representing a
significant portion of such revenues in the Harland Clarke
segment.
|
|
19.
|
Business
Segment Information
|
The Company has organized its business along three reportable
segments together with a corporate group for certain support
services. The Companys operations are aligned on the basis
of products, services and
F-40
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
industry. Management measures and evaluates the reportable
segments based on operating income. The current segments and
their principal activities consist of the following:
|
|
|
|
|
Harland Clarke segment Provides checks and
related products, direct marketing services and customized
business and home products to financial, retail and software
providers, as well as consumers and small businesses. This
segment operates in the United States and Puerto Rico.
|
|
|
|
Harland Financial Solutions segment Provides
technology products and services to financial services clients
worldwide. This segment operates primarily in the United States,
Israel and Ireland.
|
|
|
|
Scantron segment Provides data management
solutions and related services to educational, commercial,
healthcare and governmental entities worldwide. This segment
operates in the United States and Canada.
|
Selected summarized financial information for 2009, 2008 and
2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harland
|
|
|
|
|
|
|
|
|
Harland
|
|
Financial
|
|
|
|
Corporate
|
|
|
|
|
Clarke(1)(4)
|
|
Solutions(1)(2)
|
|
Scantron(1)(3)
|
|
and
Other(1)(5)
|
|
Total
|
|
Product revenues, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
1,221.6
|
|
|
$
|
73.0
|
|
|
$
|
123.2
|
|
|
$
|
|
|
|
$
|
1,417.8
|
|
2008
|
|
|
1,285.4
|
|
|
|
79.9
|
|
|
|
126.5
|
|
|
|
|
|
|
|
1,491.8
|
|
2007
|
|
|
1,101.4
|
|
|
|
50.0
|
|
|
|
47.9
|
|
|
|
|
|
|
|
1,199.3
|
|
Service revenues, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
4.4
|
|
|
$
|
205.9
|
|
|
$
|
84.2
|
|
|
$
|
|
|
|
$
|
294.5
|
|
2008
|
|
|
4.7
|
|
|
|
213.8
|
|
|
|
84.3
|
|
|
|
|
|
|
|
302.8
|
|
2007
|
|
|
2.5
|
|
|
|
133.0
|
|
|
|
35.1
|
|
|
|
|
|
|
|
170.6
|
|
Intersegment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.6
|
|
|
$
|
(0.6
|
)
|
|
$
|
|
|
2008
|
|
|
0.3
|
|
|
|
|
|
|
|
0.5
|
|
|
|
(0.8
|
)
|
|
|
|
|
2007
|
|
|
0.6
|
|
|
|
|
|
|
|
0.6
|
|
|
|
(1.2
|
)
|
|
|
|
|
Operating income
(loss):(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
195.8
|
|
|
$
|
32.8
|
|
|
$
|
34.5
|
|
|
$
|
(12.8
|
)
|
|
$
|
250.3
|
|
2008
|
|
|
217.1
|
|
|
|
34.1
|
|
|
|
28.4
|
|
|
|
(14.8
|
)
|
|
|
264.8
|
|
2007
|
|
|
181.1
|
|
|
|
16.8
|
|
|
|
12.4
|
|
|
|
(16.1
|
)
|
|
|
194.2
|
|
Depreciation and amortization (excluding amortization of
deferred financing fees and original discount):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
109.3
|
|
|
$
|
26.9
|
|
|
$
|
25.9
|
|
|
$
|
|
|
|
$
|
162.1
|
|
2008
|
|
|
112.5
|
|
|
|
28.7
|
|
|
|
23.3
|
|
|
|
|
|
|
|
164.5
|
|
2007
|
|
|
98.2
|
|
|
|
17.3
|
|
|
|
10.6
|
|
|
|
0.1
|
|
|
|
126.2
|
|
Non-cash asset impairment charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
33.6
|
|
|
$
|
10.6
|
|
|
$
|
0.2
|
|
|
$
|
|
|
|
$
|
44.4
|
|
2008
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.4
|
|
2007
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Capital expenditures (excluding capital leases):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
28.3
|
|
|
$
|
6.5
|
|
|
$
|
7.4
|
|
|
$
|
|
|
|
$
|
42.2
|
|
2008
|
|
|
32.2
|
|
|
|
4.0
|
|
|
|
12.0
|
|
|
|
|
|
|
|
48.2
|
|
2007
|
|
|
18.0
|
|
|
|
5.6
|
|
|
|
1.9
|
|
|
|
|
|
|
|
25.5
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
$
|
1,070.3
|
|
|
$
|
327.0
|
|
|
$
|
290.3
|
|
|
$
|
1,564.4
|
|
|
$
|
3,252.0
|
|
December 31, 2008
|
|
|
1,184.2
|
|
|
|
335.4
|
|
|
|
307.0
|
|
|
|
1,565.2
|
|
|
|
3,391.8
|
|
|
|
|
(1) |
|
Includes results of the acquired Harland businesses from the
date of acquisition. |
F-41
Harland
Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
|
|
|
(2) |
|
Includes results of the acquired Peldec business from the date
of acquisition. |
|
(3) |
|
Includes results of the acquired Data Management business from
the date of acquisition. |
|
(4) |
|
Includes results of the acquired Transaction Holdings, Protocol
IMS and SubscriberMail businesses from the date of acquisition. |
|
(5) |
|
Total assets include goodwill of $1,473.2 and $1,465.5 as of
December 31, 2009 and 2008, respectively, which is not
assigned to the operating segments. |
|
(6) |
|
Includes restructuring costs of $32.5, $14.6 and $5.6 for 2009,
2008 and 2007, respectively (see Note 15). |
F-42
Schedule II
Valuation and Qualifying Accounts and Reserves
(in millions)
The following is a summary of the valuation and qualifying
accounts and reserves for the years ended December 31,
2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
Amounts
|
|
Balance
|
|
Ending
|
|
|
Balance
|
|
Reserved
|
|
Written Off
|
|
Balance
|
|
Allowance for Doubtful Accounts and Sales Returns and
Allowance Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
$
|
2.8
|
|
|
$
|
7.6
|
|
|
$
|
7.4
|
|
|
$
|
3.0
|
|
December 31, 2008
|
|
$
|
2.4
|
|
|
$
|
8.0
|
|
|
$
|
7.6
|
|
|
$
|
2.8
|
|
December 31, 2007
|
|
$
|
|
|
|
$
|
5.4
|
|
|
$
|
3.0
|
|
|
$
|
2.4
|
|
F-43