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 1, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
Commission file number 1-6352
JOHN H. HARLAND COMPANY
(Exact name of registrant as specified in its charter)
GEORGIA 58-0278260
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2939 Miller 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 29, 1999 was 30,246,531.
<PAGE>
<TABLE>
Item 1. FINANCIAL STATEMENTS
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
<CAPTION>
October 1, December 31,
(In thousands) 1999 1998
- -------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 57,598 $ 42,541
Accounts receivable, net 65,674 68,925
Inventories 22,621 24,892
Deferred income taxes 14,650 14,396
Other 8,338 8,601
---------- ----------
Total current assets 168,881 159,355
---------- ----------
INVESTMENTS AND OTHER ASSETS:
Investments 9,652 4,276
Goodwill and intangibles - net 63,619 68,172
Deferred income taxes 9,996 14,600
Other 31,120 24,472
---------- ----------
Total investments and other assets 114,387 111,520
---------- ----------
PROPERTY, PLANT AND EQUIPMENT 273,168 259,222
Less accumulated depreciation
and amortization 157,555 138,327
---------- ----------
Property, plant and equipment - net 115,613 120,895
---------- ----------
Total $ 398,881 $ 391,770
========== ==========
<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>
October 1, December 31,
(In thousands, except share amounts) 1999 1998
- ------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable - trade $ 26,795 $ 29,441
Deferred revenues 22,470 23,821
Accrued liabilities:
Salaries, wages and employee benefits 26,747 26,495
Taxes 9,502 5,353
Restructuring costs 2,363 9,059
Other 12,983 12,213
---------- ----------
Total current liabilities 100,860 106,382
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 106,522 107,071
Other 16,828 16,003
---------- ----------
Total long-term liabilities 123,350 123,074
---------- ----------
Total liabilities 224,210 229,456
---------- ----------
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
Retained earnings 317,518 293,425
Accumulated other comprehensive
income (loss) 3,279 (400)
Unamortized restricted stock award (462) (470)
---------- ----------
Total shareholders' equity 358,242 330,462
Less 7,644,938 and 6,814,638 shares
of treasury stock - at cost,
respectively 183,571 168,148
---------- ----------
Shareholders' equity - net 174,671 162,314
---------- ----------
Total $ 398,881 $ 391,770
========== ==========
<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 AND NINE MONTH PERIODS ENDED OCTOBER 1, 1999
AND OCTOBER 2, 1998
(Unaudited)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(In thousands, except OCT. 1, OCT. 2, OCT. 1, OCT. 2,
per share amounts) 1999 1998 1999 1998
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 141,140 $ 147,364 $ 432,155 $ 426,174
--------- --------- --------- ---------
COST AND EXPENSES:
Cost of sales 72,352 79,173 226,797 240,427
Selling, general and
administrative expenses 47,579 44,309 144,352 136,018
Software development charge 10,927 10,927
Amortization of intangibles 1,508 2,517 4,526 7,564
Restructuring charge 1,301 4,889
--------- --------- --------- ---------
Total 121,439 138,227 375,675 399,825
--------- --------- --------- ---------
INCOME FROM OPERATIONS 19,701 9,137 56,480 26,349
--------- --------- --------- ---------
OTHER INCOME(EXPENSE):
Interest expense (1,999) (1,962) (5,552) (5,650)
Other - net 781 (60) 798 3,927
--------- --------- --------- ---------
Total (1,218) (2,022) (4,754) (1,723)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 18,483 7,115 51,726 24,626
INCOME TAXES 5,952 3,107 19,249 10,466
--------- --------- --------- ---------
NET INCOME 12,531 4,008 32,477 14,160
RETAINED EARNINGS AT
BEGINNING OF PERIOD 307,512 329,813 293,425 324,324
--------- --------- --------- ---------
320,043 333,821 325,902 338,484
Cash dividends (2,322) (2,336) (6,980) (6,999)
Issuance of treasury shares
under stock plans (203) (252) (1,404) (252)
--------- --------- --------- ---------
RETAINED EARNINGS AT END
OF PERIOD $ 317,518 $ 331,233 $ 317,518 $ 331,233
========= ========= ========= =========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
BASIC 30,834 31,083 31,007 31,094
DILUTED 31,693 31,405 31,633 31,432
========= ========= ========= =========
EARNINGS PER COMMON SHARE:
BASIC $ .41 $ .13 $ 1.05 $ .46
DILUTED $ .40 $ .13 $ 1.04 $ .46
========= ========= ========= =========
CASH DIVIDENDS PER
COMMON SHARE $ .075 $ .075 $ .225 $ .225
========= ========= ========= =========
<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 NINE MONTHS ENDED OCTOBER 1, 1999 AND OCTOBER 2, 1998
(Unaudited)
<CAPTION>
(In thousands) 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 32,477 $ 14,160
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 29,798 31,950
Software development charge 10,927
Provision for doubtful accounts 567
(Gain)loss on sale of assets 238 (3,938)
Other 912 3,080
Change in assets and liabilities:
Deferred income taxes 1,856 (535)
Accounts receivable 2,683 (1,592)
Inventories and other current assets 4,784 15,780
Accounts payable and accrued expenses (7,784) (14,933)
---------- ---------
Net cash provided by operating activities 65,531 54,899
---------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (16,583) (26,033)
Proceeds from sale of property, plant and equipment 1,250 6,453
Long-term investments and other assets (10,764) (15,875)
---------- ---------
Net cash used in investing activities (26,097) (35,455)
---------- ---------
FINANCING ACTIVITIES:
Issuance of treasury stock 1,605 1,873
Dividends paid (6,980) (6,999)
Repurchase of common stock (18,661) (2,885)
Long-term debt - net (549) (2,290)
Other - net 208 674
---------- ----------
Net cash used in financing activities (24,377) (9,627)
---------- ----------
Increase in cash and cash equivalents 15,057 9,817
Cash and cash equivalents at beginning of period 42,541 13,004
---------- ----------
Cash and cash equivalents at end of period $ 57,598 $ 22,821
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 1, 1999
(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements contained in
this report are unaudited but reflect all adjustments 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 year ended December 31, 1998 ("1998 Form
10-K").
Reference is made to the accounting policies of the Company
described in the notes to consolidated financial statements
included in the 1998 Form 10-K. The Company has consistently
followed those policies in preparing this report.
3. Restructuring Charge
The Company accrued restructuring charges related to
certain actions initiated by the Company during the fourth
quarter of 1998 (the "1998 Restructuring") and the third
quarter of 1996 (the "1996 Restructuring").
The 1998 Restructuring included the decision to discontinue
development of the Harland Relationship Manager ("HRM")
system. The discontinuance of the development of the HRM
system prompted a revision of projected operations for this
business and an assessment of the recoverability of certain
long-term assets, including acquisition-related intangibles.
The 1998 Restructuring also included a corporate
reorganization, consolidation of database marketing
operations, recognition of the impairment of certain assets
and reductions in selling and marketing personnel.
The 1996 Restructuring related to consolidation of
manufacturing operations, including severance and associated
revaluation of assets, and valuation adjustments related to
discontinuing certain subsidiary product lines.
The Company recorded restructuring charges for severance
that were not previously accrued totaling $1.3 million and
$4.9 million for the three and nine month periods ended
October 2, 1998, respectively. The accrued restructuring
charges related to both the 1998 and 1996 restructurings are
expected to be paid out during 1999 and 2000.
<PAGE>
<TABLE>
4. Income Taxes
The provisions for income taxes for the nine months ended
October 1, 1999 and October 2, 1998 were as follows (in
thousands):
<CAPTION>
1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Current provision $ 17,393 $ 9,931
Deferred provision 1,856 535
--------- ---------
Total $ 19,249 $ 10,466
========= =========
</TABLE>
<TABLE>
5. Inventories
As of October 1, 1999 and December 31, 1998, inventories
consisted of the following (in thousands):
<CAPTION>
1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Raw materials and semi-finished goods $ 21,372 $ 22,865
Finished goods 1,113 1,605
Hardware component parts 136 422
--------- ---------
Total $ 22,621 $ 24,892
========= =========
</TABLE>
<TABLE>
6. Comprehensive Income (Loss)
Other comprehensive income for the Company includes foreign
currency translation adjustments and unrealized gains
(losses) on marketable securities. Total comprehensive
income for the three and nine month periods ended October 1,
1999 and October 2, 1998 was as follows (in thousands):
<CAPTION>
Three Months Ended Nine Months Ended
Oct. 1, Oct. 2, Oct.1, Oct.2,
1999 1998 1999 1998
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income: $12,531 $ 4,008 $32,477 $14,160
Other comprehensive
income, net of tax:
Foreign exchange
translation adjustments 68 (230) 106 (327)
Unrealized gains (losses) on
marketable securities (13,019) 3,572
-------- -------- -------- --------
Comprehensive income
(loss) $ (420) $ 3,778 $36,155 $13,833
======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
7. Earnings per Common Share
The computation of basic and diluted earnings per share is
as follows (in thousands except per share amounts):
<CAPTION>
Three Months Ended Nine Months Ended
Oct. 1, Oct. 2, Oct.1, Oct. 2,
1999 1998 1999 1998
- -----------------------------------------------------------------------
Computation of basic earnings per common share:
<S> <C> <C> <C> <C>
Numerator
Net Income $12,531 $ 4,008 $ 32,477 $ 14,160
--------- --------- --------- ---------
Denominator
Average weighted shares
outstanding 30,806 31,067 30,983 31,081
Average weighted deferred
shares outstanding under
non-employee directors
compensation plan 28 16 24 13
--------- --------- --------- ---------
Shares outstanding for
basic earnings per share
calculation 30,834 31,083 31,007 31,094
--------- --------- --------- ---------
Basic earnings per share $ 0.41 $ 0.13 $ 1.05 $ 0.46
========= ========= ========= =========
Computation of diluted earnings per common share:
Numerator
Net Income $ 12,531 $ 4,008 $ 32,477 $ 14,160
Reduced interest expense
on assumed conversions of
convertible subordinated
debentures 74 79 263 258
--------- --------- --------- ---------
Net income for diluted
earnings per share
calculation 12,605 4,087 32,740 14,418
--------- --------- --------- ---------
Denominator
Basic weighted average
shares outstanding 30,834 31,083 31,007 31,094
Dilutive effect of stock
options 571 14 338 30
Assumed conversions
of convertible subordinated
debentures 288 308 288 308
--------- --------- --------- ---------
Shares outstanding for
diluted earnings per share
calculation 31,693 31,405 31,633 31,432
--------- --------- --------- ---------
Diluted earnings per share $ 0.40 $ 0.13 $ 1.04 $ 0.46
========= ========= ========= =========
</TABLE>
<PAGE>
8. Business Segments
The Company operates its business in two segments. The
Financial Service segment ("FS") includes checks and forms,
database marketing software, direct marketing and loan and
deposit origination software sold primarily to financial
institutions.
The Scantron segment includes optical mark reading equipment,
scannable forms, survey services and field maintenance
services. Scantron sells these products and services primarily
to the commercial and education markets.
The Company's operations are primarily in the United States and
Puerto Rico. There were no significant inter-segment sales and
no material amounts of the Company's sales are dependent upon a
single customer. Equity investments, as well as foreign assets,
are not significant to the consolidated results of the Company.
The Company's accounting policies for segments are the same as
those referred to in Note 2. Management evaluates segment
performance based on segment income or loss before income
taxes. Segment income or loss includes restructuring charges,
software and other development and acquired in-process research
and development costs written off but excludes interest income,
interest expense and certain other non-operating gains and
losses that are considered corporate items. Total assets of
each business segment did not change materially from the amount
disclosed in the 1998 Form 10-K.
In 1999, certain activities were reclassified between the FS
business segment and Corporate operations. Prior periods have
been restated for certain of these reclassifications.
Selected summarized financial information for 1999 and 1998
periods were as follows (in thousands):
<TABLE>
<CAPTION>
Business Segment
------------------------ Corporate Consol-
FS Scantron and Other idated
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Quarter ended October 1, 1999
Net Sales $ 114,849 $ 26,291 $ 141,140
Income (loss) 25,760 6,001 $(13,278) 18,483
Quarter ended October 2, 1998
Net Sales $ 122,894 $ 24,470 $ 147,364
Income (loss) 13,738 5,663 $(12,286) 7,115
Year to date October 1, 1999
Net Sales $ 358,105 $ 74,050 $ 432,155
Income (loss) 82,724 12,282 $(43,280) 51,726
Year to date October 2, 1998
Net Sales $ 359,356 $ 66,818 $ 426,174
Income (loss) 56,701 11,615 $(43,690) 24,626
</TABLE>
<PAGE>
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 and forms,
database marketing software, direct marketing and loan and
deposit origination software sold primarily to financial
institutions.
The Scantron segment includes optical mark reading
equipment, scannable forms, survey services and field
maintenance services. Scantron sells these products and
services primarily to the commercial and education markets.
RESULTS OF OPERATIONS THIRD QUARTER 1999 VERSUS 1998
Consolidated net sales for the quarter ended October 1, 1999
were $141.1 million compared to $147.4 million for the
quarter ended October 2, 1998. FS sales totaled $114.8
million and $122.9 million and Scantron's sales totaled
$26.3 million and $24.5 million for the third quarters of
1999 and 1998, respectively. The decrease of $8.1 million in
FS sales was due to the impact of lower check volumes,
reduced software revenues, which was anticipated, and some
price mix erosion in traditional checks. Volumes for
traditional checks decreased 6.5% in 1999 from 1998 due to
business lost to bank mergers, reduced orders from a
supplier of direct checks, a shift of certain order types to
another product within marketing services and a one day
shorter production cycle in 1999. Scantron's sales increased
$1.8 million or 7.4% over 1998 largely due to acquisitions
in its field service operations.
Consolidated gross profit increased to 48.7% in the third
quarter of 1999 from 46.3% in the third quarter of 1998. FS
margins continued to drive this improvement, which improved
to 48.0% in 1999 from 44.8% in 1998, due to lower
manufacturing costs per check unit. Scantron's gross
profit declined to 51.8% from 53.8% primarily due to the
growth in field service operations, which has lower margins,
and the introduction of new products.
Consolidated selling, general and administrative expenses
increased by $3.3 million in the third quarter of 1999 from
1998, much of the increase resulting from investments in
systems and processes. As a percentage of sales these
expenses increased to 33.7% from 30.1%. Amortization of
intangibles decreased by $1.0 million from the third quarter
of 1998 compared to the third quarter of 1999. This decrease
in amortization expense is related to a valuation adjustment
for certain intangible assets recorded in the fourth quarter
of 1998.
During the third quarter of 1998, the Company expensed $10.9
million of costs primarily associated with the development
of a database marketing software product, which had
previously been capitalized.
Consolidated income from operations increased $10.6 million
from the third quarter of 1998. This improvement is
primarily due to the software development charge and
restructuring expenses recorded in the third quarter of 1998
and also to the improvement in FS gross margins in 1999.
Other income (expense) was an expense of $1.2 million in the
third quarter of 1999, which was a decrease of $0.8 million
from 1998 due primarily to investment income generated from
incremental cash.
Consolidated income before income taxes increased $11.4
million compared to the third quarter of 1998.
The Company's consolidated effective income tax rate for the
third quarter of 1999 was 32.2% compared to 43.7% for the
third quarter of 1998. The decrease in the effective rate is
due to a tax credit of $0.9 million as well as to a change
in the effective tax rate for 1999. The rate change is due
to improved earnings which reduce the impact of non-
<PAGE>
deductible goodwill. Also contributing to the change in the
effective income tax is the aforementioned adjustment of
intangible assets which reduced non-deductible goodwill in
the 1999 period. The effective tax rate for 1999, excluding
the impact of the tax credit, is estimated to be 39.0%.
The Company's net income for the third quarter of 1999 was
$12.5 million compared to $4.0 million for 1998. Basic and
diluted earnings per share were $0.41 and $0.40,
respectively for the third quarter of 1999 compared to $0.13
in 1998. Third quarter 1999 earnings per share included the
impact of a tax credit which had a favorable impact of $0.03
and the lowering the effective tax rate for the year to 39%
which had a favorable impact of $0.01. Third quarter 1998
earnings included 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 1999 VERSUS 1998
Consolidated net sales for the nine months ended October 1,
1999 were $432.2 million compared to $426.2 million for the
nine months ended October 2, 1998. FS sales totaled $358.1
million and $359.4 million and Scantron's sales totaled
$74.0 million and $66.8 million for the first nine months of
1999 and 1998, respectively. The increase in FS revenues
occurred in direct marketing and computer checks. Partially
offsetting this growth was a decrease in revenue from
database marketing software. Volumes for traditional checks
increased 3.1% in 1999 over 1998 primarily due to new
business from several large customers which began after the
first quarter of 1998. The positive effect on FS revenues
from the volume increase was reduced by a product mix shift
to larger national accounts and overall pricing erosion.
Scantron's sales increased $7.2 million or 10.8% over 1998.
Scantron's revenue growth came from increases in its field
service operations and also in its core scanning product
areas.
Consolidated gross profit increased to 47.5% in 1999 from
43.6% in 1998. The improvement was driven largely by FS
where gross profit improved to 47.5% in 1999 from 41.1% in
1998. The FS margin improvement was due to lower check
manufacturing costs resulting from consolidation of
manufacturing operations. Scantron's gross profit
increased to 48.2% from 45.7% in the first nine months of
1999 over 1998, primarily due to sales and margin growth in
its core scanning products.
Consolidated selling, general and administrative expenses
increased $8.3 million over 1998 and increased as a
percentage of sales from 31.9% in 1998 to 33.4% in 1999.
Costs associated with Year 2000 remediation and investments
in new systems and processes are the primary reasons for the
increase. Amortization of intangibles decreased by $3.0
million over 1998 due to the previously mentioned valuation
adjustment for certain intangible assets.
In 1998, the Company expensed $10.9 million of costs
primarily associated the development of a database marketing
software product which had previously been capitalized.
Consolidated income from operations increased by $30.1
million over 1998 primarily because of the improvement in FS
gross margins and the software development charge and
restructuring expenses recorded in 1998.
Other income (expense) was an expense of $4.8 million in
1999 as compared to $1.7 million in 1998. This change is
primarily due to gains realized in 1998 from certain asset
sales offset by the impact of investment income resulting
from cash generated in 1999.
Consolidated income before income taxes increased $27.1
million over 1998.
The Company's consolidated effective income tax rate was
37.2% compared to 42.5% for 1998. The decrease in the
<PAGE>
effective rate is due to a tax credit of $0.9 million taken
in 1999 as well as to a change in the effective tax rate for
1999. Without the tax credit, the Company's effective tax
rate in 1999 would be 39.0%. The rate change is due to
improved earnings which reduce the impact of non-deductible
goodwill as well as the aforementioned adjustment of
intangible assets which reduced non-deductible goodwill in
the 1999 period.
The Company's net income for the nine months ended October
1, 1999 was $32.5 million compared to $14.2 million for
1998. Basic and diluted earnings per share were $1.05 and
$1.04, respectively for the first nine months of 1999
compared to $0.46 in 1998. The 1999 earnings per share
included a tax credit that had a favorable impact of $0.03.
Included in the calculation of earnings per share for the
1998 period were costs related to the development of
software and restructuring charges, which reduced earnings
per share by $0.20 and $0.09, respectively and gains on the
sale of assets, which increased earnings per share by
approximately $0.07.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash flows provided by operating activities for the first
nine months of 1999 were $65.5 million compared to $54.9
million for the first nine months of 1998. The primary uses
of funds in the first nine months of 1999 were for
repurchases of common stock and for capital expenditures.
In April 1999, the Company authorized the repurchase of up
to 3.1 million shares of the Company's outstanding common
stock, representing approximately ten percent of the
Company's outstanding shares. The Company will make periodic
purchases on the open market or in private transactions.
Shares repurchased under the program can be held in
treasury, used for acquisitions, used to fund the Company's
stock benefit and compensation plans or for other corporate
purposes. The Company will fund the purchases from current
cash flows. As of October 1, 1999, the Company had purchased
971,000 shares of its common stock under this program. The
total expended to date has been $18.7 million, representing
an average of $19.12 per share.
Purchases of property, plant and equipment totaled $16.6
million in the first nine months of 1999, compared to $26.0
million in 1998. Proceeds from the sale of property, plant
and equipment were $1.3 million in the first nine months of
1999 compared to $6.5 million in 1998.
As of October 1, 1999, the Company's asset balances include
a net unrealized gain of $3.6 million related to the
Company's investment in Bottomline Technologies, Inc., which
completed an initial public offering of its common stock to
the public during the first quarter of 1999. The unrealized
gain is recorded as a component of accumulated other
comprehensive income in the shareholders' equity section of
the balance sheet.
The Company has unsecured lines of credit which provide for
borrowings up to $61.0 million. As of October 1, 1999, the
Company had no outstanding balances under these lines of
credit.
On October 1, 1999, the Company had $57.6 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 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.
<PAGE>
OUTLOOK
To improve service quality, further reduce costs and
increase the profitability of its check printing operations,
the Company will continue to evaluate the consolidation of
its printing facilities, installation of new equipment and
development of systems and processes for its production
facilities.
Three printing facilities remain to be closed as part of the
Company's plant consolidation program. One plant is
scheduled to close during the fourth quarter, and the
Company expects to incur insignificant incremental costs
during these plant consolidations.
The Company anticipates check revenue to soften slightly for
the remainder of the year in relation to current levels due
to overall pricing erosion and product mix shift to a higher
percentage of large national accounts. Also, fewer days of
production and a general seasonal decline in order volumes
is projected to have an impact on check revenue as well.
To increase revenues and profitability of its check printing
operations, the Company is strengthening its marketing
efforts with community accounts.
The Company introduced a new database marketing software product late in
the third quarter. A full roll out and general release is scheduled for
the fourth quarter. A new loan and deposit origination product is in
development and scheduled for release in 2000. Until both products are
in the market, the Company anticipates that marketing service revenue
levels will be lower in comparison to 1998.
To support the current business strategies, the Company expects to
incur additional charges related to the previously announced
restructurings, predominantly for employee severance, of less than
$1.0 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 inability to process
transactions, send invoices, or engage in similar activities.
Therefore, the Company instituted a program in 1996 to assess and
fix all potentially significant Year 2000 problems.
The program consists of three phases: (1) identification and
assessment (including prioritization) in relation to the Company's
business processes of all information technology ("IT") systems
and non-information technology systems, including buildings, plant
equipment, telephone systems, and other infrastructure systems
which contain microcontroller technology (non-IT systems) that may
be sensitive to the Year 2000 issue; (2) remediation (including
modification, upgrade and replacement) of systems that have a Year
2000 problem; and (3) testing the systems for compliance.
The Company is also reviewing the Year 2000 readiness of third
parties which provide goods or services that are mission critical
to the Company's operations, as well as its relationship with
other key strategic partners (including large customers). The
Company's senior management and Board of Directors receive regular
updates on the status of the Year 2000 program.
State of Readiness
The Company has completed the identification and readiness
assessment of all IT and non-IT systems. A risk assessment was
utilized to assign priorities to all IT and manufacturing
components. All mission-critical applications have been 100%
remediated. Compliance testing began in August 1998 and all
mission critical applications have now been fully tested. A risk
<PAGE>
assessment has been completed for all non-IT systems including
manufacturing and facility components. Testing of critical
manufacturing and facility components has been completed. The
Company believes that all significant Year 2000 problems related
to IT and non-IT systems have been resolved.
The Company estimates that the total cost of repairing and testing IT
and non-IT systems will be approximately $5.0 to $7.0 million,
which will be funded through operating cash flows. Of such costs,
approximately $4.7 million was incurred through October 1, 1999.
Costs associated with correcting and testing existing systems are
expensed as incurred. The Company believes that such costs will
not have a material effect on its liquidity, financial condition
or results of operations. The Company is replacing certain systems
in the normal course of business with new systems, which are
expected to improve functionality, usefulness and efficiency.
Approximately $7.0 million will be spent on these activities in
1999, most of which will be capitalized. The timing of the
replacement of systems was not accelerated as a result of Year
2000 issues.
Third Party Suppliers
The Company has initiated and is reviewing formal communications
with mission-critical third parties which provide goods or
services essential to the Company's operations. These
communications are to determine the extent to which the Company is
vulnerable to any failure by such third parties to remediate their
respective Year 2000 problems and to resolve such problems to the
extent practicable.
In July 1998, the Company surveyed key suppliers and utilities
initially identified as potentially mission critical to the
Company. As of October 31, 1999, the Company had received survey
responses from more than 99% 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
continues to follow up with third parties from whom it has not yet
received responses and will update its risk assessment on a
monthly basis. The Company is developing contingency plans,
including a selection of alternate providers, should they be
necessary. Visits have been made to the highest business critical
vendors to confirm or establish certification.
The Company has finalized testing with key large customers and
third parties to verify the readiness of electronic interfaces
with these entities.
Risks and Contingency Planning
To the extent practicable, the Company is revising its existing
business interruption contingency plans to address internal and
external issues specific to the Year 2000 problem. These plans,
which are intended to enable the Company to continue operating
effectively, include performing certain processes manually,
repairing or obtaining replacement systems, changing suppliers,
and reducing or suspending operations. The Company has finalized
its contingency planning for mission critical processes.
The Company has conducted 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 have been created for dealing with
the most reasonably likely worst case scenarios for IT systems,
non-IT systems, including manufacturing systems, facilities,
vendors and customers as part of the Contingency Planning for
mission critical business processes. In regard to the IT systems
risk assessment, the most reasonably likely worst case scenario is
that the Company's billing system (which has been certified as
Year 2000 capable) 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.
<PAGE>
In April 1998, the Company organized a Program Management Office
("PMO") which focuses on developing and implementing a best
practice Year 2000 remediation and testing methodology, and
retained a third party consulting group to manage the Year 2000
PMO. In addition, the Company engaged another independent party to
provide feedback on its approach and planning activities and has
incorporated the results of this study into the Company's Year
2000 program.
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 Company conducts additional testing, it is possible that it
may identify potential risks of Year 2000 disruption. It is also
possible that such a disruption could have a material effect on
the Company's 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 despite their
assurances to the Company, 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 report and in subsequent filings by the Company
with the Securities and Exchange Commission, in the Company's
press releases and in written or oral statements made by
authorized representatives of the Company, the words or phrases
"should result", "are expected to", "will continue", "is
anticipated", "estimate", "project" or similar expressions are
intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.
These statements are necessarily subject to certain risks and
uncertainties, including, but not limited to, those discussed
below that could cause actual results to differ materially from
the Company's historical experience and its present expectations
or projections. Caution should be taken not to place undue
reliance on any such forward-looking statements, which speak only
as of the date such statements are made and which may or may not
be based on historical experiences and/or trends which may or may
not continue in the future. The Company does not undertake and
specifically declines any obligation to publicly release the
result of any revisions which may be made to any forward-looking
statements to reflect events or circumstances occurring after the
date of such statements or to reflect the occurrence of
unanticipated events.
Various factors may affect the Company's financial performance,
including, but not limited to, those factors discussed below and
could cause the Company's actual results for future periods to
differ from any opinions, statements or projections expressed with
respect thereto. Such differences could be material and adverse.
Many variables will impact the ability to improve service quality,
production efficiencies and reduce expenses. These include, but
are not limited to, the development and implementation of new
technology and information systems used in the Company's
manufacturing and call center operations. Further, there can be no
assurance that the Company can reproduce or improve upon historic
profit margin trends. Many factors can affect the Company's
ability to improve profitability, including, among other factors,
competitive pricing trends, the ability to secure similar
materials prices and labor rates, and the ability to reduce the
cost of manufacturing. Competition among suppliers, restricted
supply of materials, labor and services, and other such factors
outside of the Company's control, may adversely affect prices and
may materially impact the Company's results.
Several factors outside the Company's control could negatively
impact check revenue. These include the continuing expansion of
<PAGE>
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, direct marketing and loan and deposit origination
software, there can be no assurances that the Company will achieve
its growth targets. There are many variables relating to the
development of new software products, including the timing and
costs of the development effort, product performance,
functionality, product acceptance and competition. 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.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
All financial instruments held by the Company are held for
purposes other than trading and are exposed to primarily two types
of market risks: interest rate and equity price.
Interest Rate Risk
The fair value of the Company's long-term debt is affected by
changes in interest rates. The following presents the sensitivity
of the fair value of the Company's long-term debt to a
hypothetical 10% decrease in interest rates as of October 1, 1999
(in thousands):
<TABLE>
<CAPTION>
Carrying Fair Hypothetical
Value Value(a) Fair Value(b)
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Long-term debt, including
current portion $106,522 $100,741 $104,643
======== ======== ========
Equity Price Risk
The fair value of the Company's investments is primarily affected
by fluctuations in the market price for the common stock of
Bottomline Technologies, Inc. ("Bottomline"). The change in market
value is accounted for as a component of other comprehensive
income. The following presents the value at risk for the Company's
investment in Bottomline reflecting the high and low closing
market prices for the nine months ended October 1, 1999 (in
thousands):
Carrying
Value(c) High(a) Low(a)
- -----------------------------------------------------------------------------
Investment in Bottomline $ 8,067 $ 53,633 $ 8,067
======== ======== ========
</TABLE>
(a) Based on quoted market prices for these or similar items.
(b) Calculated based on the change in discounted cash flow.
(c) Based on market value as of October 1, 1999.
As of October 29, 1999, the carrying value of the Bottomline
investment was $11.5 million.
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 1, 1999.
<PAGE>
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)
11/15/1999 /s/ William M.Dollar
Date: _________________ By:_____________________________
William M. Dollar
Vice President,
Corporate Controller
(Principal Accounting Officer)
<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 1, 1999 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-31-1999
<PERIOD-END> OCT-01-1999
<CASH> 57,598
<SECURITIES> 0
<RECEIVABLES> 72,513
<ALLOWANCES> 6,839
<INVENTORY> 22,621
<CURRENT-ASSETS> 168,881
<PP&E> 273,168
<DEPRECIATION> 157,555
<TOTAL-ASSETS> 398,881
<CURRENT-LIABILITIES> 100,860
<BONDS> 106,522
<COMMON> 37,907
0
0
<OTHER-SE> 136,764
<TOTAL-LIABILITY-AND-EQUITY> 398,891
<SALES> 432,155
<TOTAL-REVENUES> 432,155
<CGS> 226,797
<TOTAL-COSTS> 226,797
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,754
<INCOME-PRETAX> 51,726
<INCOME-TAX> 19,249
<INCOME-CONTINUING> 32,477
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,477
<EPS-BASIC> 1.05
<EPS-DILUTED> 1.04
</TABLE>
