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 April 2, 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 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 May
3, 1999 was 31,113,287.
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Item 1. FINANCIAL STATEMENTS
<TABLE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
<CAPTION>
April 2, December 31,
(In thousands) 1999 1998
- ----------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 51,228 $ 42,541
Accounts receivable 68,270 68,925
Inventories 23,846 24,892
Deferred income taxes 13,329 14,396
Other 7,926 8,601
---------- ----------
Total current assets 164,599 159,355
---------- ----------
INVESTMENTS AND OTHER ASSETS:
Investments 39,252 4,276
Goodwill and intangibles - net 66,655 68,172
Deferred income taxes 256 14,600
Other 24,207 24,472
---------- ----------
Total investments and other assets 130,370 111,520
---------- ----------
PROPERTY, PLANT AND EQUIPMENT 261,294 259,222
Less accumulated depreciation
and amortization 142,719 138,327
---------- ----------
Property, plant and equipment - net 118,575 120,895
---------- ----------
Total $ 413,544 $ 391,770
========== ==========
<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
------------------------------------
April 2, December 31,
(In thousands, except share amounts) 1999 1998
- ----------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable - trade $ 24,737 $ 29,441
Deferred revenues 23,130 23,821
Accrued liabilities:
Salaries, wages and employee benefits 21,194 26,495
Taxes 10,262 5,353
Restructuring costs 6,357 9,059
Other 13,430 12,213
---------- ----------
Total current liabilities 99,110 106,382
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 106,585 107,071
Other 16,238 16,003
---------- ----------
Total long-term liabilities 122,823 123,074
---------- ----------
Total liabilities 221,933 229,456
---------- ----------
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 300,408 293,425
Accumulated other comprehensive
income (loss) 20,547 (400)
Unamortized restricted stock award (555) (470)
---------- ----------
Total shareholders' equity 358,307 330,462
Less 6,750,316 and 6,814,638 shares
of treasury stock - at cost 166,696 168,148
---------- ----------
Shareholders' equity - net 191,611 162,314
---------- ----------
Total $ 413,544 $ 391,770
========== ==========
<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 QUARTERLY PERIODS ENDED APRIL 2, 1999 AND APRIL 3, 1998
(Unaudited)
<CAPTION>
(In thousands, except per share amounts) 1999 1998
- --------------------------------------------------------------------------
<S> <C> <C>
NET SALES $ 146,018 $ 143,538
---------- ----------
COST AND EXPENSES:
Cost of sales 77,229 82,475
Selling, general and
administrative expenses 48,416 48,217
Amortization of intangibles 1,508 2,525
Restructuring charge 2,070
---------- ----------
Total 127,153 135,287
---------- ----------
INCOME FROM OPERATIONS 18,865 8,251
---------- ----------
OTHER INCOME(EXPENSE):
Interest expense (1,799) (1,824)
Other - net (88) 4,041
---------- ----------
Total (1,887) 2,217
---------- ----------
INCOME BEFORE INCOME TAXES 16,978 10,468
INCOME TAXES 6,961 4,397
---------- ----------
NET INCOME 10,017 6,071
RETAINED EARNINGS AT
BEGINNING OF PERIOD 293,425 324,324
---------- ----------
303,442 330,395
Cash dividends (2,333) (2,329)
Issuance of treasury shares
under stock plans (701)
---------- ----------
RETAINED EARNINGS AT END
OF PERIOD $ 300,408 $ 328,066
========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
BASIC 31,123 31,070
DILUTED 31,450 31,406
EARNINGS PER COMMON SHARE:
BASIC $ .32 $ .20
DILUTED $ .32 $ .20
CASH DIVIDENDS PER
COMMON SHARE $ .075 $ .075
<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 QUARTERLY PERIODS ENDED APRIL 2, 1999 AND APRIL 3, 1998
(Unaudited)
<CAPTION>
(In thousands) 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 10,017 $ 6,071
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 9,242 11,357
(Gain)loss on sale of assets 68 (3,929)
Provision for bad debt 99 1,306
Other 186 89
Change in assets and liabilities:
Deferred income taxes 857 2,132
Accounts receivable 555 2,562
Inventories and other current assets 1,707 9,194
Accounts payable and accrued expenses (7,271) (13,930)
---------- ---------
Net cash provided by operating activities 15,460 14,852
---------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (4,403) (7,992)
Proceeds from sale of property, plant and equipment 125 5,082
Long-term investments and other assets (298) (5,013)
---------- ---------
Net cash used in investing activities (4,576) (7,923)
---------- ---------
FINANCING ACTIVITIES:
Issuance of treasury stock 618 660
Dividends paid (2,333) (2,329)
Long-term debt - net (485) (2,316)
Other - net 3 5
---------- ----------
Net cash used in financing activities (2,197) (3,980)
---------- ----------
Increase in cash and cash equivalents 8,687 2,949
Cash and cash equivalents at beginning of period 42,541 13,017
---------- ----------
Cash and cash equivalents at end of period $ 51,228 $ 15,966
========== ==========
<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
APRIL 2, 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 has accrued restructuring charges related to certain actions
initiated by the Company during the fourth quarter of 1998 (the "1998
Restructuring") and the second quarter of 1996 (the "1996 Restructuring").
The 1998 Restructuring involved 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 includes a corporate reorganization which
eliminated approximately 100 positions, 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.
In the first quarter of 1998, the Company recorded restructuring charges
of $2.1 million for severance that was not previously accrued. The
accrued restructuring charges related to both the 1998 and 1996
restructurings are expected to be paid out during 1999 and 2000.
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4. Income Taxes
<TABLE>
The provisions for income taxes for the three months ended April 2, 1999
and April 3, 1998 were as follows (in thousands):
<CAPTION>
1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Current provision $ 7,816 $ 6,529
Deferred provision (855) (2,132)
--------- ---------
Total $ 6,961 $ 4,397
========= =========
</TABLE>
5. Inventories
<TABLE>
As of April 2, 1999 and April 3, 1998, inventories consisted of the
following (in thousands):
<CAPTION>
1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Raw materials and semi-finished goods $ 22,120 $ 24,254
Finished goods 1,591 2,114
Hardware component parts 135 351
--------- ---------
Total $ 23,846 $ 26,719
========= =========
</TABLE>
6. Comprehensive Income
<TABLE>
Other comprehensive income for the Company includes foreign currency
translation adjustments and unrealized gains on marketable securities.
Total comprehensive income for the three months ended April 2, 1999 and
April 3, 1998 was as follows (in thousands):
<CAPTION>
1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Net income: $10,017 $ 6,071
Other comprehensive
income, net of tax:
Foreign exchange translation adjustments 2 5
Unrealized gains on marketable securities 20,945
------- -------
Comprehensive income $30,964 $ 6,076
======= =======
</TABLE>
7. Earnings per Common Share
The net income used in the calculation of diluted earnings per share
("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 first quarters of 1999 and 1998 were $10,096,000 and
$6,172,000, respectively. The average number of common share equivalents
for the first quarters of 1999 and 1998 used for the calculation of
basic EPS was 31,123,000 and 31,070,000, respectively. The average
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<PAGE>
number of common share equivalents for the first quarters of 1999 and
1998 used for the calculation of diluted EPS was 31,450,000 and
31,406,000, respectively. The common share equivalents relate to options
under stock compensation plans and the effect of the conversion of the
subordinated debt.
8. Business Segments
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.
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 described 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 which 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 and not restated for others which are
not considered significant.
<TABLE>
Selected summarized financial information for the first quarters of 1999
and 1998 were as follows (in thousands):
<CAPTION>
Business Segment
------------------------
Corporate Consol-
FS Scantron and Other idated
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Quarter ended April 2, 1999
Net Sales $ 123,850 $ 22,168 $146,018
Income (loss) 29,248 2,882 $ (15,152) 16,978
Quarter ended April 3, 1998
Net Sales $ 123,032 $ 20,506 $143,538
Income (loss) 18,005 2,575 $ (10,112) 10,468
</TABLE>
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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 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 FIRST QUARTER 1999 VERSUS FIRST QUARTER 1998
Consolidated net sales for the quarter ended April 2, 1999 were $146.0
million compared to $143.5 million for the quarter ended April 3, 1998.
FS sales totaled $123.8 million and $123.0 million and Scantron's sales
totaled $22.2 million and $20.5 million for the first quarter of 1999
and 1998, respectively. In FS, increases in sales for computer checks
and traditional checks were offset by a decrease in database marketing
revenues. Volumes for traditional checks increased 11.0% 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 revenues
from the volume increase was offset by a product mix shift to larger
national accounts and overall pricing erosion. Revenue from marketing
services, including database marketing software, direct marketing
campaign management and loan origination software was $16.1 million for
the quarter ended April 2, 1999, a decrease of $2.6 million from 1998.
This decrease is attributable to the absence of new database marketing
software product. Scantron's sales increased $1.7 million or 8.1% over
1998. Scantron's revenue change came from increases in its field service
operations, primarily from acquisitions, and also in its core scanning
product areas.
Consolidated gross profit increased to 47.1% in the first quarter of
1999 from 42.5% in 1998. The improvement was driven largely by FS where
gross profit improved to 47.0% in 1999 from 41.8% in 1998 due to
efficiencies gained from consolidation of manufacturing operations as
well as lower paper costs. Scantron's gross profit increased 9.6% in the
first quarter of 1999 over 1998, primarily due to an improvement in core
product margins.
Consolidated selling, general and administrative expenses were flat
versus 1998 and decreased as a percentage of sales from 33.6% in the
first quarter of 1998 to 33.2% in 1999. Amortization of intangibles
decreased by $1.0 million from the first quarter of 1998 compared to the
first quarter of 1999. This decrease in amortization expense is related
to the restructuring charge recorded in the fourth quarter of 1998 which
included a valuation adjustment for certain intangible assets.
Consolidated income from operations increased $10.6 million from the
first quarter of 1998 primarily because of the improvement in FS gross
margins.
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<PAGE>
Other income (expense) was an expense of $1.9 million in 1999 compared
to income of $2.2 million in 1998. This change is primarily due to gains
realized in 1998 from certain asset sales.
Consolidated income before income taxes increased $6.5 million or 62%
compared to the first quarter of 1998.
The Company's consolidated effective income tax rate for the quarter
ending April 2, 1999 was 41.0% compared to 42.0% for 1998. A portion of
the decrease in the effective rate is related to the aforementioned
adjustment to intangible assets which reduced non-deductible
amortization expense in the 1999 period.
The Company's net income for the first quarter of 1999 was $10.0 million
compared to $6.1 million for 1998. Basic and diluted earnings per share
were $0.32 for the first quarter of 1999 compared to $0.20 in 1998.
First quarter 1998 earnings include a $0.04 net positive impact from
gains on sales of major assets, as well as a charge for severance-
related expenses.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash flows provided by operations for the first three months of 1999
were $15.5 million compared to $14.9 million for the first three months
of 1998. The primary uses of funds in the first three months of 1999
were for capital expenditures and dividends.
Purchases of property, plant and equipment totaled $4.4 million in the
first three months of 1999, compared to $8.0 million in 1998. Proceeds
from the sale of property, plant and equipment were negligible in the
first three months of 1999 compared to $5.1 million in 1998.
As of April 2, 1999, the Company's asset balances include a net
unrealized gain of $20.9 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. This
unrealized gain is recorded as a component of accumulated other
comprehensive income in the shareholders' equity section of the balance
sheet.
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 May 3,
1999, the Company had purchased 77,500 shares of its common stock under
this program.
The Company has unsecured lines of credit which provide for borrowings
up to $61.0 million. As of April 2, 1999, the Company had no outstanding
balances under these lines of credit.
On April 2, 1999, the Company had $51.2 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
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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.
OUTLOOK
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.
Four printing facilities remain to be closed as part of the Company's
plant consolidation program. The final phase of this program began
during the fourth quarter of 1998, and the Company expects to complete
closings during 2000. The Company expects insignificant incremental
costs during these plant consolidations.
The Company anticipates 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.
In an effort to increase revenues, the Company is strengthening its
marketing efforts with community accounts, which pay a premium for
service.
New software products for database marketing and loan and deposit
origination are in development and are scheduled for release in late
1999. Until the release of these products, marketing services revenue
levels will be lower in comparison to 1998
To support the current business strategies, the Company expects to incur
additional charges related to restructurings previously discussed,
predominantly for employee severance, of approximately $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, a program was instituted by the Company 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
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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 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 have been 100% remediated. The majority (88%) of these
applications have been fully tested with 12% being scheduled for
completion no later than June 30,1999. A risk assessment has been
completed for all non-IT systems including manufacturing and facility
components. Testing of manufacturing and facility components are
expected to be completed by June 30,1999. Phase 3 compliance testing
began in August 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 and testing IT and non-
IT systems will approximate $5.0 to $7.0 million which will be funded
through operating cash flows. Of such costs, approximately $3.6 million
was incurred through April 2, 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. 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 April 30, 1999, the Company had
received survey responses from 94% 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
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and will update its risk assessment quarterly. The Company is developing
contingency plans, including a selection of alternate providers, as and
if necessary. Visits will be made to the highest business critical
vendors to confirm or establish certification.
The Company has initiated formal communications and testing 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
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 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
September 30, 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 (which has been certified as Y2K 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. The most reasonably likely worst case
scenarios for non-IT systems, facilities, vendors and suppliers will be
developed upon completion of the risk assessments.
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 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
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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.
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 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. 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 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
-14-<PAGE>
<PAGE>
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.
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.
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
<TABLE>
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 April 2, 1999 (in thousands):
<CAPTION>
Carrying Fair Hypothetical
Value Value(a) Fair Value(b)
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Long-term debt, including
current portion $106,585 $104,181 $108,088
======== ======== ========
</TABLE>
Equity Price Risk
<TABLE>
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
quarter ending April 2, 1999 (in thousands):
<CAPTION>
Carrying
Value(c) High(a) Low(a)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Investment in Bottomline $ 37,497 $ 53,629 $ 11,446
======== ======== ========
<FN>
(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 April 2, 1999.
</FN>
</TABLE>
-15-<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
April 2, 1999.
-16-<PAGE>
<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)
/s/William M. Dollar
Date: _________________ By:_____________________________
William M. Dollar
Vice President,
Corporate Controller
(Principal Accounting 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 April 2, 1999
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-31-1999
<PERIOD-END> APR-02-1999
<CASH> 51,228
<SECURITIES> 0
<RECEIVABLES> 75,015
<ALLOWANCES> 6,745
<INVENTORY> 23,846
<CURRENT-ASSETS> 164,599
<PP&E> 261,294
<DEPRECIATION> 142,719
<TOTAL-ASSETS> 413,544
<CURRENT-LIABILITIES> 99,110
<BONDS> 106,585
<COMMON> 37,907
0
0
<OTHER-SE> 169,942
<TOTAL-LIABILITY-AND-EQUITY> 413,544
<SALES> 146,018
<TOTAL-REVENUES> 146,018
<CGS> 77,229
<TOTAL-COSTS> 77,229
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,799
<INCOME-PRETAX> 16,978
<INCOME-TAX> 6,961
<INCOME-CONTINUING> 23,939
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,017
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
