UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 333-133253

HARLAND CLARKE HOLDINGS CORP.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		84-1696500 (I.R.S. Employer Identification No.)
2939 Miller Road, Decatur, GA (Address of principal executive offices)		30035 (Zip code)

(770) 981-9460
(Registrant’s telephone number, including area code)

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 o       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 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):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(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 Exchange Act).

Yes o       No þ

As of March 31, 2010, there were 100 shares of the registrant’s 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.

 

 

HARLAND CLARKE HOLDINGS CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended March 31, 2010

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets			1
Consolidated Statements of Income			2
Consolidated Statements of Cash Flows			3
Notes to Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			26
Item 4. Controls and Procedures			27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			28
Item 1A. Risk Factors			28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			28
Item 3. Defaults Upon Senior Securities			28
Item 5. Other Information			28
Item 6. Exhibits			28
EX-31.1
EX-31.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Harland Clarke Holdings Corp. and Subsidiaries

Consolidated Balance Sheets

(in millions, except share and per share data)

		March 31,				December 31,
		2010				2009
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	159.9			$	63.9
Accounts receivable (net of allowances of $3.0 and $3.0)			115.9				119.7
Investments in marketable securities			24.6				24.6
Inventories			30.4				32.5
Income taxes receivable			13.2				13.5
Deferred tax assets			18.6				18.6
Prepaid expenses and other current assets			62.8				66.1
Total current assets			425.4				338.9
Property, plant and equipment			348.0				345.6
Less accumulated depreciation			(195.2	)			(184.5	)
Property, plant and equipment, net			152.8				161.1
Goodwill			1,472.8				1,473.2
Other intangible assets, net			1,161.2				1,187.9
Contract acquisition payments, net			29.7				28.6
Other assets			64.3				62.3
Total assets		$	3,306.2			$	3,252.0
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable		$	38.1			$	33.9
Deferred revenues			113.3				116.1
Current maturities of long-term debt			19.5				19.5
Accrued liabilities:
Salaries, wages and employee benefits			63.1				52.6
Income and other taxes payable			44.3				15.4
Customer incentives			26.3				23.5
Other current liabilities			32.3				30.8
Total current liabilities			336.9				291.8
Long-term debt			2,214.1				2,219.3
Deferred tax liabilities			406.2				415.3
Other liabilities			72.5				79.6
Commitments and contingencies
Stockholder’s equity:
Common stock — 200 shares authorized; par value $0.01; 100 shares issued and outstanding at March 31, 2010 and December 31, 2009			—				—
Additional paid-in capital			157.0				157.0
Retained earnings			130.2				98.0
Accumulated other comprehensive (loss) income, net of taxes:
Currency translation adjustments			(0.1	)			0.3
Funded status of benefit plans			(1.6	)			(1.6	)
Derivative fair-value adjustments			(9.7	)			(8.6	)
Unrealized gains on investments, net			0.7				0.9
Total accumulated other comprehensive loss, net of taxes			(10.7	)			(9.0	)
Total stockholder’s equity			276.5				246.0
Total liabilities and stockholder’s equity		$	3,306.2			$	3,252.0

See Notes to Consolidated Financial Statements

Harland Clarke Holdings Corp. and Subsidiaries

Consolidated Statements of Income

(in millions)
(unaudited)

		Three Months Ended
		March 31,
		2010				2009
Product revenues, net		$	355.6			$	363.1
Service revenues, net			74.4				75.5
Total net revenues			430.0				438.6
Cost of products sold			209.8				221.2
Cost of services provided			37.7				39.9
Total cost of revenues			247.5				261.1
Gross profit			182.5				177.5
Selling, general and administrative expenses			96.1				104.0
Restructuring costs			3.2				11.1
Operating income			83.2				62.4
Interest income			0.2				0.3
Interest expense			(29.9	)			(38.1	)
Gain on early extinguishment of debt			—				52.6
Income before income taxes			53.5				77.2
Provision for income taxes			21.3				30.0
Net income		$	32.2			$	47.2

See Notes to Consolidated Financial Statements

Harland Clarke Holdings Corp. and Subsidiaries

Consolidated Statements of Cash Flows

(in millions)
(unaudited)

		Three Months Ended
		March 31,
		2010				2009
Operating activities
Net income		$	32.2			$	47.2
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			13.2				14.8
Amortization of intangible assets			27.1				25.6
Amortization of deferred financing fees			1.7				1.8
Gain on early extinguishment of debt			—				(52.6	)
Deferred income taxes			(8.3	)			11.7
Changes in operating assets and liabilities, net of effect of businesses acquired:
Accounts receivable			3.7				(12.5	)
Inventories			2.1				(0.5	)
Prepaid expenses and other assets			(2.6	)			(10.0	)
Contract acquisition payments, net			(1.0	)			0.8
Accounts payable and accrued liabilities			8.2				(15.7	)
Deferred revenues			(0.4	)			5.2
Income and other taxes			28.9				16.9
Payable to parent			—				(0.7	)
Other, net			0.5				1.3
Net cash provided by operating activities			105.3				33.3
Investing activities
Net repayments of related party notes receivable			2.0				5.3
Proceeds from sale of property, plant and equipment			1.1				0.3
Capital expenditures			(6.6	)			(11.8	)
Capitalized interest			—				(0.1	)
Other, net			(0.6	)			(1.4	)
Net cash used in investing activities			(4.1	)			(7.7	)
Financing activities
Redemption of notes			—				(35.1	)
Repayments of credit agreements and other borrowings			(5.2	)			(4.9	)
Net cash used in financing activities			(5.2	)			(40.0	)
Net increase (decrease) in cash and cash equivalents			96.0				(14.4	)
Cash and cash equivalents at beginning of period			63.9				64.6
Cash and cash equivalents at end of period		$	159.9			$	50.2
Supplemental disclosure of cash paid for:
Interest, net of amounts capitalized		$	21.6			$	33.7
Income taxes, net of refunds			0.2				1.7

See Notes to Consolidated Financial Statements

Harland Clarke Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements
(dollars in millions)
(unaudited)

1. Description of 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”). Novar 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 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. The aggregate consideration of $13.1 for these transactions includes contingent consideration of $1.8 for SubscriberMail upon the achievement of certain revenue targets in 2010 and 2011, 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 business to business strategic services, business to consumer strategic services, database marketing and analytics, outbound business to business teleservices, production and fulfillment.

     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 products 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 to these products and services, the Harland Clarke segment offers 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 information collection and tracking, and survey services. Scantron’s solutions combine a variety of data collection, analysis, and management tools including web-based solutions, 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 March 31, 2010 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.

     The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full fiscal year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

     All terms used but not defined elsewhere herein have the meaning ascribed to them in the Company’s 2009 Annual Report on Form 10-K.

2. Summary of Significant Accounting Policies

     Reference is made to the significant accounting policies of the Company described in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

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.

Recently Adopted Accounting Guidance

     Effective January 1, 2010, the Company adopted new guidance for fair value measurements and disclosures. The new guidance requires disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements related to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The new guidance increases disclosure requirements but does not have an impact on the Company’s 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.

     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.

3. Acquisitions

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. The aggregate consideration of $13.1 for these transactions includes contingent consideration of $1.8 for SubscriberMail upon the achievement of certain revenue targets in 2010 and 2011, with a maximum contingent consideration of $2.0 if the targets are met. SubscriberMail is a leading email marketing service provider that offers patented tools to develop and deliver professional email communications. SubscriberMail results of operations have been included in the Company’s operations since December 31, 2009, the date of its acquisition. Protocol IMS focuses on direct marketing services with solutions that include business to business strategic services, business to consumer strategic services, database marketing and analytics, outbound business to business teleservices, production and fulfillment. Protocol IMS results of operations have been included in the Company’s 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.

Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

4. Inventories

     Inventories consist of the following:

		March 31,				December 31,
		2010				2009
Finished goods		$	8.4			$	9.8
Work-in-process			8.4				9.5
Raw materials			13.6				13.2
		$	30.4			$	32.5

5. Assets Held For Sale

     At March 31, 2010, 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
Atlanta, GA		Information Technology		2010

     In 2010, the Company closed its information technology facility in Atlanta, GA and relocated those operations into an existing facility. The Greensboro facility was closed to better utilize plant network capacity and maximize manufacturing and distribution efficiencies. The other Atlanta facilities were closed as part of the Company’s plan to exit duplicative facilities related to an 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 Company sold its Syracuse facility, which was closed in 2009, 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:

		March 31,				December 31,
		2010				2009
Land		$	2.1			$	1.4
Buildings and improvements			3.2				3.5
		$	5.3			$	4.9

Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

6. Goodwill and Other Intangible Assets

     The change in carrying amount of goodwill by business segment for the three months ended March 31, 2010 is as follows:

						Harland
		Harland				Financial
		Clarke				Solutions				Scantron				Total
Balance as of December 31, 2009		$	779.4			$	425.2			$	268.6			$	1,473.2
Effect of exchange rate changes			—				(0.4	)			—				(0.4	)
Balance as of March 31, 2010		$	779.4			$	424.8			$	268.6			$	1,472.8

     Useful lives, gross carrying amounts and accumulated amortization for other intangible assets are as follows:

						Gross Carrying Amount								Accumulated Amortization
		Useful Life				March 31,				December 31,				March 31,				December 31,
		(in years)				2010				2009				2010				2009
Amortized intangible assets:
Customer relationships			3 – 20			$	1,233.4			$	1,233.4			$	282.7			$	260.5
Trademarks and tradenames			2 – 25				154.5				154.5				5.6				3.4
Software and other			2 – 10				65.4				65.1				30.4				28.2
Patents and patents pending			3 – 20				20.0				20.0				4.4				4.0
							1,473.3				1,473.0				323.1				296.1
Indefinite-lived intangible assets:
Trademarks and tradenames							11.0				11.0				—				—
Total other intangible assets						$	1,484.3			$	1,484.0			$	323.1			$	296.1

     Amortization expense was $27.1 and $25.6 for the three months ended March 31, 2010 and 2009, respectively.

     Estimated aggregate amortization expense for intangible assets through December 31, 2014 is as follows:

Nine months ending December 31, 2010		$	81.6
Year ending December 31, 2011			102.4
Year ending December 31, 2012			95.0
Year ending December 31, 2013			83.7
Year ending December 31, 2014			77.3

7. Business Segment Information

     The Company has organized its business along three reportable segments together with a corporate group for certain support services. The Company’s operations are aligned on the basis of products, services and 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 primarily 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.

Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)

(unaudited)

     Selected summarized financial information for the three months ended March 31, 2010 and 2009 is as follows:

						Harland
		Harland				Financial								Corporate
		Clarke(1)				Solutions				Scantron				and Other				Total
Product revenues, net:
Three months ended March 31, 2010		$	308.6			$	16.8			$	30.2			$	—			$	355.6
Three months ended March 31, 2009			314.1				17.0				32.0				—				363.1
Service revenues, net:
Three months ended March 31, 2010		$	1.1			$	52.5			$	20.8			$	—			$	74.4
Three months ended March 31, 2009			1.0				52.2				22.3				—				75.5
Intersegment revenues:
Three months ended March 31, 2010		$	—			$	—			$	0.1			$	(0.1	)		$	—
Three months ended March 31, 2009			—				—				0.1				(0.1	)			—
Operating income (loss): (2)
Three months ended March 31, 2010		$	65.6			$	11.4			$	9.3			$	(3.1	)		$	83.2
Three months ended March 31, 2009			50.9				7.4				6.8				(2.7	)			62.4
Depreciation and amortization (excluding amortization of deferred financing fees):
Three months ended March 31, 2010		$	26.8			$	7.1			$	6.4			$	—			$	40.3
Three months ended March 31, 2009			27.3				6.7				6.4				—				40.4
Capital expenditures (excluding capital leases):
Three months ended March 31, 2010		$	4.4			$	0.9			$	1.3			$	—			$	6.6
Three months ended March 31, 2009			8.2				1.0				2.6				—				11.8

8. Comprehensive Income

     Total comprehensive income for the three months ended March 31, 2010 and 2009 is as follows:

		Three Months Ended
		March 31,
		2010				2009
Net income		$	32.2			$	47.2
Other comprehensive income (loss):
Foreign currency translation adjustments			(0.4	)			(0.8	)
Derivative fair-value adjustments, net of taxes of $0.6 and $2.4			(1.1	)			3.7
Unrealized losses on investments, net of taxes of $0.1 and $ —			(0.2	)			—
Comprehensive income		$	30.5			$	50.1

Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

9. Postretirement Defined 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 Company’s 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.

     Net periodic postretirement benefit cost for these plans is as follows:

		Three Months Ended
		March 31,
		2010				2009
Interest cost		$	0.3			$	0.3
Net amortization			—				—
Net postretirement benefit cost		$	0.3			$	0.3

10. Income Taxes

     The Company is subject to taxation in the United States and various state and foreign jurisdictions. The statute of limitations for the Company’s federal and state tax returns for the tax years 2005 through 2009 generally remain open. In addition, open tax years related to foreign jurisdictions remain subject to examination but are not considered material.

     There are no events that have occurred since December 31, 2009 that had a material impact on amounts accrued for the Company’s uncertain tax positions.

11. Long-Term Debt

		March 31,				December 31,
		2010				2009
$1,900.0 Senior Secured Credit Facilities		$	1,750.5			$	1,755.0
Senior Floating Rate Notes due 2015			206.8				206.8
9.50% Senior Fixed Rate Notes due 2015			271.3				271.3
Capital lease obligations and other indebtedness			5.0				5.7
			2,233.6				2,238.8
Less: current maturities			(19.5	)			(19.5	)
Long-term debt, net of current maturities		$	2,214.1			$	2,219.3

$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 Company’s 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 2.8% at March 31, 2010. As of March 31, 2010, there were no outstanding borrowings under the Revolver and there was $87.8 available for borrowing (giving effect to the issuance of $12.2 of letters of credit).

Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

     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 Company’s 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 Company’s 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 Company’s, each of the co-borrowers’ and the guarantors’ tangible and intangible 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, 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). 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. No such excess cash flow payment was required to be paid in 2010 with respect to 2009.

     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.

Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

Senior Notes due 2015

     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 March 31, 2010. The Senior Notes are unsecured and are therefore effectively subordinated to all of the Company’s senior secured indebtedness, including outstanding borrowings 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 Company’s 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.

     During 2009, the Company extinguished $136.9 principal amount of debt by purchasing 2015 Senior Notes in individually negotiated transactions for an aggregate purchase price of $67.6.

Gain on Early Extinguishment of Debt

     Of the $136.9 principal amount of debt extinguished in 2009, $90.5 was extinguished during the first quarter of 2009 by purchasing 2015 Senior Notes in individually negotiated transactions for an aggregate purchase price of $35.1, resulting in a gain of $52.6 after the write-off of $2.8 of unamortized deferred financing fees related to the extinguished debt. There were no early extinguishments of debt during the first quarter of 2010.

Capital Lease Obligations and Other Indebtedness

     The Company has outstanding capital lease obligations and other indebtedness with principal balances totaling $5.0 and $5.7 at March 31, 2010 and December 31, 2009, respectively. These obligations have imputed interest rates ranging from 5.7% to 9.6% and have required payments, including interest, of $1.0 remaining in 2010, $1.6 in 2011, $1.2 in 2012, $1.1 in 2013 and $0.9 in 2014. During the first quarter of 2009, a subsidiary of the Company entered into a capital lease and other indebtedness totaling $1.2 and, accordingly, such non-cash transaction amounts have been excluded from the consolidated statements of cash flows.

12. Derivative Financial Instruments

Interest Rate Hedges

     The Company uses hedge transactions, which are accounted for as cash flow hedges, to limit the Company’s 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 Company’s 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 income 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 swapped 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

Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

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 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.

				March 31,				December 31,
Derivatives Designated as Cash Flow Hedging Instruments:		Balance Sheet Classification		2010				2009
Interest rate swaps		Other current liabilities		$	3.3			$	6.3
		Other liabilities			12.6				7.9

     Fair value of interest rate swaps is based on forward-looking interest rate curves as provided by the counterparty, adjusted for the Company’s credit risk.

     These derivative instruments had no ineffective portions during the three months ended March 31, 2010 and 2009. Accordingly, no amounts were required to be reclassified from accumulated other comprehensive loss to the consolidated statements of income 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.

										Loss Reclassified from
										Accumulated Other
		Loss Recognized in Other								Comprehensive Loss into
		Comprehensive Income								Interest Expense for the
		for the Three Months								Three Months Ended
		Ended March 31,								March 31,
Derivatives Designated as Cash Flow Hedging Instruments:		2010				2009				2010				2009
Interest rate swaps		$	8.0			$	2.5			$	6.3			$	8.5

     The Company expects to reclassify approximately $18.7 into net income as additional interest expense during the twelve months ending March 31, 2011.

     The following presents the balances and net changes in the accumulated other comprehensive loss related to these derivative instruments, net of income taxes.

		Three Months Ended
		March 31,
Balances and Net Changes:		2010				2009
Balance at beginning of period		$	8.6			$	16.8
Loss reclassified from accumulated other comprehensive loss into interest expense, net of taxes of $2.5 and $3.3			(3.8	)			(5.2	)
Net change in fair value of interest rate swaps, net of taxes of $3.1 and $1.0			4.9				1.5
Balance at end of period		$	9.7			$	13.1

Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited

     See Note 8 for additional information regarding the effect of these derivative instruments on other comprehensive income.

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.

Recurring Fair Value Measurements

     As of March 31, 2010, the Company held two types of financial instruments subject to valuation on a recurring basis, marketable securities and interest rate swaps. Marketable securities consist of corporate equity securities and United States treasury securities. 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 other current liabilities and other liabilities in the accompanying consolidated balance sheets. Fair values as of March 31, 2010 and December 31, 2009 are as follows:

		Balance at
		March 31, 2010				(Level 1)				(Level 2)				(Level 3)
United States treasury securities		$	24.6			$	24.6			$	—			$	—
Corporate equity securities			1.5				1.5				—				—
Liability for interest rate swaps			15.9				—				15.9				—

		Balance at
		December 31, 2009				(Level 1)				(Level 2)				(Level 3)
United States treasury securities		$	24.6			$	24.6			$	—			$	—
Corporate equity securities			1.9				1.9				—				—
Liability for interest rate swaps			14.2				—				14.2				—

     Fair value of interest rate swaps is based on forward-looking interest rate curves as provided by the counterparty, adjusted for the Company’s credit risk. 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 Company’s 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 management’s 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 March 31, 2010 and December 31, 2009 was approximately $2,032.0 and $1,912.5, respectively. The carrying value of long- term debt at March 31, 2010 and December 31, 2009 was $2,233.6 and $2,238.8, respectively.

Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

14. Marketable Securities

     The Company’s marketable securities are classified as available-for-sale and are reported at their fair values (quoted market price), which are as follows:

						Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
Balance at March 31, 2010:
United States treasury securities		$	24.6			$	—			$	—			$	24.6
Corporate equity securities			0.3				1.3				(0.1	)			1.5
Total		$	24.9			$	1.3			$	(0.1	)		$	26.1
Balance at December 31, 2009:
United States treasury securities		$	24.6			$	—			$	—			$	24.6
Corporate equity securities			0.3				1.7				(0.1	)			1.9
Total		$	24.9			$	1.7			$	(0.1	)		$	26.5

     The United States treasury securities mature in 2012.

     The following presents the gross unrealized losses and fair values of the Company’s 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
						Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses
At March 31, 2010:
Corporate equity securities		$	—			$	—			$	0.1			$	0.1
At December 31, 2009:
Corporate equity securities		$	—			$	—			$	0.1			$	0.1

     The Company has determined that the gross unrealized losses on its investments at March 31, 2010 are temporary in nature. Accordingly, the Company does not consider the investments to be other-than-temporarily impaired at March 31, 2010.

15. Commitments and Contingencies

  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 Company’s businesses. 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.

  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 HFS’s LaserPro software permitted BOE to generate loan documents that were deceptive and usurious in that they failed to disclose properly the effect of the

Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

“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 HFS’s motion to dismiss Mr. Kitson’s 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, BOE’s 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 Company’s financial position or results of operations.

16. Restructuring

  Harland Clarke and Corporate

     The Company adopted plans during 2008, 2009 and 2010 to realize cost savings in the Harland Clarke segment by consolidating printing plants, contact centers and selling, general and administrative functions.

     The Company expensed $1.3 for severance and severance-related costs and $0.4 for facilities closures and other costs during the three months ended March 31, 2010 and expensed $6.8 for severance and severance-related costs and $0.5 for facilities closures and other costs during the three months ended March 31, 2009. The Company expects to incur in future periods an additional $2.0 for costs related to these plans. Ongoing lease commitments related to these plans continue through 2013.

     The following table details the components of the Company’s restructuring accruals under its plans related to the Harland Clarke segment and Corporate for the three months ended March 31, 2010 and 2009:

		Beginning								Paid in				Non-cash				Ending
		Balance				Expensed				Cash				Utilization				Balance
Three Months Ended March 31, 2010:
Severance and severance-related		$	2.5			$	1.3			$	(1.8	)		$	—			$	2.0
Facilities closures and other costs			2.5				0.4				(0.7	)			(0.1	)			2.1
Total		$	5.0			$	1.7			$	(2.5	)		$	(0.1	)		$	4.1
Three Months Ended March 31, 2009:
Severance and severance-related		$	7.4			$	6.8			$	(6.3	)		$	—			$	7.9
Facilities closures and other costs			2.3				0.5				(0.5	)			(0.3	)			2.0
Total		$	9.7			$	7.3			$	(6.8	)		$	(0.3	)		$	9.9

     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 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

Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

2011, focuses on moving from a product-centric organization to a functional organization in order to enhance customer support.

     The Company expensed $0.2 for severance and severance-related costs during the three months ended March 31, 2010, and expensed $1.4 for severance and severance-related costs and $1.0 for facilities closures and other costs during the three months ended March 31, 2009. The Company currently expects to incur additional costs of $0.2 related to these plans, which is subject to refinement as the reorganization progresses.

     The following table details the Company’s restructuring accruals related to the Harland Financial Solutions segment for the three months ended March 31, 2010 and 2009:

		Beginning								Paid in				Ending
		Balance				Expensed				Cash				Balance
Three months ended March 31, 2010:
Severance and severance-related		$	1.0			$	0.2			$	(0.5	)		$	0.7
Facilities and other costs			0.1				—				(0.1	)			—
Total		$	1.1			$	0.2			$	(0.6	)		$	0.7
Three months ended March 31, 2009:
Severance and severance-related		$	1.4			$	1.4			$	(1.3	)		$	1.5
Facilities and other costs			0.7				1.0				(0.2	)			1.5
Total		$	2.1			$	2.4			$	(1.5	)		$	3.0

  Scantron

     As a result of an acquisition, the Company adopted plans to restructure the Scantron segment in 2008. 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. The Company completed substantially all of the planned employee terminations and consolidation of printing and manufacturing operations related to the acquisition as of March 31, 2009 and expensed $1.4 for severance and severance-related costs during the three months ended March 31, 2009.

     The Company expensed $1.3 for severance and severance-related costs related to further consolidation of operations and elimination of certain selling, general and administrative expenses during the three months ended March 31, 2010.

     The following table details the components of the Company’s restructuring accruals related to the Scantron segment for the three months ended March 31, 2010 and 2009:

		Beginning								Paid in				Ending
		Balance				Expensed				Cash				Balance
Three months ended March 31, 2010:
Severance and severance-related		$	0.5			$	1.3			$	(1.2	)		$	0.6
Three months ended March 31, 2009:
Severance and severance-related		$	1.0			$	1.4			$	(0.9	)		$	1.5

Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

     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.

17. Transactions with Related Parties

  Notes Receivable

     In 2008, Harland Clarke Holdings 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, 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 Delphax’s assets. The revolving facility has a borrowing base calculated based on Delphax’s 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 its acquisition of the senior secured credit facility and the note, Harland Clarke Holdings also acquired 250,000 shares of Delphax common stock from the previous holder of the Delphax note. In January 2010, the note was amended 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 balances on the senior secured credit facility and the note are included in prepaid expenses and other current assets and other assets in the accompanying consolidated balance sheets. During the three months ended March 31, 2010, the Company received $2.0 in payments on the note, bringing the principal balance of the note to $5.0 at March 31, 2010. An additional principal payment of $1.0 on the note is due by June 30, 2010. Interest income of $0.1 and $0.3 was recorded during the three months ended March 31, 2010 and 2009, respectively.

  Other

     The Company expensed $0.7 and $0.7 during the three months ended March 31, 2010 and 2009, respectively, for services provided to the Company by M & F Worldwide. This amount is reflected in selling, general and administrative expenses.

Harland Clarke Holdings Corp. and Subsidiaries

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion regarding our financial condition and results of operations for the three months ended March 31, 2010 and 2009 should be read in conjunction with the more detailed financial information contained in our consolidated financial statements and their notes included elsewhere in this Quarterly Report on Form 10-Q.

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 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”). Novar 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 changed its name on May 2, 2007 from Clarke American Corp. to Harland Clarke Holdings. The Company’s 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 products 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 to these products and services, the Harland Clarke segment offers 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 information collection and tracking, and survey services. Scantron’s solutions combine a variety of data collection, analysis, and management tools including web-based solutions, 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. The aggregate consideration of $13.1 million for these transactions includes contingent consideration of $1.8 million for SubscriberMail upon the achievement of certain revenue targets in 2010 and 2011, 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 business to business strategic services, business to consumer strategic services, database marketing and analytics, outbound business to business teleservices, production and fulfillment.

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 Clarke’s margins.

     Harland Clarke’s 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 segment’s 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 segment’s 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 Clarke’s 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 Clarke’s 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 Federal Deposit Insurance Corporation and National Credit Union Association 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 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 products and services offered by Harland Financial Solutions.

Harland Clarke Holdings Corp. and Subsidiaries

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 Scantron’s on-line testing products. Educational funding changes may also reduce the rate of consumption of Scantron’s forms and purchase of additional hardware to process these forms. Scantron’s 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 Scantron’s 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 Scantron’s non-paper data collection business could benefit from this trend, Scantron’s 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 Scantron’s customers adjust their research or testing expenditures.

     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 and to continue to align its cost structure with business needs. 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 businesses along three reportable segments together with a corporate group for certain support services. The Company’s operations are aligned on the basis of products, services and industry. Management measures and evaluates the reportable segments based on operating income.

     Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

          The operating results for the three months ended March 31, 2010, as reflected in the accompanying consolidated statements of income and described below, include the operating results of the acquired Protocol IMS and SubscriberMail businesses from their respective dates of acquisition.

Net Revenues:

		Three Months Ended
		March 31,
$ in millions		2010				2009
Consolidated Net Revenues:
Harland Clarke segment		$	309.7			$	315.1
Harland Financial Solutions segment			69.3				69.2
Scantron segment			51.1				54.4
Eliminations			(0.1	)			(0.1	)
Total		$	430.0			$	438.6

          Net revenues decreased by $8.6 million, or 2.0%, to $430.0 million in the 2010 period from $438.6 million in the 2009 period.

          Net revenues for the Harland Clarke segment decreased by $5.4 million, or 1.7%, to $309.7 million in the 2010 period from $315.1 million in the 2009 period. The decrease was primarily a result of volume declines in check and related products, partially offset by increased revenues per unit and revenues from the 2009

Harland Clarke Holdings Corp. and Subsidiaries

acquisitions. Net revenues in the 2010 period included charges of $0.3 million for non-cash fair value acquisition accounting adjustments to deferred revenue related to the SubscriberMail acquisition.

          Net revenues for the Harland Financial Solutions segment increased by $0.1 million, or 0.1%, to $69.3 million in the 2010 period from $69.2 million in the 2009 period. Increases in maintenance revenues and outsourced host processing revenues were substantially offset by decreases in early termination fees and hardware sales.

          Net revenues for the Scantron segment decreased by $3.3 million, or 6.1%, to $51.1 million in the 2010 period from $54.4 million in the 2009 period. The decrease was primarily due to declines in service maintenance, forms and hardware revenues, which the Company believes were negatively affected by the economic downturn. These declines were partially offset by increases in revenues from web-based products and services.

Cost of Revenues:

		Three Months Ended
		March 31,
$ in millions		2010				2009
Consolidated Cost of Revenues:
Harland Clarke segment		$	190.2			$	200.8
Harland Financial Solutions segment			30.3				30.0
Scantron segment			27.1				30.4
Eliminations			(0.1	)			(0.1	)
Total		$	247.5			$	261.1

          Cost of revenues decreased by $13.6 million, or 5.2%, to $247.5 million in the 2010 period from $261.1 million in the 2009 period.

          Cost of revenues for the Harland Clarke segment decreased by $10.6 million, or 5.3%, to $190.2 million in the 2010 period from $200.8 million in the 2009 period. The decrease in cost of revenues was primarily due to labor cost reductions and decreases in depreciation and occupancy expenses, all of which resulted from restructuring activities. Additionally, lower volumes, which resulted in lower materials and other variable overhead expenses, contributed to the decrease. Decreases in cost of revenues were partially offset by the 2009 acquisitions and an increase in amortization expense of $1.4 million resulting from the reclassification of the Harland Clarke tradename from an indefinite-lived to a definite-lived intangible asset in the fourth quarter of 2009. Cost of revenues as a percentage of revenues for the Harland Clarke segment was 61.4% in the 2010 period as compared to 63.7% in the 2009 period.

          Cost of revenues for the Harland Financial Solutions segment increased by $0.3 million, or 1.0%, to $30.3 million in the 2010 period from $30.0 million in the 2009 period. The increase in cost of revenues was primarily due to an increase in amortization expense of $0.5 million resulting from the reclassification of the Harland Clarke tradename from an indefinite-lived to a definite-lived intangible asset in the fourth quarter of 2009, partially offset by labor cost reductions resulting from restructuring activities and reductions in travel expenses. Cost of revenues as a percentage of revenues for the Harland Financial Solutions segment was 43.7% in the 2010 period as compared to 43.4% in the 2009 period.

          Cost of revenues for the Scantron segment decreased by $3.3 million, or 10.9% to $27.1 million in the 2010 period from $30.4 million in the 2009 period. The decrease was primarily due to volume declines and labor cost reductions resulting from restructuring activities. Cost of revenues as a percentage of revenues for the Scantron segment was 53.0% in the 2010 period as compared to 55.9% in the 2009 period.

Harland Clarke Holdings Corp. and Subsidiaries

Selling, General and Administrative Expenses:

		Three Months Ended
		March 31,
$ in millions		2010				2009
Consolidated Selling, General and Administrative Expenses:
Harland Clarke segment		$	52.2			$	56.1
Harland Financial Solutions segment			27.4				29.4
Scantron segment			13.4				15.8
Corporate			3.1				2.7
Total		$	96.1			$	104.0

          Selling, general and administrative expenses decreased by $7.9 million, or 7.6%, to $96.1 million in the 2010 period from $104.0 million in the 2009 period.

          Selling, general and administrative expenses for the Harland Clarke segment decreased by $3.9 million, or 7.0%, to $52.2 million in the 2010 period from $56.1 million in the 2009 period. The decrease was primarily due to labor cost reductions resulting from restructuring activities and reductions in selling expenses and advertising expenses. Selling, general and administrative expenses from the 2009 acquisitions partially offset the overall decrease. Selling, general and administrative expenses as a percentage of revenues for the Harland Clarke segment were 16.9% in the 2010 period as compared to 17.8% in the 2009 period.

          Selling, general and administrative expenses for the Harland Financial Solutions segment decreased by $2.0 million, or 6.8%, to $27.4 million in the 2010 period from $29.4 million in the 2009 period. The decrease was primarily due to labor cost reductions resulting from restructuring activities and decreases in travel expenses and depreciation. These decreases were partially offset by an increase in selling expenses. Selling, general and administrative expenses in the 2010 and 2009 periods included charges of $0.4 million and $1.0 million, respectively, for compensation expense related to an incentive agreement for the Peldec assets purchase. Selling, general and administrative expenses as a percentage of revenues for the Harland Financial Solutions segment was 39.5% in the 2010 period as compared to 42.5% in the 2009 period.

          Selling, general and administrative expenses for the Scantron segment decreased $2.4 million, or 15.2%, to $13.4 million in the 2010 period from $15.8 million in the 2009 period. The decrease is primarily due to a $1.3 million one-time expense in the 2009 period related to a contractual obligation owing to a former employee upon termination of employment and lower integration expenses in the 2010 period. Selling, general and administrative expenses as a percentage of revenues for the Scantron segment was 26.2% in the 2010 period as compared to 29.0% in the 2009 period.

          Selling, general and administrative expenses for the Corporate segment increased $0.4 million, or 14.8% to $3.1 million in the 2010 period from $2.7 million in the 2009 period related to increases in general overhead costs.

Restructuring Costs

          The Company adopted plans during 2008, 2009 and 2010 to strengthen operating margins and leverage incremental synergies within the printing plants, contact centers and selling, general and administrative areas by leveraging the Company’s shared services capabilities and reorganizing certain operations and sales and support functions.

          In the 2010 period, the Company recorded restructuring costs of $1.7 million for the Harland Clarke segment, $0.2 million for the Harland Financial Solutions segment and $1.3 million for the Scantron segment related to these plans. In the 2009 period, the Company recorded restructuring costs of $7.3 million for the Harland Clarke segment, $2.4 million for the Harland Financial Solutions segment and $1.4 million for the Scantron segment related to these plans.

Harland Clarke Holdings Corp. and Subsidiaries

Interest Income

          Interest income was $0.2 million in the 2010 period as compared to $0.3 million in the 2009 period. The decrease in interest income was primarily due to lower interest rates on investments in cash equivalents in the 2010 period.

Interest Expense

          Interest expense was $29.9 million in the 2010 period as compared to $38.1 million in the 2009 period. The decrease in interest expense was largely due to lower effective interest rates, as well as a decrease in total debt outstanding.

Gain on Early Extinguishment of Debt

          During the 2009 period, the Company extinguished debt with a total principal amount of $90.5 million by purchasing 2015 Senior Notes in individually negotiated transactions for an aggregate purchase price of $35.1 million, resulting in a gain of $52.6 million after the write-off of $2.8 million of unamortized deferred financing fees related to the extinguished debt.

Provision for Income Taxes

          The Company’s effective tax rate was 39.8% in the 2010 period and 38.9% in the 2009 period. The increase was primarily due to a charge in the 2010 period for the change in federal tax law relating to the deductibility of retiree prescription drug subsidies.

Liquidity and Capital Resources

Cash Flow Analysis

          The Company’s net cash provided by operating activities during the three months ended March 31, 2010 was $105.3 million as compared to $33.3 million during the three months ended March 31, 2009. The increase in net cash provided by operating activities of $72.0 million was due to changes in working capital and an increase in cash flow from operations. Working capital decreased during the three months ended March 31, 2010 compared to the same period in 2009 primarily due to greater collections on accounts receivable and the timing of payments related to other accrued expenses and prepaid expenses.

          The Company’s net cash used in investing activities was $4.1 million during the three months ended March 31, 2010 as compared to $7.7 million during the three months ended March 31, 2009. The decrease in cash used in investing activities during the three months ended March 31, 2010 compared to the same period in 2009 was primarily due to lower capital expenditures, which were partially offset by repayments on a related party note receivable.

          The Company’s net cash used in financing activities was $5.2 million during the three months ended March 31, 2010 as compared to $40.0 million during the three months ended March 31, 2009. The decrease in net cash used in financing activities was primarily due to the extinguishment of $90.5 million principal amount of 2015 Senior Notes for an aggregate purchase price of $35.1 million during the three months ended March 31, 2009.

The Company’s Consolidated Contractual Obligations and Commitments

          There were no material changes to the Company’s contractual obligations and commitments as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 during the three months ended March 31, 2010.

Liquidity Assessment

          The Company believes that its cash and cash equivalents, borrowings available under its credit agreement (as further discussed in Note 11 to the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q) and anticipated cash flow from operating activities will be sufficient to meet the Company’s 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:

Harland Clarke Holdings Corp. and Subsidiaries

	•		Capital Expenditures. The Company’s 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 three months ended March 31, 2010 and 2009, the Company incurred $6.6 million and $11.8 million of capital expenditures and $0.0 million and $0.1 million of capitalized interest, respectively.
	•		Contract Acquisition Payments. During the three months ended March 31, 2010 and 2009, the Company made $9.2 million and $12.5 million of contract acquisition payments to its clients, respectively.
	•		Restructuring/Cost Reductions. Restructuring accruals 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 Company’s operations. During the three months ended March 31, 2010 and 2009, the Company made $4.3 million and $9.2 million of payments for restructuring, respectively.

          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.

Cash Flow Risks

          The Company’s 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, competitive, legislative, regulatory and other conditions, many of which are beyond the Company’s 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 March 31, 2010, the Company had $87.8 million of availability under its revolving credit facility (after giving effect to the issuance of $12.2 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 are insufficient to pay the Company’s 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 Company’s existing and future indebtedness may limit its ability to pursue any of these alternatives.

Critical Accounting Policies and Estimates

          There were no material changes to the Company’s Critical Accounting Policies and Estimates included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 as filed on February 26, 2010 with the United States Securities and Exchange Commission (“SEC”), which is available on the SEC’s website at www.sec.gov.

Forward-Looking Statements

          This Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, as well as certain of the Company’s other public documents and statements and oral statements, contains forward-looking statements that reflect management’s current assumptions and estimates of future performance and economic conditions. When used in this Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q. 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

Harland Clarke Holdings Corp. and Subsidiaries

investors to read the summary of the Company’s critical accounting policies and estimates included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates.”

          In addition to factors described in the Company’s SEC filings and others, the following factors could cause the Company’s actual results to differ materially from those expressed in any forward-looking statements made by the Company:

	•		our substantial indebtedness;
	•		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;
	•		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 Company’s earnings, total assets and market prices of the Company’s outstanding securities;
	•		our ability to generate sufficient cash in the future that affects our ability to make payments on our indebtedness;
	•		our ability to incur substantially more debt that could exacerbate the risks associated with our substantial leverage;
	•		covenant restrictions under our indebtedness that may limit our ability to operate our businesses and react to market changes;
	•		increases in interest rates;
	•		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;
	•		consolidation among financial institutions;
	•		adverse changes or failures or consolidation of the large financial institution clients on which we depend, resulting in decreased revenues and/or pricing pressure;
	•		intense competition in all areas of our businesses;
	•		our ability to successfully manage future acquisitions;
	•		our ability to implement any or all components of our business strategy;
	•		interruptions or adverse changes in our vendor or supplier relationships;
	•		increased production and delivery costs;
	•		fluctuations in the costs of raw materials and other supplies;
	•		our ability to attract, hire and retain qualified personnel;
	•		technological improvements that may reduce any advantage over other providers in our respective industries;
	•		our ability to protect customer or consumer data against data security breaches;
	•		changes in legislation relating to consumer privacy protection that could increase our costs or limit our future business opportunities;
	•		contracts with our clients relating to consumer privacy protection that could restrict our business;
	•		our ability to protect our intellectual property rights;

Harland Clarke Holdings Corp. and Subsidiaries

	•		our reliance on third-party providers for certain significant information technology needs;
	•		software defects or cyber attacks that could harm our businesses and reputation;
	•		sales and other taxes that could have adverse effects on our businesses;
	•		environmental risks;
	•		the ability of our Harland Financial Solutions segment to achieve organic growth;
	•		regulations governing the Harland Financial Solutions segment;
	•		our ability to develop new products for our Scantron segment;
	•		future warranty or product liability claims which could be costly to resolve and result in negative publicity;
	•		government and school clients’ budget deficits, which could have an adverse impact on our Scantron segment;
	•		softness in direct mail response rates;
	•		lower than expected cash flow from operations;
	•		unfavorable foreign currency fluctuations;
	•		the loss of one of our significant customers;
	•		work stoppages and other labor disturbances; and
	•		unanticipated internal control deficiencies or weaknesses.

          The Company encourages investors to read carefully the risk factors described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 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 3. Quantitative and Qualitative Disclosures About Market Risk

          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 March 31, 2010, the Company had $1,750.5 million of term loans outstanding under its credit agreement, $12.2 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 increase of 1 percentage point in the variable component of interest rates applicable to its floating rate debt outstanding at March 31, 2010 would have resulted in an increase in its interest expense for the three months ended March 31, 2010 of approximately $2.2 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 Quarterly Report on Form 10-Q. These derivatives currently swap the underlying variable rates for fixed rates ranging from 2.140% to 5.362%.

          Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 presents additional quantitative and qualitative disclosures about exposure to risk in foreign currency exchange rates. There have been no material changes to the disclosures regarding foreign currency exchange rates as of March 31, 2010.

Harland Clarke Holdings Corp. and Subsidiaries

Item 4. Controls and Procedures

          (a) Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.

          (b) Internal Control Over Financial Reporting. There have not been any changes in the Company’s 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 quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Harland Clarke Holdings Corp. and Subsidiaries

PART II. OTHER INFORMATION

Item 1. 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 HFS’s 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 HFS’s motion to dismiss Mr. Kitson’s 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, BOE’s 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.

          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 1A. Risk Factors

          There was no material change to the Company’s risk factors as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 during the three months ended March 31, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

          None.

Item 3. Defaults Upon Senior Securities

          There was no event of default upon senior securities during the three months ended March 31, 2010.

Item 5. Other Information

          No additional information need be presented.

Item 6. Exhibits

31.1		Certification of Charles T. Dawson, Chief Executive Officer, dated May 5, 2010.
31.2		Certification of Peter A. Fera, Jr., Chief Financial Officer, dated May 5, 2010.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX

31.1		Certification of Charles T. Dawson, Chief Executive Officer, dated May 5, 2010.
31.2		Certification of Peter A. Fera, Jr., Chief Financial Officer, dated May 5, 2010.