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 September 29, 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 October 27,
2000 was 28,492,357.
<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 September 29, December 31,
per share amounts) 2000 1999
----------------------------------------------------------------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 17,379 $ 49,823
Accounts receivable, net 75,921 60,901
Inventories 21,465 23,411
Deferred income taxes 15,966 12,664
Prepaid income taxes 12,255 379
Other 8,933 5,870
---------- ----------
Total current assets 151,919 153,048
---------- ----------
INVESTMENTS AND OTHER ASSETS:
Investments 23,698 23,167
Goodwill and other intangibles - net 143,783 61,213
Deferred income taxes 16,714 9,911
Refundable contract payments 26,683 19,793
Assets Held for sale 20,080 1,187
Other 32,278 11,090
---------- ----------
Total investments and other assets 263,236 126,361
---------- ----------
PROPERTY, PLANT AND EQUIPMENT 315,058 272,555
Less accumulated depreciation
and amortization 189,294 160,559
---------- ----------
Property, plant and equipment - net 125,764 111,996
---------- ----------
Total $ 540,919 $ 391,405
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
(In thousands, except share and September 29, December 31,
per share amounts) 2000 1999
----------------------------------------------------------------------
(Unaudited)
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable - trade $ 27,050 $ 29,587
Deferred revenues 33,411 22,471
Accrued liabilities:
Salaries, wages and employee benefits 29,059 25,793
Taxes 7,688 6,284
Acquisition-related severance 8,236 -
Other 22,799 14,598
---------- ----------
Total current liabilities 128,243 98,733
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 206,615 106,446
Other 18,886 17,200
---------- ----------
Total long-term liabilities 225,501 123,646
---------- ----------
Total liabilities 353,744 222,379
---------- ----------
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 346,181 326,049
Accumulated other comprehensive
income 19,669 19,091
Unamortized restricted stock awards (1,772) (415)
---------- ----------
401,985 382,632
Less 9,417,840 and 9,263,895 shares
of treasury stock - at cost,
respectively 214,810 213,606
---------- ----------
Shareholders' equity - net 187,175 169,026
---------- ----------
Total $ 540,919 $ 391,405
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 29, 2000
AND OCTOBER 1, 1999
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
(In thousands, except Sep. 29, Oct. 1, Sep. 29, Oct. 1,
per share amounts) 2000 1999 2000 1999
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 179,784 $ 173,727 $ 528,176 $ 530,871
---------- ---------- ---------- ----------
COST AND EXPENSES:
Cost of sales 104,878 106,948 316,800 331,754
Selling, general and
administrative expenses 49,427 45,715 141,468 138,539
Amortization of intangibles 2,419 1,508 5,505 4,526
Acquired in-process
research & development 8,248 - 8,248 -
---------- ---------- ---------- ----------
Total 164,972 154,171 472,021 474,819
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 14,812 19,556 56,155 56,052
---------- ---------- ---------- ----------
OTHER INCOME(EXPENSE):
Interest expense (2,825) (2,000) (6,342) (5,552)
Other - net 57 927 1,404 1,226
---------- ---------- ---------- ----------
Total (2,768) (1,073) (4,938) (4,326)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 12,044 18,483 51,217 51,726
INCOME TAXES 7,444 5,952 22,722 19,249
---------- ---------- ---------- ----------
NET INCOME 4,600 12,531 28,495 32,477
RETAINED EARNINGS AT
BEGINNING OF PERIOD 344,099 307,512 326,049 293,425
---------- ---------- ---------- ----------
348,699 320,043 354,544 325,902
Cash dividends (2,132) (2,322) (6,382) (6,980)
Issuance of treasury shares
under stock plans (386) (203) (1,981) (1,404)
---------- ---------- ---------- ----------
RETAINED EARNINGS AT END
OF PERIOD $ 346,181 $ 317,518 $ 346,181 $ 317,518
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
BASIC 28,485 30,834 28,442 31,007
DILUTED 28,788 31,693 28,845 31,633
========== ========== ========== ==========
EARNINGS PER COMMON SHARE:
BASIC $ 0.16 $ 0.41 $ 1.00 $ 1.05
DILUTED $ 0.16 $ 0.40 $ 0.99 $ 1.04
========== ========== ========== ==========
CASH DIVIDENDS PER
COMMON SHARE $ 0.075 $ 0.075 $ 0.225 $ 0.225
========== ========== ========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2000 AND OCTOBER 1, 1999
(Unaudited)
(In thousands) 2000 1999
-----------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 28,495 $ 32,477
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 32,627 29,798
Acquired in-process research & development costs 8,248
Other 2,822 1,717
Change in assets and liabilities,
net of effects of business acquired:
Deferred income taxes 2,284 1,856
Accounts receivable 2,707 2,683
Inventories and other current assets 20,173 4,784
Accounts payable and accrued expenses (27,951) (7,784)
---------- ----------
Net cash provided by operating activities 69,405 65,531
---------- ----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (28,688) (16,583)
Proceeds from sale of property, plant and equipment 211 1,250
Acquisition of Concentrex, Incorporated,
net of cash acquired (140,042) -
Notes receivable from Netzee, Inc. (5,000) -
Long-term investments and other assets (15,608) (10,764)
---------- ----------
Net cash used in investing activities (189,127) (26,097)
---------- ----------
FINANCING ACTIVITIES:
Purchases of treasury stock (7,000) (18,661)
Issuance of treasury stock 1,892 1,605
Dividends paid (6,382) (6,980)
Long-term debt - net 99,980 (549)
Payments of deferred debt issue costs (1,174) -
Other - net (38) 207
---------- ----------
Net cash provided by (used in) financing activities 87,278 (24,378)
---------- ----------
Increase (decrease) in cash and cash equivalents (32,444) 15,056
Cash and cash equivalents at beginning of period 49,823 42,541
---------- ----------
Cash and cash equivalents at end of period $ 17,379 $ 57,597
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 29, 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. Acquisition
On August 23, 2000, the Company completed its cash tender offer for all of the
outstanding common stock of Concentrex Incorporated ("Concentrex"). 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.
The acquisition costs totaled $143.0 million which included the purchase of
outstanding shares of common stock of Concentrex at $7 per share, preferred
stock and stock options ($42.0 million), the payoff of Concentrex's loan
obligations ($83.8 million), and certain other acquisition costs (approximately
$17.2 million). Approximately $100 million of the acquisition costs was funded
from a new credit facility obtained by the Company (see Note 6).
The acquisition costs have been allocated on the basis of the estimated fair
market values of the assets acquired and liabilities assumed. As part of this
allocation, the Company acquired in-process research and development costs of
$8.2 million which was expensed at acquisition. Of the total acquisition costs,
approximately $104.9 million was preliminarily allocated to intangibles assets,
of which $94.2 million represented goodwill being amortized over eleven years on
a straight-line basis and $10.7 million of other intangibles being amortized
over seven years on a straight-line basis. The purchase price allocation for
this acquisition is preliminary and further refinements are likely to be made
based on the completion of final valuation studies.
The acquisition was accounted for under the purchase method of accounting and,
accordingly, the results of operations of Concentrex have been included in the
Company's consolidated financial statements from the date of acquisition.
<PAGE>
The following unaudited pro forma summary presents information as if the
Concentrex acquisition occurred at the beginning of the respective year in which
the assets were acquired as well as the beginning of the immediately preceding
year. Related to presenting this effect, the unaudited pro forma summary also
include adjustments related to the purchase of 100% of the common stock of
ULTRADATA Corporation by Concentrex in 1999. Also, a portion of Harland's
purchase price of Concentrex has been allocated to the net realizable value of
certain assets of Concentrex's online banking and electronic payments business
which the Company has identified as businesses held for sale. The pro forma
summary includes adjustments which remove the operating results of the
businesses held for sale. The pro forma summary results also include certain
other adjustments, primarily increased amortization of intangible assets,
increased interest expense and reduced interest income. Pro forma results
include the write-off of acquired in-process research and development costs of
$8.2 million and $18.7 million for the nine-month periods ended September 29,
2000 and October 1, 1999, respectively (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Nine Months Ended
Sep. 29 Oct. 1
2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net sales $594,182 $612,528
Net income 11,021 5,207
Earnings per share:
Basic $ 0.39 $ 0.17
Diluted $ 0.38 $ 0.16
</TABLE>
The unaudited pro forma financial information presented does not purport to be
indicative of either the results of operations that would have occurred had the
acquisitions taken place at the beginning of the periods presented or of future
results.
4. Income Taxes
The provisions for income taxes for the nine months ended September 29, 2000 and
October 1, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Current provision $ 20,438 $ 17,393
Deferred provision 2,284 1,856
--------- ---------
Total $ 22,722 $ 19,249
========= =========
</TABLE>
5. Inventories
As of September 29, 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 $ 20,091 $ 22,628
Finished goods 1,066 592
Hardware component parts 308 191
--------- ---------
Total $ 21,465 $ 23,411
========= =========
</TABLE>
<PAGE>
6. Long Term Debt
In August 2000, the Company entered into a $300 million revolving credit
facility ("the Credit Facility") maturing in 2004. The Credit Facility may be
used for general corporate purposes, including acquisitions, and includes both
direct borrowings and letters of credit. The Credit Facility is unsecured and
the Company presently pays a commitment fee of 0.225% on the unused amount of
the Credit Facility. Borrowings under the Credit Facility bear interest, at the
Company's option, on the following indices: the Fed Funds Rate, the SunTrust
Bank Base Rate or LIBOR. The Credit Facility has certain financial covenants
including leverage, fixed charge and minimum net worth tests. The Credit
Facility also has restrictions that limit the Company's ability to incur
additional indebtedness, grant security interests, or sell its assets beyond
certain amounts.
The Company used a portion of the proceeds from the Credit Facility to pay off
existing senior debt in the amount of $100 million and used approximately $100
million for the acquisition of Concentrex Incorporated. Direct borrowings under
the Credit Facility at September 29, 2000 totaled $200 million. At September 29,
2000, there were no outstanding letters of credit under the Credit Facility and
$3.5 million in letters of credit outstanding outside of the Credit Facility.
The average interest rate in effect at September 29, 2000 was 7.68%.
7. 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 nine-month periods ended September 29, 2000 and October
1, 1999 was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sep. 29, Oct. 1, Sep. 29, Oct. 1,
2000 1999 2000 1999
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income: $ 4,600 $12,531 $28,495 $32,477
Other comprehensive
income (loss), net of tax:
Foreign exchange
translation adjustments 133 68 (208) 106
Unrealized gains (losses)
on investments 1,923 (13,019) 786 3,572
-------- -------- -------- --------
Comprehensive income $ 6,656 $ (420) $29,073 $36,155
======== ======== ======== ========
</TABLE>
<PAGE>
8. Earnings per Common Share
The computation of basic and diluted earnings per share for the three and nine
month periods ended September 29, 2000 and October 1, 1999 is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sep. 29, Oct. 1, Sep. 29, Oct. 1,
2000 1999 2000 1999
------------------------------------------------------------------------
Computation of basic earnings per common share:
<S> <C> <C> <C> <C>
Numerator
Net income $ 4,600 $ 12,531 $ 28,495 $ 32,477
-------- -------- -------- --------
Denominator
Average weighted shares
outstanding 28,434 30,806 28,397 30,983
Average weighted deferred
shares outstanding under
non-employee directors
compensation plan 51 28 45 24
-------- -------- -------- --------
Shares outstanding for
basic earnings per share
calculation 28,485 30,834 28,442 31,007
-------- -------- -------- --------
Basic earnings per share $ 0.16 $ 0.41 $ 1.00 $ 1.05
======== ======== ======== ========
Computation of diluted earnings per common share:
Numerator
Net income $ 4,600 $ 12,531 $ 28,495 $ 32,477
Reduced interest expense
on assumed conversions of
convertible subordinated
debentures 68 74 203 263
-------- -------- -------- --------
Net income for diluted
earnings per share
calculation 4,668 12,605 28,698 32,740
-------- -------- -------- --------
Denominator
Basic weighted average
shares outstanding 28,485 30,834 28,442 31,007
Dilutive effect of stock
options 42 571 142 338
Assumed conversions
of convertible subordinated
debentures 261 288 261 288
-------- -------- -------- --------
Shares outstanding for
diluted earnings per share
calculation 28,788 31,693 28,845 31,633
-------- -------- -------- --------
Diluted earnings per share $ 0.16 $ 0.40 $ 0.99 $ 1.04
======== ======== ======== ========
</TABLE>
<PAGE>
9. 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.
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 September 29, 2000
Net Sales $ 154,668 $ 25,316 $ (200) $ 179,784
Income (loss) 18,483 7,051 (13,490) 12,044
Quarter ended October 1, 1999
Net Sales $ 147,493 $ 26,291 $ (57) $ 173,727
Income (loss) 25,779 6,001 (13,297) 18,483
Year to date September 29, 2000
Net Sales $ 457,904 $ 70,681 $ (409) $ 528,176
Income (loss) 77,602 14,847 (41,232) 51,217
Identifiable Assets 424,611 40,966 75,342 540,919
Year to date October 1, 1999
Net Sales $ 457,040 $ 74,050 $ (219) $ 530,871
Income (loss) 83,066 12,282 (43,621) 51,727
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company operates its business in two segments. The Financial Services
segment ("FS") includes 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 THIRD QUARTER 2000 VERSUS 1999
Consolidated net sales for the quarter ended September 29, 2000 were $179.8
million compared to $173.7 million for the quarter ended October 1, 1999.
FS sales totaled $154.7 million and $147.5 million for the third quarters of
2000 and 1999, respectively. The FS sales increase of $7.2 million was primarily
attributed to growth in software, including $9.6 million from the acquisition of
Concentrex Incorporated ("Concentrex") in August 2000, (see Note 3 to the
Condensed Consolidated Financial Statements). Excluding Concentrex, FS sales
totaled $145.1 million, a 2% decrease from the 1999 period. In printed products,
sales per unit was higher than last year, offset by a 2% decline in unit volumes
resulting in a sales change which was basically flat when compared to the 1999
period. Volumes for checks decreased primarily due to the decline in the orders
received from a direct check marketer. Marketing services accounted for the
majority of the adjusted FS sales decline with decreased sales in direct
marketing services and software operations (excluding Concentrex). Direct
marketing service sales decreased due to a change in billing method for mailing
costs (having the customer pay the cost directly) which had minimal impact on
margins. Software operations sales decreased primarily due to delays in delivery
of a new loan and deposit origination product and slower than anticipated sales
of database marketing software products.
Scantron's sales totaled $25.3 million and $26.3 million for the third quarters
of 2000 and 1999, respectively, a decrease of 4%. The decrease in sales was 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 2% due to increases in scanning, survey solutions and service
groups.
Consolidated gross profit increased 12.2% in the third quarter of 2000 from the
third quarter of 1999 and increased as a percentage of sales from 38.4% in 1999
to 41.7% in 2000. An increase in FS gross margin, which improved to 39.3% in
2000 from 36.1% in 1999, continued to drive the overall improvement. The higher
FS margins were due primarily to improvement in pricing and from operating
efficiencies gained in part from plant consolidations and process improvements.
Scantron's gross profit as a percentage of sales improved to 55.6% in 2000 from
51.8% in 1999 primarily due to the divestiture of SQC, which had low gross
margins, and from improved margins in existing products and services.
Consolidated selling, general and administrative expenses increased by $3.7
million or 8.1% in the third quarter of 2000 from 1999. These expenses as a
percentage of sales were 27.5% in 2000 compared to 26.3% in 1999. The increase
was due to the addition of Concentrex operations moderated by decreases in
corporate expenditures related to Y2K-related and other projects in 1999.
In connection with the acquisition of Concentrex, the Company recorded expense
of $8.2 million for research and development efforts related to several product
development activities in process at the date of acquisition. The values
assigned to the in-process research and development efforts were determined by
independent appraisal and represent those efforts in process at the date of
acquisition that had not yet reached the point where technological feasibility
had been established and that had no alternative future uses. Accounting rules
require these costs be expensed as incurred.
Consolidated income from operations decreased $4.7 million from the third
quarter of 1999, primarily due to the in-process research and development charge
of $8.2 million associated with the Concentrex acquisition. Excluding the charge
for acquired in-process research and development, operating income increased 18
percent over the 1999 period.
Other income (expense) was an expense of $2.8 million in the third quarter of
2000, which was an increase of $1.7 million from net expense of $1.1 million in
1999. Interest expense increased as a result of the higher levels of borrowings
related to the acquisition of Concentrex and due to floating interest rates
which were higher than fixed rates on previous debt (see Note 6 to the Condensed
Consolidated Financial Statements).
Consolidated income before income taxes decreased $6.4 million compared to the
third quarter of 1999.
The Company's consolidated effective income tax rate was 61.8% and 32.2% for the
three-month periods ending September 29, 2000 and October 1, 1999, respectively.
The increase in the effective income tax rate was primarily due to nondeductible
acquired in-process research and development costs and nondeductible
Concentrex-related intangible amortization. The effective tax rates for both the
2000 and 1999 periods were reduced by the impact of tax credits of $0.9 million
in each period. In the 1999 period, there was also a retroactive adjustment of
the estimated effective tax rate for the year to 39.0% from the previous rate of
40.0% resulting in a $332,000 reduction in taxes.
The Company's net income for the third quarter of 2000 was $4.6 million compared
to $12.5 million for 1999. Basic and diluted earnings per share were $0.16 and
$0.16, respectively, for the third quarter of 2000 compared to basic and diluted
earnings per share of $0.41 and $0.40, respectively, for the same period in
1999. However, the Concentrex acquisition negatively impacted net income by $9.1
million, or $0.31 per share, of which in-process research and development costs
accounted for $0.28. Tax credits for research and development expense positively
impacted earnings for the quarter by $0.03 per share. Excluding the negative
impact of Concentrex and positive impact of the tax credits, diluted earnings
per share were $0.44.
RESULTS OF OPERATIONS YEAR TO DATE 2000 VERSUS 1999
Consolidated net sales for the nine months ended September 29, 2000 were $528.2
million compared to $530.9 million for the nine months ended October 1, 1999.
FS sales totaled $457.9 million and $457.0 million for the first nine months of
2000 and 1999, respectively. Excluding Concentrex, FS sales decreased $8.7
million or 2% compared to 1999. Most of the decline, excluding Concentrex,
occurred in printed products, where volumes for checks decreased 5.8% from 1999
primarily due to the decline in the orders received from a direct check marketer
and the loss of major customers due to mergers and acquisitions. Software sales,
excluding Concentrex, declined due to lower product sales.
Scantron's sales totaled $70.7 million and $74.0 million for the first nine
months of 2000 and 1999, respectively, a decrease of $3.3 million or 4.5%. The
decrease in sales was primarily due to the divestiture of SQC in December 1999.
Adjusted for the SQC divestiture, Scantron sales for the period increased
approximately 3.1% compared to 1999 due to increases in its scanning and survey
businesses.
Consolidated gross profit as a percentage of sales increased to 40.0% in 2000
from 37.5% in 1999. The improvement was driven primarily by the FS segment where
gross profit as a percentage of sales improved to 38.1% in 2000 from 35.8% in
1999 due to reductions in per unit check manufacturing costs resulting from
consolidation of manufacturing operations. Scantron's gross profit as percentage
of sales increased to 52.0% from 48.2% due to the disposition of SQC and due to
the favorable mix of high-margin forms.
Consolidated selling, general and administrative expenses increased 2% from 1999
to $141.5 million in 2000 and increased as a percentage of sales from 26.1% in
1999 to 26.8% in 2000. Decreases in corporate expenditures were primarily
related to the expenses incurred during 1999 related to Y2K remediation and
internal system upgrades. Amortization of intangibles increased 21.6% over 1999
to $5.5 million due to Modelware Americas acquisition in March 2000 and the
Concentrex acquisition.
Consolidated income from operations increased by $0.1 million over 1999.
Excluding the charge for acquired in-process research and development in 2000,
operating income increased 15 percent over 1999 primarily because of the
improvement in FS gross margins and lower corporate expenses.
Other income (expense) was a net expense of $4.9 million in 2000 and $4.3
million for the nine months ended October 1, 1999. Interest expense increased
due to increases in debt levels related to financing of the Concentrex
acquisitions and refinancing of existing debt (see Note 6 to the Condensed
Consolidated Financial Statements).
Consolidated income before income taxes decreased $0.5 million over 1999.
The Company's consolidated effective income tax rate was 44.4% and 37.2% for the
nine-month periods ending September 29, 2000 and October 1, 1999, respectively.
The increase in the effective income tax rate was primarily due to nondeductible
acquired in-process research and development costs and nondeductible
Concentrex-related intangible amortization. The increase was moderated by a $0.9
million tax credit. The effective tax rate for the 1999 period was also impacted
favorably by a $0.9 million tax credit.
The Company's net income for the nine months ended September 29, 2000 was $28.5
million compared to $32.5 million for 1999. Basic and diluted earnings per share
were $1.00 and $0.99, respectively, for the first nine months of 2000 compared
to $1.05 basic and $1.04 diluted earnings per share in 1999. Excluding the
impact of Concentrex and the tax credits, net income was $36.7 million or
diluted earnings per share year-to-date of $1.27. Also, the reduction in shares
outstanding, due to treasury stock purchases, favorably impacted earnings per
share on a net basis by approximately $0.04 in 2000.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash flows provided by operating activities for the first nine months of 2000
were $69.2 million compared to $65.5 million for the first nine months of 1999.
The primary uses of funds in the first nine months of 2000 were for the
acquisition of Concentrex, payment of long-term debt, 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 may 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 September 29, 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 $28.7 million in the first
nine months of 2000, compared to $16.6 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 September 29, 2000, the Company's asset balances included a net unrealized
gain of $18.8 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.
In connection with the Concentrex acquisition, the Company entered into a $300
million revolving credit facility maturing in 2004 (see Note 6 to the Condensed
Consolidated Financial Statements). The facility may be used for general
corporate purposes, including acquisitions, and includes both direct borrowings
and letters of credit. As of September 29, 2000, direct borrowings totaled $200
million. There were $3.5 million of letters of credit outstanding that were
issued outside of the revolving credit facility.
On September 29, 2000, the Company had $17.4 million in cash and cash
equivalents. The Company believes that its current cash position, funds from
operations and the availability of funds under the new credit facility 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.
CONCENTREX ACQUISITION
On August 23, 2000, the Company completed its cash tender offer for the
outstanding common stock of Concentrex. 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.
The acquisition costs totaled $143.0 million which included the purchase of
outstanding shares of common stock of Concentrex at $7 per share and other
equity related instruments ($42.0 million), the payoff of Concentrex's loan
obligations ($83.8 million), and certain other acquisition costs (approximately
$17.2 million). Approximately $100 million of the acquisition costs was funded
from a new credit facility obtained by the Company with the balance provided
from operating funds.
The acquisition costs have been allocated on the basis of the estimated fair
market values of the assets acquired and liabilities assumed. As part of this
allocation, the Company acquired in-process research and development costs of
$8.2 million which was expensed at acquisition. Of the total acquisition costs,
approximately $104.9 million was preliminarily allocated to intangibles assets,
of which $94.2 million represented goodwill which is being amortized over eleven
years on a straight-line basis and $10.7 million to other intangibles being
amortized over seven years on a straight-line basis. The purchase price
allocation for this acquisition is preliminary and further refinements are
likely to be made based on the completion of final valuation studies.
The acquisition was accounted for under the purchase method of accounting and,
accordingly, the results of operations of Concentrex have been included in the
Company's consolidated financial statements from the date of acquisition.
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 Statements 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. Management does not anticipate that the adoption of SAB 101 will have a
material impact on the Company's Consolidated Financial Statements.
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 believes that its financial position continues to be strong. In the
short-term, the Company expects a dilutive impact from the Concentrex
acquisition of approximately $0.15 for 2000. The Company's checks operations are
expected to continue to show year-over-year improvement in the fourth quarter.
Harland anticipates that most of the remaining operations will be flat, with the
exception of its traditional software group, which will be down from last year
due to a decline in sales and the impact of new product costs. The Company will
continue the rationalization of its software business and anticipates that there
will be further reductions in headcount. These reductions could have an impact
on pre-tax earnings of up to $1.0 million in the fourth quarter of 2000. The
Company expects earnings per share for 2000 to be between $1.55 - $1.60,
excluding the effects of Concentrex and one-time severance charges.
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 nine 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.
<PAGE>
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 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
As a result of the variable nature of the senior credit facility's interest
rate, the fair value of the Company's revolving credit debt approximates its
carrying value.
Equity Price Risk
The fair value of the Company's investments is primarily affected by
fluctuations in the market price for the common stock of Bottomline
Technologies, Inc. ("Bottomline"). The change in market value is accounted for
as a component of other comprehensive income. The following presents the value
at risk for the Company's investment in Bottomline reflecting the high and low
closing market prices for the nine months ended September 29, 2000 (in
thousands):
<TABLE>
<CAPTION>
Carrying
Value(b) High(a) Low(a)
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Investment in Bottomline $ 21,694 $ 22,093 $ 11,483
========= ========= =========
<FN>
(a) Based on quoted market prices for these or similar items.
(b) Based on market value as of September 29, 2000.
</FN>
</TABLE>
As of October 27, 2000, the carrying value of the Bottomline investment was
$15.2 million.
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
The Company filed a report on Form 8-K with the Securities and Exchange
Commission on July 21, 2000 relating to the tender offer of Concentrex,
Incorporated.
On September 7, 2000 the Company filed a Form 8-K, dated August 23, 2000
reporting the consummation of the Concentrex tender offer and the related merger
of a subsidiary of the Company into Concentrex.
On November 6, 2000, the Company filed a Form 8-K/A Amendment No. 1 to the
Current Report on Form 8-K dated August 23, 2000. The Form 8-K/A provides the
financial statements and pro forma financial information required to be filed by
the Company with respect to Concentrex, Inc. becoming a wholly owned subsidiary
of Harland as of August 23, 2000.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JOHN H. HARLAND COMPANY
(Registrant)
11/13/2000 /s/ William M. Dollar
Date: _________________ By:_____________________________
William M. Dollar
Vice President,
Corporate Controller
(Principal Accounting Officer)
