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 June 30, 2000
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 July
28, 2000 was 28,433,682.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
(In thousands, except share and June 30, December 31,
per share amounts) 2000 1999
----------------------------------------------------------------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 53,411 $ 49,823
Accounts receivable, net 54,690 60,901
Inventories 21,185 23,411
Deferred income taxes 11,209 12,664
Other 8,995 6,249
---------- ----------
Total current assets 149,490 153,048
---------- ----------
INVESTMENTS AND OTHER ASSETS:
Investments 21,803 23,167
Goodwill and other intangibles - net 59,331 61,213
Deferred income taxes 8,738 9,911
Other 36,186 32,070
---------- ----------
Total investments and other assets 126,058 126,361
---------- ----------
PROPERTY, PLANT AND EQUIPMENT 285,758 272,555
Less accumulated depreciation
and amortization 170,429 160,559
---------- ----------
Property, plant and equipment - net 115,329 111,996
---------- ----------
Total $ 390,877 $ 391,405
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
(In thousands, except share and June 30, December 31,
per share amounts) 2000 1999
----------------------------------------------------------------------
(Unaudited)
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable - trade $ 22,868 $ 29,587
Deferred revenues 16,616 22,471
Accrued liabilities:
Salaries, wages and employee benefits 22,481 25,793
Taxes 7,195 6,284
Other 15,392 14,598
---------- ----------
Total current liabilities 84,552 98,733
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 106,441 106,446
Other 17,872 17,200
---------- ----------
Total long-term liabilities 124,313 123,646
---------- ----------
Total liabilities 208,865 222,379
---------- ----------
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 344,099 326,049
Accumulated other comprehensive
income 17,613 19,091
Unamortized restricted stock awards (1,554) (415)
---------- ----------
398,065 382,632
Less 9,473,815 and 9,263,895 shares
of treasury stock - at cost,
respectively 216,053 213,606
---------- ----------
Shareholders' equity - net 182,012 169,026
---------- ----------
Total $ 390,877 $ 391,405
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2000 AND JULY 2, 1999
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
(In thousands, except JUNE 30, JULY 2, JUNE 30, JULY 2,
per share amounts) 2000 1999 2000 1999
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 171,691 $ 178,400 $ 348,393 $ 357,144
---------- ---------- ---------- ----------
COST AND EXPENSES:
Cost of sales 102,927 112,881 211,922 224,806
Selling, general and
administrative expenses 45,622 46,248 92,042 92,823
Amortization of intangibles 1,586 1,510 3,085 3,018
---------- ---------- ---------- ----------
Total 150,135 160,639 307,049 320,647
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 21,556 17,761 41,344 36,497
---------- ---------- ---------- ----------
OTHER INCOME(EXPENSE):
Interest expense (1,810) (1,754) (3,518) (3,553)
Other - net 539 258 1,347 299
---------- ---------- ---------- ----------
Total (1,271) (1,496) (2,171) (3,254)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 20,285 16,265 39,173 33,243
INCOME TAXES 7,911 6,336 15,277 13,297
---------- ---------- ---------- ----------
NET INCOME 12,374 9,929 23,896 19,946
RETAINED EARNINGS AT
BEGINNING OF PERIOD 334,506 300,408 326,049 293,425
---------- ---------- ---------- ----------
346,880 310,337 349,945 313,371
Cash dividends (2,129) (2,325) (4,250) (4,658)
Issuance of treasury shares
under stock plans (652) (500) (1,596) (1,201)
---------- ---------- ---------- ----------
RETAINED EARNINGS AT END
OF PERIOD $ 344,099 $ 307,512 $ 344,099 $ 307,512
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
BASIC 28,425 31,061 28,419 31,092
DILUTED 28,834 31,694 28,871 31,613
========== ========== ========== ==========
EARNINGS PER COMMON SHARE:
BASIC $ 0.44 $ 0.32 $ 0.84 $ 0.64
DILUTED $ 0.43 $ 0.32 $ 0.83 $ 0.64
========== ========== ========== ==========
CASH DIVIDENDS PER
COMMON SHARE $ 0.075 $ 0.075 $ 0.15 $ 0.15
========== ========== ========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JULY 2, 1999
(Unaudited)
(In thousands) 2000 1999
-----------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 23,896 $ 19,946
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 19,715 19,161
Other 1,660 813
Change in assets and liabilities:
Deferred income taxes 2,848 3,958
Accounts receivable 6,269 2,432
Inventories and other current assets (520) 1,632
Accounts payable and accrued expenses (14,237) (11,718)
---------- --------
Net cash provided by operating activities 39,631 36,224
---------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (17,341) (10,580)
Proceeds from sale of property, plant and equipment 157 1,210
Long-term investments and other assets (8,814) (1,045)
---------- --------
Net cash used in investing activities (25,998) (10,415)
---------- --------
FINANCING ACTIVITIES:
Purchases of treasury stock (7,000) (3,205)
Issuance of treasury stock 1,484 1,038
Dividends paid (4,250) (4,658)
Long-term debt - net 61 (483)
Other - net (340) 38
---------- ---------
Net cash used in financing activities (10,045) (7,270)
---------- ---------
Increase in cash and cash equivalents 3,588 18,539
Cash and cash equivalents at beginning of period 49,823 42,541
---------- ----------
Cash and cash equivalents at end of period $ 53,411 $ 61,080
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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<PAGE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(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,
1999 ("1999 Form 10-K").
Reference is made to the accounting policies of the Company described in
the notes to consolidated financial statements included in the 1999 Form
10-K. The Company has consistently followed those policies in preparing
this report.
3. Income Taxes
The provisions for income taxes for the six months ended June 30, 2000
and July 2, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Current provision $ 12,429 $ 9,339
Deferred provision 2,848 3,958
--------- ---------
Total $ 15,277 $ 13,297
========= =========
</TABLE>
4. Inventories
As of June 30, 2000 and December 31, 1999, inventories consisted of the
following (in thousands):
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Raw materials and semi-finished goods $ 20,013 $ 22,628
Finished goods 788 592
Hardware component parts 384 191
--------- ---------
Total $ 21,185 $ 23,411
========= =========
</TABLE>
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<PAGE>
5. Comprehensive Income
Other comprehensive income for the Company includes foreign currency
translation adjustments and unrealized gains (losses) on investments.
Total comprehensive income for the three and six month periods ended
June 30, 2000 and July 2, 1999 was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, July 2, June 30, July 2,
1999 1999 2000 1999
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income: $12,374 $ 9,929 $23,896 $19,946
Other comprehensive
Income (loss), net of tax:
Foreign exchange
translation adjustments (397) 36
(341) 38
Unrealized gains (losses)
on investments
(1,469) (4,354) (1,137) 16,591
-------- -------- -------- --------
Comprehensive income $10,508 $ 5,611 $22,418 $36,575
======== ======== ======== ========
</TABLE>
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<PAGE>
6. Earnings per Common Share
The computation of basic and diluted earnings per share for the three
and six month periods ended June 30, 2000 and July 2, 1999 is as follows
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, July 2, June 30, July 2,
2000 1999 2000 1999
------------------------------------------------------------------------
Computation of basic earnings per common share:
<S> <C> <C> <C> <C>
Numerator
Net Income $ 12,374 $ 9,929 $ 23,896 $ 19,946
-------- -------- -------- --------
Denominator
Average weighted shares
outstanding 28,381 31,037 28,378 31,071
Average weighted deferred
shares outstanding under
non-employee directors
compensation plan 44 24 41 21
-------- -------- -------- --------
Shares outstanding for
basic earnings per share
calculation 28,425 31,061 28,419 31,092
-------- -------- -------- --------
Basic earnings per share $ 0.44 $ 0.32 $ 0.84 $ 0.64
======== ======== ======== ========
Computation of diluted earnings per common share:
Numerator
Net Income $ 12,374 $ 9,929 $ 23,896 $ 19,946
Reduced interest expense
on assumed conversions of
convertible subordinated
debentures 68 74 135 153
-------- -------- -------- --------
Net income for diluted
earnings per share
calculation 12,442 10,003 24,031 20,099
-------- -------- -------- --------
Denominator
Basic weighted average
shares outstanding 28,425 31,061 28,419 31,092
Dilutive effect of stock
options 148 345 191 233
Assumed conversions
of convertible subordinated
debentures 261 288 261 288
-------- -------- -------- --------
Shares outstanding for
diluted earnings per share
calculation 28,834 31,694 28,871 31,613
-------- -------- -------- --------
Diluted earnings per share $ 0.43 $ 0.32 $ 0.83 $ 0.64
======== ======== ======== ========
</TABLE>
-8-
<PAGE>
7. Business Segments
The Company operates its business in two segments. The Financial Services
segment ("FS") includes printed products (checks and bank forms) and
marketing services (database marketing software, direct marketing services,
and loan and deposit origination software sold primarily to financial
institutions).
The Scantron segment ("Scantron") consists of products and services sold
by the Company's Scantron subsidiary including optical mark reading
("OMR") equipment, scannable forms, survey solutions and field
maintenance. Scantron sells these products and services to the
commercial, financial 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 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 1999 Form 10-K.
Selected summarized financial information for 2000 and 1999 periods were
as follows (in thousands):
<TABLE>
<CAPTION>
Business Segment
------------------------ Corporate Consol-
FS Scantron and Other idated
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Quarter ended June 30, 2000
Net Sales $ 148,819 $ 22,872 $ 171,691
Income (loss) 29,725 4,398 $ (13,838) 20,285
Quarter ended July 2, 1999
Net Sales $ 152,809 $ 25,591 $ 178,400
Income (loss) 27,708 3,399 $ (14,842) 16,265
Year to date June 30, 2000
Net Sales $ 303,028 $ 45,365 $ 348,393
Income (loss) 59,773 7,796 $ (28,396) 39,173
Year to date July 2, 1999
Net Sales $ 309,385 $ 47,759 $ 357,144
Income (loss) 57,334 6,281 $ (30,372) 33,243
</TABLE>
8. Subsequent Event
On July 17, 2000, the Company announced it had signed a definitive agreement
to acquire the outstanding shares of Concentrex Incorporated ("Concentrex")
in a tender offer for $7 per share or approximately $46 million, which
includes stock equivalents. The total cost of the Concentrex acquisition
will be approximately $141 million, which includes loan obligations of
approximately $82 million and fees and other costs which are estimated at
approximately $13 million. The closing is subject to receiving a majority of
Concentrex's outstanding shares in the tender offer and other closing
conditions. The cash to purchase Concentrex will be from internally
generated funds and from bank borrowings. The acquisition is expected to be
completed by the end of August 2000 and will be accounted for using the
purchase method of accounting. Accordingly, the results of operations of
Concentrex will be included in the Company's consolidated financial
statements from the date of acquisition.
Concentrex is based in Portland, Oregon and is a provider of technology-
powered solutions to deliver financial services, including a broad range of
traditional software and services integrated with e-commerce solutions.
Concentrex serves over 5,000 financial institutions of all types and sizes
in the United States and had operating revenues of $107 million for the year
ended December 31, 1999.
-9-
<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 printed products (checks and bank forms) and
marketing services (database marketing software, direct marketing services,
and loan and deposit origination software sold primarily to financial
institutions).
The Scantron segment ("Scantron") represents products and services sold
by the Company's Scantron subsidiary including optical mark reading
("OMR") equipment, scannable forms, survey solutions and field
maintenance. Scantron sells these products and services to the
commercial, financial and education markets.
RESULTS OF OPERATIONS SECOND QUARTER 2000 VERSUS 1999
Consolidated net sales for the quarter ended June 30, 2000 were $171.7
million compared to $178.4 million for the quarter ended July 2, 1999.
FS sales totaled $148.8 million and $152.8 million and Scantron's sales
totaled $22.9 million and $25.6 million for the second quarters of 2000
and 1999, respectively. The FS sales decrease of $4.0 million was
incurred in both marketing services and in the printed products
businesses. Marketing services experienced a softening in direct
marketing sales somewhat due to higher interest rates and consolidation
in the credit card market. The software businesses of marketing services
also had lower revenues in the 2000 period compared to the 1999 period.
The Company is introducing a new loan and deposit origination software
product, financial.center, during the third quarter of 2000. The printed
product sales decrease was due to a decline in unit volumes somewhat
offset by an increase in average per unit pricing and favorable mix.
Volumes for checks decreased 5% from 1999 primarily due to the decline
in the orders received from a direct check marketer, the loss of major
customers due to mergers and acquisitions and to intercompany transfers
of brokerage check production to direct marketing operations. Scantron's
sales decreased 10.6% to $22.9 million primarily due to the divestiture
of Scantron Quality Computers ("SQC") in December 1999. Adjusted for the
SQC divestiture, Scantron sales for the quarter were up approximately 3%
primarily due to increases in the scanning and survey businesses and
muted somewhat by a decrease in a low margin portion of field service
revenue.
Consolidated gross profit increased 5.0% in the second quarter of 2000
from the second quarter of 1999 and increased as a percentage of sales
from 36.7% in 1999 to 40.1% in 2000. An increase in FS gross margin,
which improved to 38.4% in 2000 from 35.5% in 1999, continued to drive
the overall improvement. The higher FS margins were due primarily to the
improvement in pricing and from operating efficiencies gained in part
from plant consolidations. Scantron's gross profit as a percentage of
sales improved to 50.9% in 2000 from 44.8% in 1999 primarily due to the
divestiture of SQC which had low gross margins and from improved margins
from existing products and services.
Consolidated selling, general and administrative expenses decreased by
$0.6 million or 1.4% in the second quarter of 2000 from 1999. These
expenses as a percentage of sales were 26.6% in 2000 compared to 25.9%
in 1999. Decreases in corporate expenditures, relating somewhat to Y2K-
related expenditures in 1999, were offset by increases in FS customer
support and marketing expenses.
Consolidated income from operations increased $3.8 million from the
second quarter of 1999, primarily reflecting gross margin improvements
achieved in the Company's businesses.
Other income (expense) was an expense of $1.3 million in the second
quarter of 2000, which was a decrease of $0.2 million from net expense
of $1.5 million in 1999.
Consolidated income before income taxes increased $4.0 million compared
to the second quarter of 1999.
The Company's consolidated effective income tax rate for the second
quarter of 2000 and the second quarter of 1999 was 39%.
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<PAGE>
The Company's net income for the second quarter of 2000 was $12.4
million compared to $9.9 million for 1999. Basic and diluted earnings
per share were $0.44 and $0.43, respectively for the second quarter of
2000 compared to basic and diluted earnings per share of $0.32 for the
same period in 1999. Earnings per share in 2000 were favorably impacted
by the Company's repurchase of 3,040,000 shares from April 1999 through
March 2000. The reduction in shares outstanding favorably impacted
earnings per share on a net basis by approximately $0.02.
RESULTS OF OPERATIONS YEAR TO DATE 2000 VERSUS 1999
Consolidated net sales for the six months ended June 30, 2000 were
$348.4 million compared to $357.1 million for the six months ended July
2, 1999. FS sales totaled $303.0 million and $309.4 million and
Scantron's sales totaled $45.4 million and $47.8 million for the first
six months of 2000 and 1999, respectively. The decrease in FS revenues
occurred in printed products and in the software product portion of
marketing services. Increased sales in direct marketing services reduced
the impact of these declines. Volumes for checks decreased 7% from 1999
primarily due to the decline in the orders received from a direct check
marketer, the loss of major customers due to mergers and acquisitions,
the intercompany transfer of brokerage check production to direct
marketing operations and the favorable impact on 1999 check volume of a
large conversion. Scantron's sales decreased $2.4 million or 5.0%
compared to 1999 primarily due to the divestiture of SQC. Adjusted for
the divestiture of SQC, Scantron sales increased 6% over the 1999 period
due to increases in its scanning and survey businesses.
Consolidated gross profit as a percentage of sales increased to 39.2% in
2000 from 37.1% in 1999. The improvement was driven largely by FS where
gross profit as a percentage of sales improved to 37.5% in 2000 from
35.7% in 1999 due to reductions in per unit check manufacturing costs
resulting from consolidation of manufacturing operations. Scantron's
gross profit increased 2.9% in the first six months of 2000 as compared
to the 1999 period primarily due to the divestiture of SQC. Adjusted for
SQC, Scantron gross profit increased approximately 6% over the 1999
period primarily due to its scanning business.
Consolidated selling, general and administrative expenses decreased
nearly 1% from 1999 to $92.0 million in 2000 and remained approximately
consistent at 26% of sales in 1999 and 2000. Decreases in corporate
expenditures primarily related to expenses incurred during 1999 related
to Y2K remediation and internal system upgrades were offset by increases
in FS related to customer service and marketing costs. Amortization of
intangibles increased 2.2% over 1999 to $3.1 million due to the
Modelware Americas acquisition.
Consolidated income from operations increased by $4.8 million over 1999
primarily because of the improvement in FS gross margins and lower
corporate expenses.
Other income (expense) was an expense of $2.2 million in 2000 and $3.3
million for the six months ended July 2, 1999.
Consolidated income before income taxes increased $5.9 million over
1999.
The Company's consolidated effective income tax rate was 39.0% and 40.0%
for the six-month periods ending June 30, 2000 and July 2, 1999,
respectively.
The Company's net income for the six months ended June 30, 2000 was
$23.9 million compared to $19.9 million for 1999. Basic and diluted
earnings per share were $0.84 and $0.83 respectively for the first six
months of 2000 compared to $0.64 basic and diluted earnings per share in
1999. The reduction in shares outstanding, due to treasury stock
purchases, favorably impacted earnings per share on a net basis by
approximately $0.04.
-11-
<PAGE>
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash flows provided by operating activities for the first six months of
2000 were $39.6 million compared to $36.2 million for the first six
months of 1999. The primary uses of funds in the first six months of
2000 were for capital expenditures, repurchases of common stock and
refundable customer contract payments.
In April 1999, the Company's Board of Directors authorized the
repurchase of up to 3.1 million shares or 10% of the Company's
outstanding common stock. 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. As
of June 30, 2000, the Company had purchased 3,040,000 shares of common
stock under this authorization. The total expended to date has been
$56.5 million, representing an average of $18.58 per share. The Company
funded the purchases from current cash flows. In March 2000, the Board
of Directors approved the extension of this program to include up to an
additional 2.9 million shares of common stock. No additional purchases
have been made since March 2000.
Purchases of property, plant and equipment totaled $17.3 million in the
first six months of 2000, compared to $10.6 million in 1999. The
increase in capital expenditures is primarily related to digital
printing equipment purchases. In January 2000, the Company entered into
a purchase agreement to purchase digital printing equipment with an
aggregate commitment of $21.3 million (2000 - $11.4 million, 2001 - $9.9
million).
As of June 30, 2000, the Company's asset balances included a net
unrealized gain of $17.8 million primarily related to the Company's
investment in Bottomline Technologies, Inc. The unrealized gain was
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 June 30, 2000, the Company had no outstanding
balances under these lines of credit.
On June 30, 2000, the Company had $53.4 million in cash and cash
equivalents. The Company believes that its current cash position, funds
from operations and the availability of funds under credit agreements
being negotiated will be sufficient to meet anticipated requirements for
working capital, dividends, capital expenditures and other corporate
needs, including the recently announced acquisition of Concentrex
Incorporated. 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.
CONCENTREX ACQUISITION
On July 17, 2000, the Company announced it had signed a definitive agreement
to acquire the outstanding shares of Concentrex Incorporated ("Concentrex")
in a tender offer for $7 per share or approximately $46 million, which
includes stock equivalents. The total cost of the Concentrex acquisition
will be approximately $141 million, which includes loan obligations of
approximately $82 million and fees and other costs which are estimated at
approximately $13 million. The closing is subject to receiving a majority of
Concentrex's outstanding shares in the tender offer and other closing
conditions. The cash to purchase Concentrex will be from internally
generated funds and from bank borrowings. The acquisition is expected to be
completed by the end of August 2000 and will be accounted for using the
purchase method of accounting. Accordingly, the results of operations of
Concentrex will be included in the Company's consolidated financial
statements from the date of acquisition.
Concentrex is based in Portland, Oregon and is a provider of technology-
powered solutions to deliver financial services, including a broad range
of traditional software and services integrated with e-commerce
solutions. Concentrex serves over 5,000 financial institutions of all
types and sizes in the United States and had operating revenues of $107
million for the year ended December 31, 1999.
-12-
<PAGE>
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("FAS 133"), as amended by Statement No. 137 and No. 138, which provides
a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. Upon adoption, all
derivative instruments will be recognized in the balance sheet at fair
value, and changes in the fair values of such instruments must be
recognized currently in earnings unless specific hedge accounting
criteria are met. FAS 133 will be effective for the Company on January
1, 2001. We are currently evaluating this Statement; however, based on
our current positions, we do not expect that it will have a material
effect on the Company's financial position. We do not believe that an
estimate of the probable effects of adoption on the financial statements
would be meaningful at this time.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
provides guidance on applying generally accepted accounting principles
to revenue recognition issues in financial statements. We will adopt SAB
101 as required in the fourth quarter of 2000. We are currently
evaluating the effect that such adoption might have on our financial
position and results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 "Accounting of Certain Transactions involving
Stock Compensation - an Interpretation of APB No. 25" ("FIN 44"). FIN 44
clarifies the application of APB No. 25 for (a) the definition of
employee for purposes of applying APB No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a
previously fixed stock option or award and (d) the accounting for an
exchange of stock compensation awards in a business combination. We
adopted FIN 44 on July 1, 2000, and the adoption did not have a material
effect on the financial position or results of operations of the
Company.
OUTLOOK
The Company's operating results were positively impacted by a number of
factors, including significant improvements in gross margins for its
checks business and growth in direct marketing revenues and margins. The
Company will continue to consolidate printing facilities, install new
equipment and develop systems and processes in an effort to increase
profitability and improve service in its operations. Two printing
facilities remain to be closed as part of the previously announced plant
consolidation program. These plants will close during 2000.
The Company expects continued pricing pressure from renewals and
acquisitions of check printing contracts particularly with large
accounts although the pricing environment has moderated somewhat.
In an effort to increase volume and pricing and improve mix,
the Company has strengthened its marketing efforts with regional and
community accounts.
The Company introduced its Windows(R) version of Max$ell, its database
marketing software, in late 1999. The new release and ancillary products
in database marketing along with the introduction of financial.center, a
web enabled loan and deposit origination software, in the third quarter
should result in increased software revenues in 2000.
The Company expects to incur immaterial charges during 2000 for additional
employee severance related to previously announced plant closings and
implementation of new printing technology.
The Company expects the acquisition of Concentrex to be dilutive to
earnings during 2000 and 2001. However, the acquisition is expected to be
accretive to cash flow by the end of 2000.
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<PAGE>
YEAR 2000 COMPLIANCE
The Company's Year 2000 initiative defined and provided a continuing
process for assessment, remediation planning and plan implementation to
achieve a level of readiness that would meet the computer-related
challenges presented by the Year 2000 in a timely manner. Based on these
efforts, the Company considered its critical systems, critical
electronic assets, relationships with key business partners and
contingency plans ready as of December 31, 1999. The Company suffered no
material consequences in the first six months of 2000 in these areas due
to the Year 2000 issues.
The Company believes that it will not incur significant expense related
to the Year 2000 initiatives in the year ending December 31, 2000.
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,
achieve production efficiencies and reduce expenses. These include, but
are not limited to, the development and implementation of new technology
and processes 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 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
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<PAGE>
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.
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 June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
Carrying Fair Hypothetical
Value Value(a) Fair Value(b)
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Long-term debt, including
current portion $106,441 $ 98,673 $103,162
========= ========= =========
</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 June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
Carrying
Value(c) High(a) Low(a)
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Investment in Bottomline $ 19,877 $ 29,842 $ 14,535
========= ========= =========
<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 June 30, 2000.
</FN>
</TABLE>
As of July 28, 2000, the carrying value of the Bottomline investment was
$14.3 million.
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<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of the Company was held on
April 28, 2000.
(b) At the meeting William S. Antle III, John D. Johns and Eileen M.
Rudden were elected for three-year terms expiring in 2003. The
Directors whose terms continued after the Annual Meeting are
Juanita P. Baranco, Richard K. Lochridge, John J. McMahon Jr.,
G. Harold Northrop, Larry L. Prince and Timothy C. Tuff.
(c) A brief description of each matter voted upon and the results of
the voting are as follows:
Election of Directors for Three-Year Term:
William S. Antle III
Voting for 25,109,371
Withheld 543,161
John D. Johns
Voting for 25,098,636
Withheld 553,896
Eileen M. Rudden
Voting for 25,106,370
Withheld 546,162
Ratification of the appointment of Deloitte & Touche LLP as the Company's
auditors:
Voting for 25,215,313
Voting against 413,221
Withheld 23,998
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Reference No. Description of Exhibit
______________________________________________________________________________
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarterly period ended
June 30, 2000.
-16-
<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)
08/14/2000 /s/ William M. Dollar
Date: _________________ By:_____________________________
William M. Dollar
Vice President,
Corporate Controller
(Principal Accounting Officer)
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