United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _____________
Commission file number 1-6352
JOHN H. HARLAND COMPANY
(Exact name of registrant as specified in its charter)
GEORGIA 58-0278260
(State or other jurisdiction of (I.R.S. Employer
Identification No.)
incorporation or organization)
2939 Miller Rd.
Decatur, Georgia 30035
(Address of principal executive offices) (Zip code)
(404) 981-9460
(Registrant's telephone number, including area code)
(Not Applicable)
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes (X) No ( ).
The number of shares of the Registrant's Common Stock outstanding on
May 6, 1996 was 30,710,831.
<PAGE>
Item 1. FINANCIAL STATEMENTS
<TABLE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
<CAPTION>
March 31, December 31,
(In thousands) 1996 1995
- ----------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 24,186 $ 12,862
Accounts receivable 69,224 67,660
Inventories 39,091 42,296
Deferred income taxes 6,739 6,523
Other 15,367 17,942
---------- ----------
Total current assets 154,607 147,283
---------- ----------
INVESTMENTS AND OTHER ASSETS:
Investments 8,257 8,188
Goodwill and intangibles-net 128,751 133,092
Other 21,141 20,978
---------- ----------
Total investments and other assets 158,149 162,258
---------- ----------
PROPERTY, PLANT AND EQUIPMENT 366,504 364,000
Less accumulated depreciation
and amortization 204,303 198,891
---------- ----------
Property, plant and equipment - net 162,201 165,109
---------- ----------
Total $ 474,957 $ 474,650
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<CAPTION>
March 31, December 31,
(In thousands, except share amounts) 1996 1995
- ----------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Short-term debt $ 31,000 $ 35,000
Accounts payable - trade 23,362 26,311
Deferred revenues 24,301 25,141
Accrued liabilities:
Salaries, wages and employee benefits 16,288 18,217
Taxes 11,234 4,698
Other 13,829 11,703
---------- ----------
Total current liabilities 120,014 121,070
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 114,534 114,574
Deferred income taxes 4,126 4,504
Other 12,555 12,355
---------- ----------
Total long-term liabilities 131,215 131,433
---------- ----------
Total liabilities 251,229 252,503
---------- ----------
SHAREHOLDERS' EQUITY:
Series preferred stock, authorized 500,000
shares of $1.00 par value, none issued
Common stock - authorized 144,000,000
shares of $1.00 par value, issued
37,907,497 issued 37,907 37,907
Additional paid-in capital 2,145 2,375
Foreign exchange translation adjustments 54 54
Retained earnings 362,172 361,554
---------- ----------
Total shareholders' equity 402,278 401,890
Less 7,198,666 and 7,468,591 shares of
treasury stock - at cost 178,550 179,743
---------- ----------
Shareholders' equity - net 223,728 222,147
---------- ----------
Total $ 474,957 $ 474,650
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
<CAPTION>
(In thousands, except
per share amounts) 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
NET SALES $ 152,247 $ 138,291
---------- ----------
COST AND EXPENSES:
Cost of sales 84,992 70,769
Selling, general and
administrative expenses 45,951 40,948
Amortization of intangibles 4,647 3,355
---------- ----------
Total 135,590 115,072
---------- ----------
INCOME FROM OPERATIONS 16,657 23,219
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (2,225) (1,996)
Other - net (19) 49
---------- ----------
Total (2,244) (1,947)
---------- ----------
INCOME BEFORE INCOME TAXES 14,413 21,272
INCOME TAXES 5,967 8,509
---------- ----------
NET INCOME 8,446 12,763
RETAINED EARNINGS AT BEGINNING
OF PERIOD 361,554 346,660
---------- ----------
370,000 359,423
Cash dividends (7,828) (7,749)
---------- ----------
RETAINED EARNINGS AT END OF PERIOD $ 362,172 $ 351,674
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 30,709 30,475
========== ==========
NET INCOME PER COMMON SHARE $ .28 $ .42
========== ==========
CASH DIVIDENDS PER COMMON
SHARE $ .255 $ .255
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
<CAPTION>
(In thousands) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 8,446 $ 12,763
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 12,924 11,096
Other 440 520
Change in assets and liabilities net of
effect of acquisitions:
Accounts receivable (1,564) 440
Inventories and other current assets 6,003 675
Accounts payable and accrued expenses 2,189 6,309
---------- ---------
Net cash provided by operating activities 28,438 31,803
---------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (5,343) (6,494)
Proceeds from sale of property, plant and equipment 333 125
Change in short-term investments-net 400 (149)
Long-term investments and other assets-net (1,598) (1,093)
---------- ---------
Net cash used in investing activities (6,208) (7,611)
---------- ---------
FINANCING ACTIVITIES:
Sale of common stock 1,009 1,113
Dividends paid (7,828) (7,749)
Short-term debt - net (4,000) (14,000)
Other - net (87) (125)
---------- ----------
Net cash used in financing activities (10,906) (20,761)
---------- ----------
Increase in cash and cash equivalents 11,324 3,431
Cash and cash equivalents at beginning of period 12,862 19,959
---------- ----------
Cash and cash equivalents at end of period $ 24,186 $ 23,390
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements contained in this report are
unaudited but reflect all adjustments, consisting only of normal recurring
accruals, which are, in the opinion of management, necessary for a fair
presentation of the results of operations, financial position and cash flows
of the John H. Harland Company and subsidiaries ("the Company") for the
interim periods reflected. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to applicable
rules and regulations of the Securities and Exchange Commission. The results
of operations for the interim period reported herein are not necessarily
indicative of results to be expected for the full year.
2. Accounting Policies
The condensed consolidated financial statements included herein should be
read in conjunction with the consolidated financial statements and notes
thereto, and the Independent Auditors' Report included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
Reference is made to the accounting policies of the Company described in the
notes to consolidated financial statements included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995. The Company
has consistently followed those policies in preparing this report.
3. Acquisitions
During 1995 the Company acquired the businesses described below, which were
accounted for using the purchase method of accounting. The results of
operations of each acquisition are included in the consolidated financial
statements from the date of acquisition. Certain of these purchase
agreements provide for subsequent contingent payments which, if paid, will
be recorded as an increase in goodwill and will be amortized over the
remaining life of the associated goodwill.
On July 3, 1995, the Company's wholly-owned subsidiary, Scantron
Corporation, acquired the net assets of Quality Computers & Applications
Inc. ("QCA") for cash paid at closing and a contingent purchase payment
based upon a multiple of QCA 1998 operating results. The acquisition price
was funded with proceeds from short-term borrowings. QCA is a mail-order
retailer of software and hardware to the educational technology market.
On August 31, 1995, the Company acquired the net assets of dataPRINT
("dataPRINT"), a division of Data Print, Inc., for cash and a note payable.
The cash paid at closing was funded with proceeds from short-term
borrowings. dataPRINT is based in Seattle, Washington and produces computer-
compatible forms, particularly forms utilized by personal finance software
packages. The new entity operates under the name Harland dataPRINT, Inc.
Assets acquired through acquisitions in 1995 totaled $23.1 million, net of
liabilities assumed of $1.8 million. Cash paid out for these acquisitions
totaled $11.1 million along with a $12.0 million note which was paid in
January 1996. Of the total acquisition costs, $20.3 million was
preliminarily allocated to intangible assets, of which $10.6 million
represented goodwill which is being amortized over 15-20 year periods.
The following represents the unaudited pro forma results of operations which
assume the acquisitions occurred on January 1, 1995. These results include
certain adjustments, primarily increased amortization expense related to
intangible assets and increased interest expense (in thousands of dollars,
except per share amounts):
<PAGE>
Three months ended
March 31, 1995
- ---------------------------------------------------------------------
Net sales $ 145,289
Net income 12,378
Net income per common share .41
The pro forma financial information presented above does not purport to be
indicative of either the results of operations that would have occurred had
the acquisitions taken place on January 1, 1995 or of future consolidated
results of operations.
4. Accounting for Income Taxes
The provision for income tax expense for the three months ended March 31,
1996 and 1995 includes the following (in thousands):
1996 1995
- ----------------------------------------------------------------------
Current provision $ 6,561 $ 10,936
Deferred benefit (594) (2,427)
--------- ---------
Total $ 5,967 $ 8,509
========= =========
5. Employee Stock Plans
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") which was effective for the Company on January
1, 1996. SFAS 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require)
compensation to be measured based on the fair value of the equity instrument
awarded. Companies are permitted, however, to continue to apply ABP Opinion
No. 25, which recognizes compensation based on the intrinsic value of the
equity instrument awarded. The Company will continue to apply ABP Opinion
No. 25 to its stock-based compensation awards and will disclose the required
pro forma effect on net income and earnings per share annually. No
compensation costs related to stock based compensation plans were recorded
in the Company's operating results for the three month periods ended March
31, 1996 and 1995.
The Company has an Employee Stock Purchase Plan ("ESPP") under which
employees are granted an option to purchase shares of the Company's common
stock during the quarter in which the option is granted. The option price is
85% of the fair market value of the stock at the beginning or end of the
quarter, whichever is lower. In the quarter ended March 31, 1996, options
representing 52,815 shares were exercised at a price of $17.80 per share. At
March 31, 1996, there were 959,330 shares reserved for purchase under the
ESPP.
The Company also has incentive and non-qualified stock option plans
("Plans") which provide for the granting of options to certain key employees
of the Company. The options to purchase shares of the Company's common stock
are generally at the fair market value of the common stock on the date of
the grant.
The Plans' option transactions for the three months ended March 31, 1996 are
as follows:
Shares (000) Exercise Prices
- ---------------------------------------------------------------------------
Outstanding at beginning of period 1,411 $11.59 - 30.00
Granted 570 23.63
Exercised (3) 19.38 - 22.75
Cancelled (12) 19.38 - 24.75
--------
Outstanding at end of period 1,966 11.59 - 30.00
========
Options granted prior to October 1995 were generally exercisable one year
from the date of the grant with a five year life. Options granted since
October 1995 have five year vesting periods and seven to ten year lives. At
March 31, 1996, there were 393,000 options exercisable and 1,268,000 shares
reserved for options under the Plans.
6. Net Income Per Share
Net income per share is based on the weighted average number of common
shares and common share equivalents outstanding during the period. Common
share equivalents include the number of shares issuable upon the exercise of
the Company's stock options.
7. Inventories
Inventories consisted of the following (in thousands of dollars):
March 31, December 31,
1996 1995
- -----------------------------------------------------------------------
Raw materials and semi-finished goods $ 30,856 $ 34,349
Finished goods 3,680 3,237
Hardware component parts 4,555 4,710
-------- --------
Total $ 39,091 $ 42,296
======== ========
<PAGE>
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
First Quarter 1996 vs. 1995
Consolidated net sales for the first quarter 1996 increased $14.0 million or
10.1% as compared to the first quarter of 1995.
The Company's Financial Markets ("FM") segment sales increased $10.5 million
or 8.8% over the 1995 period. FM's printed products provided $9.1 million of
this increase primarily due to the acquisition of dataPRINT ("dataPRINT") in
August 1995. FM order volumes in its core check and related products
business increased 1.4% over the 1995 period but this volume increase was
offset by a price and product mix decrease of 1.4% primarily due to the
competitive pricing pressures in the industry. The order volume was also
favorably impacted by some one time conversion sales. FM's decision support
product and service revenues increased over $1 million compared to the 1995
period.
Sales in Education Markets segment increased 21.8% over the 1995 period
principally due to the acquisition of Quality Computers & Applications Inc.
in July of 1995. Sales from the Company's other businesses, primarily The
Check Store, Inc. ("The Check Store"), increased $2.0 million over the 1995
period.
Consolidated gross profit decreased by 0.4% reflecting a decrease as a
percentage of sales from 48.8% in 1995 to 44.2% in 1996. The negative impact
of paper costs and competitive pricing continued to affect printed products
gross margins. FM's printed products gross margin as a percentage of its
sales decreased from 49.2% in 1995 to 43.2% in 1996. Also impacting FM's
margins for printed products was the reorganization and relocation of
certain specialty print operations during the 1996 quarter. FM's gross
margin from its decision support products and services improved in the 1996
period over the 1995 period related to its increase in revenues.
Changes in gross margins of Education Markets and other products were not
significant, with the exception of The Check Store which contributed $1.3
million to consolidated gross profit.
Consolidated selling, general and administrative expenses increased by $5.0
million or 12.2%, and increased as a percentage of sales from 29.6% in 1995
to 30.2% in 1996. Components of this increase are reorganization costs
related to the Company's transitioning from a checks and forms printer to a
financial marketing services company, marketing expenditures associated with
The Check Store, acquired operations (dataPRINT and QCA) and increased
expenditures related to information technologies. The increase in selling,
general and administrative expenses was partially offset by a $1.5 million
decrease in employee retirement benefit costs related to the Company's
merger of its profit sharing plan into its 401(k) plan.
Amortization of intangibles, principally resulting from acquisitions,
increased by $1.3 million or 38.5%, and increased as a percentage of net
sales from 2.4% in the first quarter 1995 to 3.1% for the first quarter
1996. This increase is primarily attributable to acquisitions (dataPRINT and
QCA) and the settlement of an earnout with the former owners of Marketing
Profiles, Inc., which was acquired by the Company in January 1994.
Other expense increased $297,000 in 1996 over 1995, primarily due to
interest expense related to higher average balances of short-term debt in
the first quarter 1996 compared to 1995.
The Company's consolidated effective income tax rate for the first quarter
1996 was 41.4% compared to 40.0% in 1995 primarily due to the increase of
non-deductible amortization of intangibles associated to the earnout
settlement mentioned previously. First quarter 1996 net income per share was
$0.28 or a 33% decrease compared to $0.42 in the 1995 quarter. Earnings were
impacted by costs associated with reorganization, competitive check pricing,
higher paper prices and investments in The Check Store. Investments in The
<PAGE>
Check Store affected earnings by $.06 per share versus a negative impact of
$.05 per share in 1995 and costs associated with the Company's
reorganization negatively impacted earnings $.03 per share in 1996.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash flows provided by operations in the first quarter of 1996 were $28.4
million compared to $31.8 million in 1995. This change was relative to the
change in net income in the comparable periods. The primary uses of funds in
the first quarter of 1996 were to pay dividends to the Company's
shareholders, to reduce short-term debt and for capital expenditures.
Purchases of property, plant and equipment totaled $5.3 million in the first
quarter of 1996, compared to $6.5 million in 1995.
The Company has unsecured lines of credit which provide for borrowings up to
$111.0 million. At March 31, 1996, $31.0 million was outstanding under
these lines of credit. In January 1996, the Company paid a $12 million note
related to the acquisition of dataPRINT.
On March 31, 1996, the Company had $24.6 million in cash and cash
equivalents and short-term investments. The Company believes that its
current cash position funds from operations and the availability of funds
under its lines of credit will be sufficient to meet anticipated
requirements for working capital, dividends, capital expenditures and other
corporate needs, and management is not aware of any condition that would
materially alter this trend. The Company also believes that it possesses
sufficient unused debt capacity and access to equity capital markets to
pursue additional acquisition opportunities.
OUTLOOK
To improve service and increase the profitability of its check printing
business, the Company is standardizing products and pricing and
consolidating its manufacturing operations. Over a two-year period, the
Company will consolidate its 40 core printing plants into a network of seven
regional facilities and incorporate advanced manufacturing technology and
systems into this network. The Company also plans to centralize and
outsource customer service and data entry functions by the end of first
quarter 1997.
The Company is also in the process of combining its various sales and
marketing functions into a single, multi-product organization, focused on
serving the financial institution market. This unit will offer an integrated
product line of marketing decision support, direct marketing, print and
delivery systems under the Harland brand. Future plans include developing
and acquiring new technology and businesses to enhance this product line.
The total impact of implementing these strategies is being determined and is
expected to be announced during the second quarter. Annual savings in
operating costs associated with these and other initiatives, while not yet
fully quantified, are expected to be in the $50 to $75 million range.
<PAGE>
PART II. OTHER INFORMATION
===========================
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Reference No. Description of Exhibit
- ----------------------------------------------------------------
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the three months ended March 31,
1996.
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.
JOHN H. HARLAND COMPANY
(Registrant)
May 15, 1996 William M. Dollar
Date: _________________ By:_____________________________
William M. Dollar
Vice-President, Finance and
Treasurer
(Authorized Officer and
Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's financial statements for the three months ended March 31, 1996 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 23,786
<SECURITIES> 400
<RECEIVABLES> 71,727
<ALLOWANCES> 2,503
<INVENTORY> 39,091
<CURRENT-ASSETS> 154,607
<PP&E> 366,504
<DEPRECIATION> 204,303
<TOTAL-ASSETS> 474,957
<CURRENT-LIABILITIES> 120,015
<BONDS> 114,534
<COMMON> 37,907
0
0
<OTHER-SE> 178,550
<TOTAL-LIABILITY-AND-EQUITY> 474,957
<SALES> 152,247
<TOTAL-REVENUES> 152,247
<CGS> 70,604
<TOTAL-COSTS> 84,992
<OTHER-EXPENSES> 84,992
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,225
<INCOME-PRETAX> 14,413
<INCOME-TAX> 5,967
<INCOME-CONTINUING> 8,446
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,446
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
</TABLE>
