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 October 2, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to________________
Commission file number 1-6352
JOHN H. HARLAND COMPANY
(Exact name of registrant as specified in its charter)
GEORGIA 58-0278260
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2939 Miller Rd.
Decatur, Georgia 30035
(Address of principal executive offices) (Zip code)
(770) 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
October 14, 1998 was 31,013,137.
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Item 1. FINANCIAL STATEMENTS
<TABLE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
------
October 2, December 31,
(In thousands) 1998 1997
- ----------------------------------------------------------------------
(Unaudited)
<S>
CURRENT ASSETS: <C> <C>
Cash and cash equivalents $ 22,821 $ 13,004
Accounts receivable 72,265 73,130
Inventories 24,092 26,442
Deferred income taxes 12,827 10,763
Prepaid income taxes 4,260 13,907
Other 7,357 11,140
---------- ----------
Total current assets 143,622 148,386
---------- ----------
INVESTMENTS AND OTHER ASSETS:
Assets held for disposal 6,909 8,721
Investments 4,520 5,185
Goodwill and intangibles - net 107,574 115,538
Deferred income taxes 7,965 9,494
Other 23,354 20,919
---------- ----------
Total investments and other assets 150,322 159,857
---------- ----------
PROPERTY, PLANT AND EQUIPMENT 258,665 249,350
Less accumulated depreciation
and amortization 136,265 131,407
---------- ----------
Property, plant and equipment - net 122,400 117,943
---------- ----------
Total $ 416,344 $ 426,186
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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<TABLE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
October 2, December 31,
(In thousands, except share amounts) 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C>
(Unaudited)
CURRENT LIABILITIES:
Accounts payable - trade $ 24,436 $ 33,816
Deferred revenues 23,032 25,799
Accrued liabilities:
Salaries, wages and employee benefits 23,583 21,829
Taxes 4,237 10,986
Restructuring costs 5,401 6,634
Other 14,145 10,703
---------- ----------
Total current liabilities 94,834 109,767
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 107,068 109,358
Other 15,785 14,235
---------- ----------
Total long-term liabilities 122,853 123,593
---------- ----------
Total liabilities 217,687 233,360
---------- ----------
SHAREHOLDERS' EQUITY:
Series preferred stock, authorized 500,000
shares of $1.00 par value, none issued
Common stock - authorized 144,000,000
shares of $1.00 par value,
37,907,497 shares issued 37,907 37,907
Additional paid-in capital 1,458
Foreign exchange translation adjustment (513) (186)
Retained earnings 331,233 324,324
---------- ----------
Total shareholders' equity 368,627 363,503
Less 6,894,360 and 6,849,524 shares
of treasury stock - at cost 169,970 170,677
---------- ----------
Shareholders' equity - net 198,657 192,826
---------- ----------
Total $ 416,344 $ 426,186
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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<TABLE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE AND NINE MONTH PERIODS ENDED OCTOBER 2, 1998
AND SEPTEMBER 30, 1997
(Unaudited)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(In thousands, except OCT. 2, SEPT. 30, OCT. 2, SEPT. 30,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 147,364 $ 142,099 $ 426,174 $ 421,056
---------- ---------- ---------- ----------
COST AND EXPENSES:
Cost of sales 78,309 82,578 237,603 243,869
Selling, general and
administrative expenses 45,173 46,178 138,842 131,423
Software development charge 10,927 10,927
Amortization of intangibles 2,517 3,510 7,564 10,929
Restructuring charge 1,301 4,889 2,745
---------- ---------- ---------- ----------
Total 138,227 132,266 399,825 388,966
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 9,137 9,833 26,349 32,090
---------- ---------- ---------- ----------
OTHER INCOME(EXPENSE):
Interest expense (1,962) (2,029) (5,650) (6,626)
Other - net (60) 452 3,927 2,645
---------- ---------- ---------- ----------
Total (2,022) (1,577) (1,723) (3,981)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 7,115 8,256 24,626 28,109
INCOME TAXES 3,107 3,427 10,466 11,665
---------- ---------- ---------- ----------
NET INCOME 4,008 4,829 14,160 16,444
RETAINED EARNINGS AT
BEGINNING OF PERIOD 329,813 323,291 324,324 316,315
---------- ---------- ---------- ----------
333,821 328,120 338,484 332,759
Cash dividends (2,336) (2,323) (6,999) (6,962)
Issue of treasury shares
under employee stock plans (252) (252)
---------- ---------- ---------- ----------
RETAINED EARNINGS AT END
OF PERIOD $ 331,233 $ 325,797 $ 331,233 $ 325,797
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
BASIC 31,083 30,969 31,094 30,954
DILUTED 31,405 31,386 31,432 31,459
========== ========== ========== ==========
EARNINGS PER COMMON SHARE:
BASIC $ .13 $ .16 $ .46 $ .53
DILUTED $ .13 $ .16 $ .46 $ .53
========== ========== ========== ==========
CASH DIVIDENDS PER
COMMON SHARE $ .075 $ .075 $ .225 $ .225
========== ========== ========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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<TABLE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED OCTOBER 2, 1998 AND SEPTEMBER 30, 1997
(Unaudited)
<CAPTION>
(In thousands) 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 14,160 $ 16,444
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 31,950 29,179
Software development charge 10,927
Gain on sale of assets (3,938) (2,293)
Other 3,080 3,025
Change in assets and liabilities:
Deferred income taxes (535) 9,549
Accounts receivable (1,592) 2,973
Inventories and other current assets 15,780 6,850
Accounts payable and accrued expenses (14,933) (14,232)
---------- ---------
Net cash provided by operating activities 54,899 51,495
---------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (26,033) (27,663)
Proceeds from sale of property, plant and equipment 6,453 24,446
Long-term investments and other assets (15,875) (8,343)
---------- ---------
Net cash used in investing activities (35,455) (11,560)
---------- ---------
FINANCING ACTIVITIES:
Issuance of treasury stock 1,873 3,691
Dividends paid (6,999) (6,962)
Repurchase of common stock (2,885) (1,979)
Short-term debt - net (43,089)
Long-term debt - net (2,290) (4,685)
Other - net 674 (119)
---------- ----------
Net cash used in financing activities (9,627) (53,143)
---------- ----------
Increase/(decrease) in cash and cash equivalents 9,817 (13,208)
Cash and cash equivalents at beginning of period 13,004 22,667
---------- ----------
Cash and cash equivalents at end of period $ 22,821 $ 9,459
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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JOHN H. HARLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1998
(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, 1997 ("1997 10-K").
Reference is made to the accounting policies of the Company described in
the notes to consolidated financial statements included in the 1997 10-
K. The Company has consistently followed those policies in preparing
this report.
Effective January 1, 1998, the Company began reporting its quarterly
results on a 13-week basis. As a result, the first quarter of 1998
ended on April 3, 1998, the second quarter of 1998 ended on July 3,
1998, and the third quarter of 1998 ended on October 2, 1998.
3. Restructuring Charge
In April 1996, the Company announced plans to consolidate its check
imprint plants into a network of regional facilities. The Company
recorded restructuring charges of $1.3 million in the third quarter of
1998, and $4.9 million and $2.7 million in the nine month period of 1998
and 1997, respectively, for severance that was not previously accrued.
In the third quarters of 1998 and 1997, the Company made payments
totaling $1.0 million related to previously accrued restructuring costs.
Management expects to incur additional charges in 1998 and 1999,
predominantly related to employee severance. As part of this
restructuring, certain assets, predominantly land, buildings and
equipment at the facilities to be closed, with a carrying value of $6.9
million are held for sale at October 2, 1998. The Company expects to
sell these assets within one year of the related facility being closed.
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4. Accounting for Income Taxes
The provisions for income taxes for the nine months ended October 2,
1998 and September 30, 1997, were as follows (in thousands):
October 2, September 30,
1998 1997
- ------------------------------------------------------------------------
Current provision $ 9,931 $ 4,224
Deferred provision 535 7,441
--------- ---------
Total $ 10,466 $ 11,665
========= =========
5. Inventories
Inventories consisted of the following (in thousands):
October 2, December 31,
1998 1997
- ------------------------------------------------------------------------
Raw materials and semi-finished goods $ 22,351 $ 23,902
Finished goods 1,530 2,116
Hardware component parts 211 424
--------- ---------
Total $ 24,092 $ 26,442
========= =========
6. Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
Statement requires that all items recognized under accounting standards
as components of comprehensive income be reported in financial
statements. This Statement also requires that an entity classify items
of other comprehensive income by their nature in an annual financial
statement. Other comprehensive income for the Company includes foreign
currency translation adjustments. Total comprehensive income for the
three and nine month periods ended October 2, 1998 and September 30,
1997 were as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
OCT. 2, SEPT. 30, OCT. 2, SEPT. 30,
1998 1997 1998 1997
- -----------------------------------------------------------------------
Net income: $ 4,008 $ 4,829 $14,160 $16,444
Other comprehensive
income net of tax:
Change in equity due to
foreign exchange
translation adjustments (230) (19) (327) (161)
-------- -------- -------- --------
Comprehensive income $ 3,778 $ 4,810 $13,833 $16,283
======== ======== ======== ========
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7. Earnings per Common Share
Earnings per common share (EPS) for all periods have been computed under
the provisions of Statement of Financial Accounting Standards No. 128
"Earnings Per Share". The net income used in the calculation of diluted
EPS is adjusted for the effect of interest on the conversion of
subordinated debt. The net income used in the calculations of diluted
EPS for the third quarters of 1998 and 1997 were $4,087,000 and
$4,931,000, respectively. The net income used in the calculations of
diluted EPS for the nine months ended October 2, 1998 and September 30,
1997 were $14,418,000 and $16,749,000, respectively.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company operates its business in two segments. The Financial Services
segment ("FS") includes checks, forms and other printed products, database
marketing software, direct marketing campaign management and loan
origination software sold primarily to financial institutions.
The Scantron segment represents products and services sold by the
Company's Scantron subsidiary, including optical mark reading equipment,
scannable forms, survey services, mail order software and field
maintenance services. Scantron sells these products and services to
education and commercial markets.
RESULTS OF OPERATIONS THIRD QUARTER 1998 VERSUS THIRD QUARTER 1997
Consolidated net sales for the quarter ended October 2, 1998 were $147.4
million compared to $142.1 million for the quarter ended September 30,
1997. FS sales totaled $122.9 million and $118.3 million for the third
quarter of 1998 and 1997, respectively. The increases in FS sales
resulted primarily from increases in sales for computer checks, forms,
and direct marketing in 1998 over 1997. Volumes for traditional checks
increased 5.9% in 1998 over 1997. The positive effect on revenues from
the volume increase was offset by an erosion in pricing and changes in
product mix. Revenue from marketing services, including database
marketing software, direct marketing campaign management and loan
origination software was $16.3 million for the quarter ended October 2,
1998, an increase of $2.7 million over 1997. This increase primarily
resulted from growth in the direct marketing area. Scantron's sales
increased $0.7 million or 2.9% over 1997, primarily due to expansion of
field maintenance operations.
Consolidated gross profit increased by 16.0% in the third quarter of
1998 from 1997. FS gross profit increased 19.4% in the third quarter of
1998 from 1997. Primarily, this increase resulted from lower costs for
printed products in 1998. Improvements in operations from plant
consolidations and process improvements contributed to the lower costs
in 1998 as compared to 1997. Scantron's gross profit increased 3.5% in
the third quarter of 1998 over 1997, primarily due to an improvement in
core product margins and the increased sales from the expansion of field
maintenance operations. Consolidated gross margin was 41.9% in the
third quarter of 1997 as compared to 46.9% in 1998.
Consolidated selling, general and administrative expenses decreased by
$1.0 million or 2.2%. Selling, general and administrative expenses
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decreased as a percentage of sales from 32.5% in the third quarter of
1997 to 30.7% in 1998.
During the quarter ended October 2, 1998, $10.9 million of deferred
costs related to the development of certain software products were
expensed. These previously capitalized costs were primarily associated
with the development of the Harland Relationship Manager software
system. The Company will expense continuing development costs until
product performance requirements are met and product availability dates
are determined.
Amortization of intangibles decreased by $1.0 million from the third
quarter of 1997 compared to the third quarter of 1998, due to certain
intangible assets becoming fully amortized in 1997.
The Company's consolidated effective income tax rate for the quarter
ending October 2, 1998 was 43.7% compared to 41.5% for 1997.
The Company's net income for the third quarter of 1998 was $4.0 million
compared to $4.8 million for 1997. Basic and diluted earnings per share
were $0.13 for the third quarter of 1998 compared to $0.16 in 1997.
Included in the calculation of earnings per share for 1998 were costs
related to the development of software and restructuring charges, which
reduced earnings per share by $0.20 and $0.03 respectively.
RESULTS OF OPERATIONS YEAR TO DATE 1998 VERSUS 1997
Consolidated net sales for the nine months ended October 2, 1998 were
$426.2 million compared to $421.0 million for the nine months ended
September 30, 1997. FS sales totaled $359.3 million and $356.9 million
for 1998 and 1997, respectively. The increase in FS sales resulted
primarily from higher increases in sales for computer checks, forms and
direct marketing in 1998 over 1997. Volumes for traditional checks
increased 4.6% in 1998 over 1997. Sales price and changes in product
mix for checks reduced revenues primarily because of lower prices
experienced as a result of discounting occurring in traditional check
markets, and lower prices associated with the higher volume national
accounts. Revenue from marketing services, including database marketing
software, direct marketing campaign management and loan origination
software was $47.2 million for the first nine months of 1998, an
increase of $5.4 million over 1997. Scantron's sales increased $2.7
million or 4.2% over 1997, primarily due to expansion of field
maintenance operations.
Consolidated gross profit increased by 6.4% in 1998 from 1997. FS gross
profit increased 5.9% in 1998 from 1997. Primarily, this increase
resulted from lower costs for printed products in 1998. Improvements in
operations from plant consolidations and process improvements
contributed to the lower costs in 1998 as compared to 1997. Scantron's
gross profit increased 9.1% in 1998 over 1997, primarily due to an
improvement in core products margins and the increased sales from the
expansion of field maintenance operations. Consolidated gross margin
was 42.1% in 1997 as compared to 44.2% in 1998.
Consolidated selling, general and administrative expenses increased by
$7.4 million, with the largest increases resulting from increased costs
related to upgrading technology and implementation of new customers.
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Selling, general and administrative expenses increased as a percentage
of sales from 31.2% in 1997 to 32.6% in 1998.
During the quarter ended October 2, 1998, the Company expensed $10.9
million of costs primarily associated with the development of the
Harland Relationship Manager software system, which had previously been
capitalized.
Amortization of intangibles decreased by $3.4 million from 1997 compared
to 1998 due to certain intangible assets becoming fully amortized in
1997.
Other income (expense) was a net expense of $4.0 million in 1997 and a
net expense of $1.7 million in 1998. This decrease of $2.3 million in
net expense was primarily due to the gains from the sale of production
facilities and the Company aircraft.
The Company's consolidated effective income tax rate for 1998 was 42.5%
compared to 41.5% for 1997.
The Company's net income for 1998 was $14.1 million compared to $16.4
million for 1997. Basic and diluted earnings per share for 1998 were
$0.46 in 1998 compared to $0.53 in 1997. Included in the calculation of
earnings per share for 1998 were costs related to the development of
software and restructuring charges, which reduced earnings per share by
approximately $0.20 and $0.09 per share respectively, partially offset
by a gain on the sale of assets, which increased earnings per share by
approximately $0.07. Net income in 1997 included restructuring charges,
which reduced earnings per share by approximately $0.06 per share,
offset by a gain on the sale of buildings, which increased earnings per
share by approximately $0.05.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash flows provided by operations for the first nine months of 1998 were
$54.9 million compared to $51.5 million for the first nine months of
1997. The primary uses of funds in the first nine months of 1998 were
for capital expenditures, customer incentive payments and dividends
paid.
Purchases of property, plant and equipment totaled $26.0 million in the
first nine months of 1998, compared to $27.7 million in 1997. Proceeds
from the sale of property, plant and equipment totaled $6.5 million in
the first nine months of 1998 compared to $24.4 million in 1997.
In April 1997, the Company's board of directors authorized the repurchase
of up to 1.5 million shares of the Company's outstanding common stock. In
May 1997, the Company paid $2.0 million to repurchase 100,000 shares. In
August 1998, the Company paid $2.9 million to repurchase 200,000 shares.
The Company has unsecured lines of credit which provide for borrowings
up to $111.0 million. As of October 2, 1998, the Company had no
outstanding balances under these lines of credit.
On October 2,1998, the Company had $22.8 million in cash and cash
equivalents. The Company believes that its current cash position, funds
from operations and the availability of funds under its lines of credit
will be sufficient to meet anticipated requirements for working capital,
dividends, capital expenditures and other corporate needs. Management is
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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
On October 6, 1998 Timothy C. Tuff was elected president, chief
executive officer and a director of the Company. Tuff, 51, was
president of Boral Industries, Inc. He is expected to assume full-time
responsibilities in early December.
The Company's third quarter operating results were positively impacted
by a number of factors, including the continued cost reductions in
labor, materials and overhead in the Company's check printing
operations. SG&A was also lower in the third quarter, as the Company
continues to pursue reductions in SG&A, both as a percentage of sales
and in aggregate dollars.
To improve service quality, further reduce costs and increase the
profitability of its check printing operations, the Company will
continue to consolidate printing facilities, install new equipment and
develop systems and processes for its production facilities.
Six printing facilities remain to be closed as part of the Company's
plant consolidation program. The final phase of this program will begin
in the fourth quarter of 1998, and the Company expects to complete
closings during 2000. The Company expects duplicate costs to continue
as part of plant consolidation.
The Company anticipates revenue to soften slightly as a result of
overall pricing erosion and a product mix shift to a higher percentage
of large national accounts. In an effort to increase revenues, the
Company is strengthening its marketing efforts with community accounts.
The Company will expense continuing development costs of the Harland
Relationship Manager(TM) system until product performance requirements are
met and product availability dates are determined. The Company expects
the ongoing cost of development to be approximately $600,000 per month
for the remainder of the year. The decision is expected to have minimal
impact on revenue in 1998, and it will be factored into the Company's
1999 business plan.
To support the current business strategies, the Company expects to incur
additional charges, predominantly related to employee severance, of
approximately $1.3 million in 1998 and $6.0 million in 1999.
YEAR 2000 COMPLIANCE
Background - The Year 2000 issue is the result of potential problems
with computer systems or any equipment with computer chips using just
two digits rather than four to identify years (e.g., 98 for 1998). On
January 1, 2000, any clock or date-recording mechanism, including date-
sensitive software using only two digits to represent the year, may
recognize a date using 00 as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing
disruption of operations, including, among other things, a temporary
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inability to process transactions, send invoices, or engage in similar
activities. Therefore, a program was instituted by the Company to
assess and fix all potentially significant Year 2000 problems.
The program consists of three phases: (1) identification and assessment
(including prioritization) in relation to the Company's business
processes of all information technology systems (IT systems) and non-
information technology systems, including buildings, plant equipment,
telephone systems, and other infrastructure systems which contains
microcontroller technology (non-IT systems) that may be sensitive to the
Year 2000 issue; (2) remediation (including modification, upgrade and
replacement) of systems that have a Year 2000 problem; and (3) testing
the systems for compliance.
The Company is also reviewing the Year 2000 readiness of third parties
who provide goods or services which are mission critical to the
Company's operations, as well as its relationship with other key
strategic partners (including large customers). The Company's senior
management and the Board of Directors receive regular updates on the
status of the Year 2000 program.
State of Readiness - The Company has completed the Phase 1 identification and
readiness assessment of all IT and non-IT systems. A risk assessment was
utilized to assign priorities to all IT components. All mission-critical
applications are in Phase 2 remediation and are approximately 90% complete as
of October 2, 1998. These applications are scheduled to be fully remediated
by December 31, 1998. The Phase 3 compliance testing began in August 1998
and is expected to be completed no later than May 31, 1999. A risk assessment
is also underway for all non-IT systems to include manufacturing and facility
components. Plans to upgrade or replace non-compliant components are expected
to be in place by December 31, 1998. The Company believes that all
significant Year 2000 problems related to IT and non-IT systems will be
resolved with the completion of Phase 3 compliance testing.
The Company estimates that the cost of repairing, replacing and testing
the IT and non-IT systems approximate $7.0 million, and will be funded
through operating cash flows. Of such costs, approximately $2.0 was
incurred through October 2, 1998. Costs associated with correcting and
testing existing systems are expensed as incurred. The Company believes
that such costs will not have a material effect on its liquidity,
financial condition or results of operations. The Company is replacing
certain systems in the normal course of business with new systems, which
are expected to improve functionality, usefulness and efficiency. The
timing of the replacement of systems was not accelerated as a result of
Year 2000 issues.
Third Parties - The Company has initiated and is reviewing formal
communications with mission-critical third parties which provide goods
or services essential to the Company's operations in order to (1)
determine the extent to which the Company is vulnerable to any failure
by such third parties to remediate their respective Year 2000 problems
and (2) resolve such problems to the extent practicable.
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In July 1998 the Company surveyed key suppliers and utilities initially
identified as potentially mission critical to the Company. A follow-up
communication was sent to vendors and service providers that did not
initially respond, or whose initial responses were deemed unsatisfactory
in some respect by the Company. As of November 1, 1998, the Company had
received survey responses from approximately 50% of such third parties,
each of which has provided written assurances that it expects to address
all significant Year 2000 issues on a timely basis. The Company plans
to follow up with third parties from whom it has not yet received
responses by telephone, and expects to complete the initial risk review
and assessment of all mission-critical third parties by December 31,
1998. The Company will then develop contingency plans, including a
selection of alternate providers, as and if necessary.
The Company will also initiate formal communications with key large
customers to determine the extent to which electronic interfaces with
such entities are vulnerable to the year 2000 issue and the steps needed
to be year 2000 compliant.
Risks and Contingency Planning - The Company is revising its existing
business interruption contingency plans to address internal and external
issues specific to the Year 2000 problem, to the extent practicable.
These plans, which are intended to enable the Company to continue to
operate effectively, include performing certain processes manually,
repairing or obtaining replacement systems, changing suppliers, and
reducing or suspending operations. The Company expects to finalize its
contingency planning by mid-year 1999.
The Company is conducting a comprehensive analysis and risk assessment
of the operational problems, customer disruption and costs (including
loss of revenues) that would be most likely to result from the failure
by the Company or certain third parties to complete efforts necessary to
achieve Year 2000 compliance on a timely basis. Contingency plans are
being developed for dealing with the most reasonably likely worst case
scenarios for IT systems, non-IT systems, including manufacturing
systems, facilities, vendors and customers. In regard to the IT systems
risk assessment, the most reasonably likely worst case scenario is that
the Company's billing system will fail to function properly. Should the
billing system fail completely, the Company would be unable to submit
invoices to the customers for a period of time. In this situation the
Company would expect to recover all or most of the unbilled revenue upon
resolving the causes of the system failure. The most reasonably likely
worst case scenarios for non-IT systems, vendors and suppliers will be
developed upon completion of the risk assessments.
The Company's senior IT executive, who was primarily responsible for its
Year 2000 compliance program, left the Company in November 1998.
However, in April 1998 the Company organized a Program Management Office
("PMO") focusing on developing and implementing a best practice Year
2000 remediation and testing methodology, and retained a third party
consulting group to manage the Year 2000 PMO. Accordingly the Company
believes that the loss of such executive, who has been replaced on an
interim basis, will not have an adverse impact on the progress or timing
of the Company's compliance program.
-13-<PAGE>
<PAGE>
Possible Consequences of Year 2000 Problems - To date, the Company has
not identified any IT or non-IT system that presents a material risk of
not being Year 2000 compliant or for which a suitable alternative cannot
be implemented. However, as the initiative moves through the testing
phase, it is possible that the Company may identify potential risks of
Year 2000 disruption. It is also possible that such a disruption could
have a material effect on its financial condition and results of
operations. In addition, if any key third parties who provide goods or
services that are mission critical to the Company's business activities
fail to appropriately address their Year 2000 issues, there could be a
material adverse effect on the Company's financial condition and results
of operations.
RISK FACTORS AND CAUTIONARY STATEMENTS
When used in this Form 10-Q and in subsequent filings by the Company
with the Securities and Exchange Commission, in the Company's press
releases and in written or oral statements made by authorized
representatives of the Company, the words or phrases "should result",
"are expected to", "will continue", "is anticipated", "estimate",
"project" or similar expressions are intended to identify "forward-
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are necessarily subject
to certain risks and uncertainties, including, but not limited to, those
discussed below that could cause actual results to differ materially
from the Company's historical experience and its present expectations or
projections. Caution should be taken not to place undue reliance on any
such forward-looking statements, which speak only as of the date such
statements are made and which may or may not be based on historical
experiences and/or trends which may or may not continue in the future.
The Company does not undertake and specifically declines any obligation
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances occurring
after the date of such statements or to reflect the occurrence of
unanticipated events.
Various factors may affect the Company's financial performance,
including, but not limited to, those factors discussed below and could
cause the Company's actual results for future periods to differ from any
opinions, statements or projections expressed with respect thereto. Such
differences could be material and adverse.
Regarding the rebuilding of the Company's manufacturing operations,
there can be no assurances that the printing plant consolidation will
occur within a projected time frame and that it, combined with the
centralization of customer service, will result in the anticipated
quality improvements or projected costs savings. Many variables will
impact the ability to improve production efficiencies and reduce
redundant expenses. These include, but are not limited to, the
development and implementation of new manufacturing technology and
information systems used in the Company's data entry and production
operations and the successful development of software to enhance call
center operations. Further, there can be no assurance that the Company
can reproduce or improve upon historic profit margin trends. Many
factors can affect the Company's ability to improve profitability,
-14-<PAGE>
<PAGE>
including, among other factors, competitive pricing trends, the ability
to secure similar materials prices and labor rates, and the ability to
reduce the cost of manufacturing. Competition among suppliers,
restricted supply of materials, labor and services, and other such
factors outside of the Company's control, may adversely affect prices
and may materially impact the Company's results.
Several factors outside the Company's control, could negatively impact
check revenue. These include the continuing expansion of alternative
payment systems such as credit cards, debit cards and other forms of
electronic commerce or on-line payment systems. Check revenues could
also be adversely affected by continued consolidation of financial
institutions and competitive check pricing, among other factors. There
can be no assurances that the Company will not lose significant
customers or that any such loss could be offset by the addition of new
customers. Also, there can be no assurance that the Company will
experience similar or higher revenue compared to prior years, or that
any targets or projections made relating to check revenues will be
achieved.
While the Company believes substantial growth opportunities exist in FS,
specifically marketing services such as database marketing software and
direct marketing, there can be no assurances that the Company will
achieve its growth targets. There are many variables relating to the
development of the next generation database marketing software,
including the timing and costs of the development effort, product
performance, functionality, product acceptance and competition. During
the quarter ended October 2, 1998, the Company expensed $10.9 million of
deferred costs primarily associated with the development of the Harland
Relationship Manager software system, which had previously been
capitalized. Also, no assurance can be made as to market acceptance and
to the potential impact of governmental regulations on the Company's
ability to expand its direct marketing business and meet projected
growth targets.
There can also be no assurance that all or some of the anticipated cost
savings expected from rebuilding the manufacturing operation will not be
offset by increased expenses from other areas or be shared with
customers in the form of discounted prices. As a result, the full impact
of the cost savings may not be reflected in operating income.
Although the Company is taking due precautions and believes its internal
systems and those of its vendors and customers will be Year 2000
compliant on a timely basis, it can make no assurances that there will
not be a material adverse impact on the Company or its customers as a
result of Year 2000 delays or failures.
From time to time, authorized representatives of the Company may make
predictions or forecasts regarding the Company's future results,
including estimated earnings. Any such forecast reflects various
assumptions, which are subject to significant uncertainties, many of
which may prove to be incorrect. Further, the achievement of any
forecast depends on numerous factors, many of which are beyond the
Company's control. As a result, there can be no assurance that the
Company's performance will be consistent with any management forecasts
or that the variation from such forecasts may not be material and
adverse. Accordingly, investors are cautioned not to base their entire
analysis of the Company's business and prospects upon isolated
predictions, but instead are encouraged to utilize the entire available
-15-<PAGE>
<PAGE>
mix of historical and forward-looking information when evaluating the
Company. Further, there can be no assurance that a review of both
historical trends and predictions will necessarily lead to the same
results that may actually be experienced in the future.
In addition, authorized representatives of the Company may occasionally
comment on published projections by independent analysts regarding the
Company's future performance. Such comments should not be interpreted as
an endorsement or adoption of any given estimate or range of estimates,
or the assumptions and methodologies upon which such estimates are
based. The Company expressly disclaims any continuing responsibility to
advise analysts or the public markets of its view regarding the current
accuracy of the published estimates of outside analysts. Persons relying
on such estimates should pursue their own independent investigation and
analysis of their accuracy and the reasonableness of the assumptions on
which they are based, and they should also be aware that actual results
could differ from such estimates.
Generally speaking, the Company does not make public its own internal
projections or budgets. Undue reliance should not be placed on any
comments regarding the differences between such independent estimates
and the Company's own expectations regarding its future operations. The
methodologies employed by the Company in arriving at its own internal
projections and the approaches taken by independent analysts in making
their estimates may differ in many significant respects. Although the
Company may presently perceive a given estimate to be reasonable,
changes in the Company's business, market conditions or the general
economic climate may materially impact the results obtained through the
use of differing analyses and assumptions.
-16-<PAGE>
<PAGE>
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 quarterly period ended
October 2, 1998.
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)
11/17/98 /s/William M. Dollar
Date: _________________ By:_____________________________
William M. Dollar
Vice President, Finance and
Treasurer
(Principal Accounting Officer)
11/17/98 /s/S. David Passman III
Date: _________________ By:_____________________________
S. David Passman III
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
-17-<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's financial statements for the quarterly period ended October 2,
1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> OCT-02-1998
<CASH> 22,821
<SECURITIES> 0
<RECEIVABLES> 77,011
<ALLOWANCES> 4,746
<INVENTORY> 24,092
<CURRENT-ASSETS> 143,622
<PP&E> 258,665
<DEPRECIATION> 136,265
<TOTAL-ASSETS> 416,344
<CURRENT-LIABILITIES> 94,834
<BONDS> 107,068
<COMMON> 37,907
0
0
<OTHER-SE> 160,750
<TOTAL-LIABILITY-AND-EQUITY> 416,344
<SALES> 426,174
<TOTAL-REVENUES> 426,174
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<INTEREST-EXPENSE> 5,650
<INCOME-PRETAX> 24,626
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