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 July 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
August 6, 1999 was 31,006,752.
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<PAGE>
Item 1. FINANCIAL STATEMENTS
<TABLE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
<CAPTION>
July 2, December 31,
(In thousands) 1999 1998
- ----------------------------------------------------------------------
<S> <C> <C>
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 61,080 $ 42,541
Accounts receivable, net 66,326 68,925
Inventories 23,259 24,892
Deferred income taxes 13,966 14,396
Other 8,590 8,601
---------- ----------
Total current assets 173,221 159,355
---------- ----------
INVESTMENTS AND OTHER ASSETS:
Investments 31,249 4,276
Goodwill and intangibles - net 65,137 68,172
Deferred income taxes 12 14,600
Other 23,122 24,472
---------- ----------
Total investments and other assets 119,520 111,520
---------- ----------
PROPERTY, PLANT AND EQUIPMENT 265,920 259,222
Less accumulated depreciation
and amortization 148,715 138,327
---------- ----------
Property, plant and equipment - net 117,205 120,895
---------- ----------
Total $ 409,946 $ 391,770
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
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<PAGE>
<TABLE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<CAPTION>
July 2, December 31,
(In thousands, except share amounts) 1999 1998
- ----------------------------------------------------------------------
<S> <C> <C>
(Unaudited)
CURRENT LIABILITIES:
Accounts payable - trade $ 28,541 $ 29,441
Deferred revenues 23,178 23,821
Accrued liabilities:
Salaries, wages and employee benefits 21,254 26,495
Taxes 5,656 5,353
Restructuring costs 3,756 9,059
Other 12,278 12,213
---------- ----------
Total current liabilities 94,663 106,382
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 106,588 107,071
Other 16,441 16,003
---------- ----------
Total long-term liabilities 123,029 123,074
---------- ----------
Total liabilities 217,692 229,456
---------- ----------
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 307,512 293,425
Accumulated other comprehensive
income (loss) 16,229 (400)
Unamortized restricted stock award (509) (470)
---------- ----------
Total shareholders' equity 361,139 330,462
Less 6,900,745 and 6,814,638 shares
of treasury stock - at cost,
respectively 168,885 168,148
---------- ----------
Shareholders' equity - net 192,254 162,314
---------- ----------
Total $ 409,946 $ 391,770
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
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<PAGE>
<TABLE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE AND SIX MONTH PERIODS ENDED JULY 2, 1999 AND JULY 3,
1998
(Unaudited)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(In thousands, except JULY 2, JULY 3, JULY 2, JULY 3,
per share amounts) 1999 1998 1999 1998
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 144,997 $ 135,272 $ 291,015 $ 278,810
--------- --------- --------- ---------
COST AND EXPENSES:
Cost of sales 77,216 78,779 154,445 161,254
Selling, general and
administrative expenses 48,357 43,492 96,773 91,709
Amortization of intangibles 1,510 2,522 3,018 5,047
Restructuring charge 1,518 3,588
--------- --------- --------- ---------
Total 127,083 126,311 254,236 261,598
--------- --------- --------- ---------
INCOME FROM OPERATIONS 17,914 8,961 36,779 17,212
--------- --------- --------- ---------
OTHER INCOME(EXPENSE):
Interest expense (1,754) (1,864) (3,553) (3,688)
Other _ net 105 (54) 17 3,987
--------- --------- --------- ---------
Total (1,649) (1,918) (3,536) 299
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 16,265 7,043 33,243 17,511
INCOME TAXES 6,336 2,962 13,297 7,359
--------- --------- --------- ---------
NET INCOME 9,929 4,081 19,946 10,152
RETAINED EARNINGS AT
BEGINNING OF PERIOD 300,408 328,066 293,425 324,324
--------- --------- --------- ---------
310,337 332,147 313,371 334,476
Cash dividends (2,325) (2,334) (4,658) (4,663)
Issuance of treasury shares
under stock plans (500) (1,201)
--------- --------- --------- ---------
RETAINED EARNINGS AT END
OF PERIOD $ 307,512 $ 329,813 $ 307,512 $ 329,813
========= ========= ========= =========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
BASIC 31,061 31,131 31,092 31,100
DILUTED 31,694 31,481 31,613 31,444
========= ========= ========= =========
EARNINGS PER COMMON SHARE:
BASIC $ .32 $ .13 $ .64 $ .33
DILUTED $ .32 $ .13 $ .64 $ .33
========= ========= ========= =========
CASH DIVIDENDS PER
COMMON SHARE $ .075 $ .075 $ .15 $ .15
========= ========= ========= =========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
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<PAGE>
<TABLE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 2, 1999 AND JULY 3, 1998
(Unaudited)
<CAPTION>
(In thousands) 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 19,946 $ 10,152
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 19,161 21,418
(Gain)loss on sale of assets 74 (4,143)
Other 739 3,492
Change in assets and liabilities:
Deferred income taxes 3,958 3,083
Accounts receivable 2,432 2,867
Inventories and other current assets 1,632 5,633
Accounts payable and accrued expenses (11,718) (14,428)
---------- ---------
Net cash provided by operating activities 36,224 28,074
---------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (10,580) (17,821)
Proceeds from sale of property, plant and equipment 1,210 6,219
Long-term investments and other assets (1,045) (16,881)
---------- ---------
Net cash used in investing activities (10,415) (28,483)
---------- ---------
FINANCING ACTIVITIES:
Issuance of treasury stock 1,038 1,279
Dividends paid (4,658) (4,663)
Purchases of treasury stock (3,205)
Long-term debt - net (483) (2,301)
Other - net 38 (97)
---------- ----------
Net cash used in financing activities (7,270) (5,782)
---------- ----------
Increase/(decrease) in cash and cash equivalents 18,539 (6,191)
Cash and cash equivalents at beginning of period 42,541 13,004
---------- ----------
Cash and cash equivalents at end of period $ 61,080 $ 6,813
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
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<PAGE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 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 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 $1.5 million and $3.6 million for the
three and six month periods ended July 3, 1998, respectively. 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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<PAGE>
4. Income Taxes
<TABLE>
The provisions for income taxes for the six months ended July 2, 1999
and July 3, 1998 were as follows (in thousands):
<CAPTION>
1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Current provision $ 9,339 $ 4,276
Deferred provision 3,958 3,083
--------- ---------
Total $ 13,297 $ 7,359
========= =========
</TABLE>
5. Inventories
<TABLE>
As of July 2, 1999 and December 31, 1998, inventories consisted of
the following (in thousands):
<CAPTION>
1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Raw materials and semi-finished goods $ 21,422 $ 22,865
Finished goods 1,661 1,605
Hardware component parts 176 422
--------- ---------
Total $ 23,259 $ 24,892
========= =========
</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 and six month
periods ended July 2, 1999 and July 3, 1998 was as follows (in
thousands):
<CAPTION>
Three Months Ended Six Months Ended
July 2, July 3, July 2, July 3,
1999 1998 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income: $ 9,929 $ 4,081 $19,946 $10,152
Other comprehensive
income, net of tax:
Foreign exchange
translation adjustments 36 (102) 38 (97)
Unrealized gains on
marketable securities (4,354) 16,591
------- ------- ------- -------
Comprehensive income $ 5,611 $ 3,979 $36,575 $10,055
======= ======= ======= =======
</TABLE>
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<PAGE>
7. Earnings per Common Share
<TABLE>
The computation of basic and diluted earnings per share is as follows
(in thousands except per share amounts):
<CAPTION>
Three Months Ended Six Months Ended
July 2, July 3, July 2, July 3,
1999 1998 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Computation of basic earnings per common share:
Numerator
Net Income $ 9,929 $ 4,081 $ 19,946 $ 10,152
-------- -------- -------- --------
Denominator
Average weighted shares
outstanding 31,037 31,118 31,071 31,088
Average weighted deferred
shares outstanding under
non-employee directors
compensation plan 24 13 21 12
-------- -------- -------- --------
Shares outstanding for
basic earnings per share
calculation 31,061 31,131 31,092 31,100
-------- -------- -------- --------
Basic earnings per share $ 0.32 $ 0.13 $ 0.64 $ 0.33
======== ======== ======== ========
Computation of diluted earnings per common share:
Numerator
Net Income $ 9,929 $ 4,081 $ 19,946 $ 10,152
Reduced interest expense
on assumed conversions of
convertible subordinated
debentures 74 79 153 179
-------- -------- -------- --------
Net income for diluted
earnings per share
calculation 10,003 4,160 20,099 10,331
-------- -------- -------- --------
Denominator
Basic weighted average
shares outstanding 31,061 31,131 31,092 31,100
Dilutive effect of stock
options 345 42 233 36
Assumed conversions
of convertible subordinated
debentures 288 308 288 308
-------- -------- -------- --------
Shares outstanding for
diluted earnings per share
calculation 31,694 31,481 31,613 31,444
-------- -------- -------- --------
Diluted earnings per share $ 0.32 $ 0.13 $ 0.64 $ 0.33
======== ======== ======== ========
</TABLE>
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<PAGE>
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 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 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.
<TABLE>
Selected summarized financial information for 1999 and 1998 periods
were as follows (in thousands):
<CAPTION>
Business Segment
------------------------ Corporate Consol-
FS Scantron and Other idated
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Quarter ended July 2, 1999
Net Sales $ 119,406 $ 25,591 $ 144,997
Income (loss) 27,465 3,399 $ (14,599) 16,265
Quarter ended July 3, 1998
Net Sales $ 113,429 $ 21,843 $ 135,272
Income (loss) 13,900 3,377 $ (10,234) 7,043
Year to date July 2, 1999
Net Sales $ 243,256 $ 47,759 $ 291,015
Income (loss) 56,964 6,281 $ (30,002) 33,243
Year to date July 3, 1998
Net Sales $ 236,461 $ 42,349 $ 278,810
Income (loss) 32,036 5,952 $ (20,477) 17,511
</TABLE>
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<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 SECOND QUARTER 1999 VERSUS 1998
Consolidated net sales for the quarter ended July 2, 1999 were $145.0
million compared to $135.3 million for the quarter ended July 3,
1998. FS sales totaled $119.4 million and $113.4 million and
Scantron's sales totaled $25.6 million and $21.8 million for the
second quarters of 1999 and 1998, respectively. The increase of $6.0
million in FS sales was generated by direct marketing campaign
management, computer checks, and traditional checks partially offset
by a decrease in database marketing revenues. Volumes for traditional
checks increased 5.2% in 1999 over 1998 due primarily to new business
from several large customers which began during the second quarter of
1998. The positive effect on revenues from volumes was lessened by
lower pricing due largely to a product mix shift to larger national
accounts. The decrease in database marketing revenues is attributable
to the delay of a release of a new software product. Scantron's sales
increased $3.8 million or 17.4% over 1998. Scantron's revenue growth
was fueled largely by acquisitions in its field service operations.
Consolidated gross profit increased to 46.7% in the second quarter of
1999 from 41.8% in the second quarter of 1998. The improvement was
driven by FS where gross profit improved to 47.2% in 1999 from 40.1%
in 1998 due to reductions in costs of manufacturing for traditional
check products. Scantron's gross profit increased to 55.2% from 49.9%
primarily due to an improvement in core scanning product margins.
Consolidated selling, general and administrative expenses increased
by $4.9 million in the second 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 33.4% from 32.2%.
Amortization of intangibles decreased by $1.0 million from the second
quarter of 1998 compared to the second 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.
Consolidated income from operations increased $9.0 million from the
second quarter of 1998 primarily because of the improvement in FS
gross margins and restructuring expenses recorded in the second
quarter of 1998.
Other income (expense) was an expense of $1.6 million in the second
quarter of 1999 a decrease of $0.3 million from 1998.
Consolidated income before income taxes increased $9.2 million
compared to the second quarter of 1998.
The Company's consolidated effective income tax rate for the second
quarter of 1999 was 39.0% compared to 42.0% for the second quarter of
1998. The decrease in the effective rate is primarily 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 second quarter of 1999 was $9.9
million compared to $4.1 million for 1998. Basic and diluted earnings
per share were $0.32 for the second quarter of 1999 compared to $0.13
in 1998. Second quarter 1999 results included the impact of lowering
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<PAGE>
the effective tax rate for the year to 40% which is the current
estimated annual rate. Second quarter 1998 earnings included a
restructuring charge for severance-related expenses which had a $0.03
net negative impact on earnings per share.
RESULTS OF OPERATIONS YEAR TO DATE 1999 VERSUS 1998
Consolidated net sales for the six months ended July 2, 1999 were
$291.0 million compared to $278.8 million for the six months ended
July 3, 1998. FS sales totaled $243.3 million and $236.5 million and
Scantron's sales totaled $47.8 million and $42.3 million for the
first six months of 1999 and 1998, respectively. The increase in FS
revenues occurred in traditional check products, direct marketing and
computer checks. Partially offsetting these positive areas was a
decrease in revenue from database marketing software. Volumes for
traditional checks increased 8.1% 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 $5.4
million or 12.8% 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 46.9% in 1999 from 42.2% in
1998. The improvement was driven largely by FS where gross profit
improved to 47.1% in 1999 from 41.0% in 1998 due to lower check
manufacturing costs resulting from consolidation of manufacturing
operations as well as from lower paper costs. Scantron's gross profit
increased 6.8% in the first six months of 1999 over 1998, primarily
due to an improvement in core scanning product margins.
Consolidated selling, general and administrative expenses increased
$5.1 million over 1998 and increased as a percentage of sales from
32.9% in 1998 to 33.3% in 1999. Costs associated with Year 2000
remediation and investments in new systems and processes were among
the primary reasons for the increase. Amortization of intangibles
decreased by $2.0 million over 1998 due to the previously mentioned
valuation adjustment for certain intangible assets.
Consolidated income from operations increased by $19.6 million over
1998 primarily because of the improvement in FS gross margins.
Other income (expense) was an expense of $3.5 million in 1999
compared to income of $0.3 million in 1998. This change is primarily
due to gains realized in 1998 from certain asset sales.
Consolidated income before income taxes increased $15.7 million over
1998.
The Company's consolidated effective income tax rate was 40.0%
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 six months ended July 2, 1999 was
$19.9 million compared to $10.2 million for 1998. Basic and diluted
earnings per share were $0.64 for the first six months of 1999
compared to $0.33 in 1998. Included in the calculation of earnings
per share for the 1998 period were restructuring charges, which
reduced earnings per share by approximately $0.07 per share, offset
by a gain on the sale of assets, which increased earnings per share
by approximately $0.08.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash flows provided by operating activities for the first six months
of 1999 were $36.2 million compared to $28.1 million for the first
six months of 1998. The primary uses of funds in the first six months
of 1999 were for capital expenditures and dividends.
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<PAGE>
Purchases of property, plant and equipment totaled $10.6 million in
the first six months of 1999, compared to $17.8 million in 1998.
Proceeds from the sale of property, plant and equipment were $1.2
million in the first six months of 1999 compared to $6.2 million in
1998.
As of July 2, 1999, the Company's asset balances include a net
unrealized gain of $16.6 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.
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 July 2, 1999, the Company had purchased 195,500 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 July 2, 1999, the Company had
no outstanding balances under these lines of credit.
On July 2, 1999, the Company had $61.1 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.
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.
Three 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 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. In an effort to increase revenues, the Company is
strengthening its marketing efforts with community accounts.
New software products for database marketing and loan and deposit
origination are in development. The database marketing software is
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 the previously announced
restructurings, predominantly for employee severance, of
approximately $1.0 million in 1999.
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<PAGE>
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 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. 98% of these applications have been fully tested with the remaining
testing scheduled for completion by August 31,1999. A risk assessment has
been completed for all non-IT systems including manufacturing and facility
components. Testing of manufacturing and facility components was
substantially completed as of July 31, 1999. 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 by August 31,
1999.
The Company estimates that the 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 $4.3 million
was incurred through July 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. As of July 31,
1999, the Company had received survey responses from more than 99% of such
-13-
<PAGE>
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 quarterly. The
Company is developing contingency plans, including a selection of
alternate providers, should they be necessary. Visits are being 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
expects to finalize its contingency planning by September 30, 1999.
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 are being
finalized 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 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. The most reasonably likely worst case scenarios for non-IT
systems, facilities, vendors and customers will be developed upon
completion and approval of the contingency plans.
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
completes the testing phase, 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
-14-
<PAGE>
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
customer service and quality improvements or projected costs savings. Many
variables will impact the ability to improve production efficiencies and
reduce 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 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.
-15-
<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.
<TABLE>
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 July 2, 1999 (in thousands):
<CAPTION>
Carrying Fair Hypothetical
Value Value(a) Fair Value(b)
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Long-term debt, including
current portion $106,583 $101,296 $105,242
======== ======== ========
</TABLE>
<TABLE>
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 six months ended July 2,
1999 (in thousands):
<CAPTION>
Carrying
Value(c) High(a) Low(a)
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Investment in Bottomline $ 29,651 $ 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 July 2, 1999.
As of July 30, 1999, the carrying value of the Bottomline investment was
$23.1 million.
</FN>
</TABLE>
Item 4. Submission of Matters to a Vote of Security Holders
(a)The Annual Meeting of the Shareholders of the Company was held on
April 23, 1999, in Atlanta, GA. There was no solicitation in
opposition to management's nominees for Directors as listed in the
Proxy Statement and all such nominees were elected.
(c)Below is a brief description of matters voted on at the Annual
Meeting and the results of the voting:
Election of Directors for One-Year Term:
John H. Weitnauer Jr.
Voting for 24,228,708
Withheld 2,528,092
-16-
<PAGE>
Election of Directors for Three-Year Term:
Richard K. Lochridge
Voting for 24,271,369
Withheld 2,485,431
G. Harold Northrop
Voting for 24,230,029
Withheld 2,526,771
Timothy C. Tuff
Voting for 24,272,440
Withheld 2,484,360
To ratify the appointment of Deloitte & Touche LLP as the Company's
independent certified public accountants for the year ended December
31, 1999:
Voting for 26,602,970
Voting against 99,428
Withheld 54,402
To approve the 1999 Stock Option Plan, providing for the issuance of
up to 2,000,000 shares of Common Stock:
Voting for 20,348,975
Voting against 4,119,085
Voting abstain 135,448
Non-Vote 2,153,292
To approve the Amended and Restated Articles of Incorporation of the
Company:
Voting for 22,650,999
Voting against 1,709,109
Voting abstain 243,400
Non-Vote 2,153,292
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Reference No. Description of Exhibit
3.1 Amended and Restated Articles of Incorporation of John
H. Harland Company (incorporated by reference to
Exhibit B to the Registrant's Definitive Proxy
Statement dated March 12, 1999)
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarterly period
ended July 2, 1999.
-17-
<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)
8/16/1999 /s/ William M. Dollar
Date: _________________ By:_____________________________
William M. Dollar
Vice President,
Corporate Controller
(Principal Accounting Officer)
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's financial statements for the quarterly period ended July 2, 1999
and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUL-02-1999
<CASH> 61,080
<SECURITIES> 0
<RECEIVABLES> 72,998
<ALLOWANCES> 6,672
<INVENTORY> 23,258
<CURRENT-ASSETS> 173,221
<PP&E> 265,920
<DEPRECIATION> 148,715
<TOTAL-ASSETS> 409,946
<CURRENT-LIABILITIES> 94,663
<BONDS> 106,588
<COMMON> 37,907
0
0
<OTHER-SE> 154,347
<TOTAL-LIABILITY-AND-EQUITY> 409,946
<SALES> 291,015
<TOTAL-REVENUES> 291,015
<CGS> 154,445
<TOTAL-COSTS> 154,445
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,553
<INCOME-PRETAX> 33,243
<INCOME-TAX> 13,297
<INCOME-CONTINUING> 19,946
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,946
<EPS-BASIC> 0.64
<EPS-DILUTED> 0.64
</TABLE>
