HARLAND CLARKE HOLDINGS CORP - FORM 10-Q

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EX-31.1 - EXHIBIT 31.1 - HARLAND CLARKE HOLDINGS CORP	hchc-2011930xex311.htm
EX-31.2 - EXHIBIT 31.2 - HARLAND CLARKE HOLDINGS CORP	hchc-2011930xex312.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



R	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011



£	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: 333-133253

HARLAND CLARKE HOLDINGS CORP.

(Exact name of registrant as specified in its charter)



Delaware	84-1696500
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

10931 Laureate Drive, San Antonio, TX	78249
(Address of principal executive offices)	(Zip code)

(210) 697-8888

(Registrant's telephone number, including area code)

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 R No £ *

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer £	Accelerated filer £	Non-accelerated filer R	Smaller reporting company £
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes £ No R

As of October 31, 2011, there were 100 shares of the registrant's common stock outstanding, with a par value of $0.01 per share. All outstanding shares are owned by a subsidiary of M & F Worldwide Corp.

* The registrant is not required to file this Quarterly Report on Form 10-Q or other reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, but has filed all reports during the preceding 12 months that would have been required pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. The filing is required, however, pursuant to the terms of the indenture governing Harland Clarke Holdings Corp.'s senior notes due 2015.

Table of Contents

HARLAND CLARKE HOLDINGS CORP.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended September 30, 2011



PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Consolidated Balance Sheets	1

	Consolidated Statements of Income	2

	Consolidated Statements of Cash Flows	3

	Notes to Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	32

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3.	Defaults Upon Senior Securities	33

Item 4.	Removed and Reserved	33

Item 5.	Other Information	33

Item 6.	Exhibits	33

Signatures		34

Exhibit Index		35

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Harland Clarke Holdings Corp. and Subsidiaries

Consolidated Balance Sheets

(in millions, except share and per share data)



	September 30, 2011			December 31, 2010
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	204.9		$	211.5
Accounts receivable (net of allowances of $3.0 and $2.8)	130.1			124.7
Inventories	29.7			31.6
Income taxes receivable	0.5			9.3
Deferred tax assets	26.3			19.9
Prepaid expenses and other current assets	60.9			56.0
Total current assets	452.4			453.0
Property, plant and equipment	383.8			353.8
Less accumulated depreciation	(232.5		)	(210.4		)
Property, plant and equipment, net	151.3			143.4
Goodwill	1,617.3			1,526.8
Other intangible assets, net	1,102.3			1,097.4
Contract acquisition payments, net	36.5			27.2
Other assets	67.7			88.3
Total assets	$	3,427.5		$	3,336.1
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable	$	36.0		$	36.0
Deferred revenues	134.1			128.9
Current maturities of long-term debt	19.1			19.4
Accrued liabilities:
Salaries, wages and employee benefits	52.7			73.1
Income and other taxes payable	19.4			13.4
Customer incentives	38.9			29.0
Payable to parent	0.1			0.7
Other current liabilities	38.3			27.5
Total current liabilities	338.6			328.0
Long-term debt	2,186.0			2,200.3
Deferred tax liabilities	377.5			389.5
Other liabilities	88.8			79.5
Commitments and contingencies
Stockholder's equity:
Common stock — 200 shares authorized; par value $0.01; 100 shares issued and outstanding at September 30, 2011 and December 31, 2010	—			—
Additional paid-in capital	157.0			157.0
Retained earnings	284.1			181.0
Accumulated other comprehensive (loss) income, net of taxes:
Foreign currency translation adjustments	(0.3		)	(0.1		)
Unrecognized amounts included in postretirement obligations	3.8			4.0
Derivative fair-value adjustments	(8.0		)	(10.9		)
Unrealized gains on investments, net	—			7.8
Total accumulated other comprehensive (loss) income, net of taxes	(4.5		)	0.8
Total stockholder's equity	436.6			338.8
Total liabilities and stockholder's equity	$	3,427.5		$	3,336.1

See Notes to Consolidated Financial Statements

Table of Contents

Harland Clarke Holdings Corp. and Subsidiaries

Consolidated Statements of Income

(in millions)

(unaudited)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Product revenues, net	$	326.2		$	325.4		$	975.3		$	1,015.8
Service revenues, net	81.5			86.1			242.0			249.0
Total net revenues	407.7			411.5			1,217.3			1,264.8
Cost of products sold	196.5			193.2			591.5			596.9
Cost of services provided	41.5			46.0			120.8			131.0
Total cost of revenues	238.0			239.2			712.3			727.9
Gross profit	169.7			172.3			505.0			536.9
Selling, general and administrative expenses	99.2			95.9			304.5			290.5
Revaluation of contingent consideration	(19.5		)	0.3			(24.6		)	0.2
Asset impairment charges	0.1			1.9			2.4			2.5
Restructuring costs	2.3			5.0			8.3			15.2
Operating income	87.6			69.2			214.4			228.5
Interest income	0.1			0.1			0.3			0.5
Interest expense	(27.4		)	(27.7		)	(82.0		)	(87.9		)
Other income, net	—			—			13.2			0.1
Income before income taxes	60.3			41.6			145.9			141.2
Provision for income taxes	13.7			14.0			42.8			53.4
Net income	$	46.6		$	27.6		$	103.1		$	87.8

See Notes to Consolidated Financial Statements

Table of Contents

Harland Clarke Holdings Corp. and Subsidiaries

Consolidated Statements of Cash Flows

(in millions)

(unaudited)



	Nine Months Ended
	September 30,
	2011			2010
Operating activities
Net income	$	103.1		$	87.8
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	31.6			36.9
Amortization of intangible assets	90.4			81.6
Amortization of deferred financing fees	5.2			5.2
Revaluation of contingent consideration	(24.6		)	0.2
Gain on sale of marketable securities	(13.2		)	(0.1		)
Deferred income taxes	(31.8		)	(22.5		)
Asset impairments	2.4			2.5
Changes in operating assets and liabilities, net of effect of businesses acquired:
Accounts receivable	(3.6		)	(9.6		)
Inventories	1.9			0.9
Prepaid expenses and other assets	(3.1		)	(0.7		)
Contract acquisition payments, net	(9.3		)	(1.3		)
Accounts payable and accrued liabilities	(5.2		)	21.6
Deferred revenues	15.9			4.8
Income and other taxes	14.6			4.1
Payable to parent	(0.6		)	—
Other, net	(0.2		)	3.3
Net cash provided by operating activities	173.5			214.7
Investing activities
Purchase of businesses, net of cash acquired	(134.9		)	(28.6		)
Additional purchase price consideration for previous acquisition	(0.2		)	—
Net repayments of related party notes receivable	1.0			3.0
Proceeds from sale of property, plant and equipment	0.1			2.5
Proceeds from sale of marketable securities	13.4			24.7
Capital expenditures	(39.4		)	(23.2		)
Capitalized interest	(0.2		)	(0.1		)
Other, net	(4.8		)	(2.8		)
Net cash used in investing activities	(165.0		)	(24.5		)
Financing activities
Payments of contingent consideration arrangements	(0.3		)	—
Repayments of credit agreements and other borrowings	(14.8		)	(14.8		)
Net cash used in financing activities	(15.1		)	(14.8		)
Net (decrease) increase in cash and cash equivalents	(6.6		)	175.4
Cash and cash equivalents at beginning of period	211.5			63.9
Cash and cash equivalents at end of period	$	204.9		$	239.3
Supplemental disclosure of cash paid for:
Interest, net of amounts capitalized	$	70.0		$	75.8
Income taxes, net of refunds	60.1			70.6

See Notes to Consolidated Financial Statements

Table of Contents

Harland Clarke Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements

(dollars in millions)

(unaudited)

1. Description of the Business and Basis of Presentation

Harland Clarke Holdings Corp. ("Harland Clarke Holdings" and, together with its subsidiaries, the "Company") is a holding company that conducts its operations through its direct and indirect, wholly owned operating subsidiaries and was incorporated in Delaware on October 19, 2005. On December 15, 2005, CA Investment Corp., an indirect wholly owned subsidiary of M & F Worldwide Corp. ("M & F Worldwide"), purchased 100% of the capital stock of Novar USA Inc. ("Novar"). Novar was renamed Clarke American Corp. ("Clarke American") which was the successor by merger to Novar, which indirectly wholly owned the operating subsidiaries of the Clarke American business. On May 1, 2007, the Company completed the acquisition of John H. Harland Company ("Harland") and changed its name on May 2, 2007 from Clarke American to Harland Clarke Holdings.

The Company has organized its business and corporate structure along the following three business segments: Harland Clarke, Harland Financial Solutions and Scantron.

The Harland Clarke segment offers checks and related products, forms and treasury supplies, and related delivery and fraud prevention products to financial services, retail and software providers. It also provides direct marketing services to their clients including direct marketing campaigns, direct mail, database marketing, telemarketing and digital marketing. In addition to these products and services, the Harland Clarke segment offers stationery, business cards and other business and home office products to consumers and small businesses.

The Harland Financial Solutions segment provides technology products and services to financial services clients worldwide including lending and mortgage compliance and origination applications, risk management solutions, business intelligence solutions, Internet and mobile banking applications, branch automation solutions, self-service solutions, electronic payment solutions and core processing systems.

The Scantron segment provides data management solutions and related services to educational, commercial, healthcare and governmental entities worldwide including testing and assessment solutions, patient information collection and tracking, and survey services. Scantron's solutions combine a variety of data collection, analysis, and management tools including web-based solutions, software, scanning equipment, forms and related field maintenance services.

The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries after the elimination of all material intercompany accounts and transactions. The Company has consolidated the results of operations and accounts of businesses acquired from the date of acquisition.

The Company and each of its existing subsidiaries, other than unrestricted subsidiaries and certain immaterial subsidiaries are guarantors and may also be co-issuers under the 2015 Senior Notes (as hereinafter defined) (see Note 11). Harland Clarke Holdings is a holding company and has no independent assets at September 30, 2011 and no operations. The guarantees and the obligations of the subsidiaries of the Company are full and unconditional and joint and several, and any subsidiaries of the Company other than the subsidiary guarantors and obligors are not significant.

See Note 3 for information regarding recent acquisitions.

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full fiscal year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010.

All terms used but not defined elsewhere herein have the meaning ascribed to them in the Company's 2010 Annual Report on Form 10-K.

Table of Contents

Harland Clarke Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(dollars in millions)

(unaudited)

2. Summary of Significant Accounting Policies

Reference is made to the significant accounting policies of the Company described in the notes to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010.

Use of Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassifications

Certain amounts in previously issued financial statements have been reclassified to conform with the presentation in the consolidated statements of income for the third quarter of 2011. These reclassifications had no effect on previously reported net income.

Specifically, the net change in the fair value of contingent consideration arrangements is now presented as a separate line item in the consolidated statements of income. Previously, such amounts had been classified in selling, general and administrative expenses. These reclassifications are also now included in the consolidated statements of cash flows. In addition, certain other costs and expenses of an acquired operation have been reclassified between cost of revenues and selling, general and administrative expenses to conform with the Company's classification of similar operating costs and expenses.

Recently Adopted Accounting Guidance

Effective January 1, 2011, the Company adopted new guidance for multiple-deliverable revenue arrangements and certain arrangements that include software elements. The new guidance for multiple-deliverable revenue arrangements requires entities to allocate revenue in an arrangement within the scope of the guidance using estimated selling prices based on a selling price hierarchy. It also eliminates the residual method of revenue allocation and requires revenue to be allocated using the relative selling price method. Application of the new guidance did not have a material effect on the Company's financial statements.

The new guidance for certain arrangements that include software elements removes non-software components of tangible products and software components of tangible products that have software components essential to the functionality of the tangible product from the scope of software revenue recognition. The majority of the Company's software arrangements are not tangible products with software components. Application of the new guidance did not have a material effect on the Company's financial statements.

New Accounting Guidance

In September 2011, the Financial Accounting Standards Board ("FASB") amended existing guidance related to the requirement for an annual goodwill impairment test. This amendment provides entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. The amended provisions are effective for reporting periods beginning on or after December 15, 2011. However, early adoption is permitted if an entity's financial statements for the most recent annual or interim period have not yet been issued. The Company will adopt the new guidance effective January 1, 2012. This amendment affects testing steps only, and therefore adoption will not affect the Company's consolidated financial position, results of operations or cash flows.

In June 2011, the FASB amended existing guidance related to the presentation of comprehensive income. The amendment requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two separate but consecutive statements. It eliminates the option to report other comprehensive income and its components as part of the statement of changes in shareholders' equity. The amended provisions are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, and full retrospective application is required. The Company will adopt the new guidance effective January 1, 2012. This amendment affects presentation and disclosure only, and therefore adoption will not affect the Company's consolidated financial position, results of operations or cash flows.

3. Acquisitions

Acquisition of GlobalScholar

Table of Contents

Harland Clarke Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(dollars in millions)

(unaudited)

referred to as "GlobalScholar"). GlobalScholar's instructional management platform supports all aspects of managing education at K-12 schools, including student information systems; performance-based scheduler; gradebook; learning management system; longitudinal data collection, analysis and reporting; teacher development and performance tracking; and online communication and tutoring portals. GlobalScholar's instructional management platform complements Scantron's testing and assessment, response to intervention, student achievement management and special education software solutions thereby expanding Scantron's web-based education solutions. The acquisition-date purchase price was $134.9 in cash, net of cash acquired and after giving effect to working capital adjustments. In addition, the Company recorded the fair value of contingent consideration of $18.5, as described below, which resulted in total estimated consideration of $153.4 as of the acquisition date. Contingent consideration would be payable in 2012 upon achievement of certain revenue targets of GlobalScholar during calendar year 2011. The transaction was accounted for as a business combination and GlobalScholar's results of operations have been included in the Company's operations since the date of its acquisition.

The preliminary allocation of purchase price resulted in identified intangible assets of $92.3 and goodwill of $93.1. The goodwill arises because the total consideration for GlobalScholar, which reflects its future earnings and cash flow potential, exceeds the fair value of the net assets acquired. The goodwill resulting from the acquisition was assigned to the Scantron segment. Of the goodwill recognized, $5.2 is expected to be deductible for income tax purposes. The Company financed the GlobalScholar acquisition and related fees and expenses with Harland Clarke Holdings' cash on hand. The Company has recognized $1.6 of acquisition related costs through September 30, 2011 for this acquisition, of which $0.2 was expensed and included in selling, general and administrative expenses in the consolidated statements of income for the nine months ended September 30, 2011, with the remainder having been expensed and included in selling, general and administrative expenses in the fourth quarter of 2010.

The contingent consideration arrangement provides for cash payments of up to an aggregate maximum of $20.0, which may be payable upon the achievement of certain future revenue targets of GlobalScholar measured during the calendar year 2011. The acquisition-date fair value of the contingent consideration arrangement of $18.5 was estimated utilizing a discounted cash flow analysis with significant inputs that are not observable in the market (Level 3 inputs). Key assumptions include a projection of certain GlobalScholar revenues for the measurement period. The application of fair value accounting for the contingent consideration arrangement requires recurring remeasurement for changes in key assumptions (see Note 13). As of September 30, 2011, the contingent consideration liability was $0.0. The reduction in fair value from the acquisition date was the result of a decline in projected revenues during the measurement period.

The application of acquisition accounting decreased acquired deferred revenues by $14.9 to $11.6 due to a fair value adjustment. This non-cash fair value adjustment results in lower revenue being recognized over the related earnings period (of which $0.9 and $4.6 was reflected as a reduction of revenues for the three and nine months ended September 30, 2011, respectively).

The fair value of financial assets acquired was not significant and all receivables are expected to be collected. The pro forma effects for the GlobalScholar acquisition on the consolidated results of operations were not material.

Acquisition of Parsam

On December 6, 2010, Harland Financial Solutions, Inc. ("HFS"), a wholly owned subsidiary of the Company, acquired all of the outstanding membership interests of Parsam Technologies, LLC and the equity of SRC Software Private Limited (collectively referred to as "Parsam"). Parsam's solutions allow financial institutions to provide services online, in branches and at call centers, from new account opening and funding to account-to-account money transfers, person-to-person payments, account and adviser-client relationship management, and bill presentment and payment. HFS is integrating Parsam's solutions into its existing solution offerings. The acquisition-date purchase price was $32.8 in cash, net of cash acquired and after giving effect to working capital adjustments. In addition, the Company recorded the fair value of contingent consideration of $1.2, as described below, which resulted in total estimated consideration of $34.0 as of the acquisition date. Contingent consideration would be payable upon achievement of certain revenue targets of Parsam during calendar years 2011 and 2012. The transaction was accounted for as a business combination and Parsam's results of operations have been included in the Company's operations since the date of its acquisition.

The contingent consideration arrangement provides for cash payments of up to an aggregate maximum of $25.0, which may be payable upon the achievement of certain future revenue targets of Parsam measured during calendar years 2011 and 2012. The acquisition-date fair value of the contingent consideration arrangement was estimated utilizing a discounted cash flow analysis with significant inputs that are not observable in the market (Level 3 inputs). Key assumptions include a projection of certain Parsam revenues for the measurement periods. During the first quarter of 2011, the Company upon further analysis identified a $1.6 decrease in the initial estimate of acquisition-date fair value of contingent consideration with a corresponding $1.6 decrease in goodwill. The application of fair value accounting for the contingent consideration arrangement

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Harland Clarke Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(dollars in millions)

(unaudited)

requires recurring remeasurement for changes in key assumptions (see Note 13). As of September 30, 2011, the contingent consideration liability was $0.3. The decrease in the estimate of contingent consideration fair value was due to the adjustment described above and a decrease in the projection of certain Parsam revenues for the measurement periods, partially offset by the passage of time which reduced the effect of discounting to present value.

The preliminary allocation of purchase price resulted in identified intangible assets of $7.8 and goodwill of $26.2. The goodwill arises because the total consideration for Parsam, which reflects its future earnings and cash flow potential, exceeds the fair value of the net assets acquired. The goodwill resulting from the acquisition was assigned to the Harland Financial Solutions segment. Of the goodwill recognized, $23.1 is expected to be deductible for income tax purposes. The Company financed the Parsam acquisition and related fees and expenses with Harland Clarke Holdings' cash on hand. Acquisition-related fees and expenses were not material.

The application of acquisition accounting decreased acquired deferred revenues by $1.6 to $0.4 due to a fair value adjustment. This non-cash fair value adjustment results in lower revenue being recognized over the related earnings period (of which $0.2 and $0.9 was reflected as a reduction of revenues for the three and nine months ended September 30, 2011, respectively).

The fair value of financial assets acquired was not significant and all receivables are expected to be collected. The pro forma effects for the Parsam acquisition on the consolidated results of operations were not material.

Acquisition of Spectrum K12

On July 21, 2010, Scantron acquired 100% of the equity of Spectrum K12 School Solutions, Inc. ("Spectrum K12"). Spectrum K12 develops, markets and sells student achievement management, response to intervention and special education software solutions. Spectrum K12's software solutions complement Scantron's software solutions for educational assessments, content and data management. The acquisition-date purchase price was $28.6 in cash, net of cash acquired and after giving effect to working capital adjustments. In addition, the Company recorded the fair value of contingent consideration of $4.0, as described below, which resulted in total estimated consideration of $32.7 as of the acquisition date. The transaction was accounted for as a business combination and Spectrum K12's results of operations have been included in the Company's operations since the date of its acquisition.

The allocation of purchase price resulted in identified intangible assets of $6.6 and goodwill of $25.2. During 2011, the Company recorded additional deferred tax assets of $1.4 in accordance with current accounting guidance with a corresponding decrease in goodwill. The goodwill arises because the total consideration for Spectrum K12, which reflects its future earnings and cash flow potential, exceeds the fair value of the net assets acquired. The goodwill resulting from the acquisition was assigned to the Scantron segment. Of the goodwill recognized, $1.5 is expected to be deductible for income tax purposes. The Company financed the Spectrum K12 acquisition and related fees and expenses with cash on hand. Acquisition-related fees and expenses were not material.

The contingent consideration arrangement provides for cash payments of up to an aggregate maximum of $20.0, which may be payable upon the achievement of certain future revenue targets of Spectrum K12 measured during the twelve-month periods ending June 30, 2011 and 2012. Certain of the contingent consideration payments may be payable under the terms of the acquisition to eligible employees who remain employed by Spectrum K12 during the twelve-month periods ending June 30, 2011 and 2012. These contingent consideration payments of up to an aggregate of $5.0 to eligible employees will be considered incentive compensation and will be recorded as compensation expense as earned. The acquisition-date fair value of the contingent consideration arrangement of $4.9, of which $0.9 is considered to be incentive compensation, was estimated utilizing a discounted cash flow analysis with significant inputs that are not observable in the market (Level 3 inputs). Key assumptions include a projection of Spectrum K12 revenues for the measurement periods. The application of fair value accounting for the contingent consideration arrangement requires recurring remeasurement for changes in key assumptions (see Note 13). As of September 30, 2011, the fair value of the contingent consideration arrangement was $0.0. The reduction in fair value from the acquisition date was the result of a decline in projected revenues during the measurement periods.

The application of acquisition accounting decreased acquired deferred revenues by $10.5 to $5.0 due to a fair value adjustment. This non-cash fair value adjustment results in lower revenue being recognized over the related earnings period (of which $0.5 and $2.1 was reflected as a reduction of revenues for the three and nine months ended September 30, 2011, respectively, and $0.9 was reflected as a reduction of revenues for the three months ended September 30, 2010).

The fair value of financial assets acquired was not significant and all receivables have been collected. The pro forma effects for the Spectrum K12 acquisition on the consolidated results of operations were not material.

Table of Contents

Harland Clarke Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(dollars in millions)

(unaudited)

4. Inventories

Inventories consist of the following:



	September 30, 2011		December 31, 2010
Finished goods	$	7.9	$	8.8
Work-in-process	8.2		8.7
Raw materials	13.6		14.1
	$	29.7	$	31.6

5. Assets Held For Sale

At September 30, 2011, assets held for sale consist of the following Harland Clarke segment facilities:



Location	Former Use	Year Closed
Atlanta, GA	Operations Support	2008
Atlanta, GA	Printing	2008
Atlanta, GA	Information Technology	2010

During 2010, the Company closed its information technology facility in Atlanta and relocated those operations into an existing facility. The other listed Atlanta facilities were closed as part of the Company's plan to exit duplicative facilities related to an acquisition. Subsequent to the classification of the Atlanta facilities as assets held for sale, there have been significant changes in the real estate market. During the second quarter of 2010, non-cash impairment charges of $0.6 were recorded to adjust the carrying values of the print facility and information technology facility to reflect an updated estimate of the fair values less costs to sell. The Company has made appropriate changes to its marketing plan and believes these facilities will be sold within twelve months. In January 2010, the Company sold its Syracuse facility, which was closed in 2009, for its carrying value of $1.1. In June 2010, the Company sold its Greensboro facility, which was closed in 2009, for $1.3 and realized a gain of $0.3, which is included in restructuring costs in the accompanying consolidated statements of income.

Assets held for sale are included in prepaid expenses and other current assets on the accompanying consolidated balance sheets and consist of the following:



	September 30, 2011		December 31, 2010
Land	$	1.5	$	1.5
Buildings and improvements	1.9		1.9
	$	3.4	$	3.4

6. Goodwill and Other Intangible Assets

The change in carrying amount of goodwill by business segment for the nine months ended September 30, 2011 is as follows:



	Harland Clarke		Harland Financial Solutions			Scantron			Total
Balance as of December 31, 2010	$	779.4	$	452.2		$	295.2		$	1,526.8
2010 acquisitions	—		(1.4		)	(1.4		)	(2.8		)
2011 acquisition	—					93.1			93.1
Effect of exchange rate changes	—		0.2			—			0.2
Balance as of September 30, 2011	$	779.4	$	451.0		$	386.9		$	1,617.3

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Harland Clarke Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(dollars in millions)

(unaudited)

Useful lives, gross carrying amounts and accumulated amortization for other intangible assets are as follows:



		Gross Carrying Amount				Accumulated Amortization
	Useful Life (in years)	September 30, 2011		December 31, 2010		September 30, 2011		December 31, 2010
Amortized intangible assets:
Customer relationships	3 - 20	$	1,313.8	$	1,242.5	$	423.0	$	349.5
Trademarks and tradenames	2 - 25	157.5		155.0		18.6		12.3
Software and other	2 - 10	93.4		71.9		46.5		37.4
Patents and patents pending	3 - 20	21.5		21.9		6.8		5.7
		1,586.2		1,491.3		494.9		404.9
Indefinite-lived intangible assets:
Tradename		11.0		11.0		—		—
Total other intangible assets		$	1,597.2	$	1,502.3	$	494.9	$	404.9

Amortization expense was $30.3 and $90.4 for the three and nine months ended September 30, 2011, respectively, and $27.3 and $81.6 for the three and nine months ended September 30, 2010, respectively.

The weighted average amortization period for all amortizable intangible assets recorded in connection with the GlobalScholar acquisition was 5.3 years. The weighted average amortization period for each major class of amortizable intangible assets recorded in connection with the GlobalScholar acquisition was as follows: customer relationships - 5.1 years, trademarks and tradenames - 5.0 years and software - 6.0 years.

Estimated aggregate amortization expense for intangible assets through December 31, 2015 is as follows:



Three months ending December 31, 2011	$	30.4
Year ending December 31, 2012	118.4
Year ending December 31, 2013	107.0
Year ending December 31, 2014	99.2
Year ending December 31, 2015	91.8

7. Business Segment Information

The Company has organized its business along three reportable segments together with a corporate group for certain support services. The Company's operations are aligned on the basis of products, services and industry. Management measures and evaluates the reportable segments based on operating income. The current segments and their principal activities consist of the following:


•	Harland Clarke segment — Provides checks and related products, direct marketing services and customized business and home products to financial, retail and software providers, as well as consumers and small businesses. This segment operates primarily in the United States and Puerto Rico.


•	Harland Financial Solutions segment — Provides technology products and services to financial services clients worldwide. This segment operates primarily in the United States, Israel, Ireland and India.


•	Scantron segment — Provides data management solutions and related services to educational, commercial, healthcare and governmental entities worldwide. This segment operates primarily in the United States, Canada and India.

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Harland Clarke Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(dollars in millions)

(unaudited)

Selected summarized financial information for the three months ended September 30, 2011 and 2010 is as follows:



	Harland Clarke		Harland Financial Solutions⁽¹⁾		Scantron⁽²⁾		Corporate and Other⁽³⁾			Total
Product revenues, net:
Three months ended September 30, 2011	$	277.9	$	17.9	$	30.4	$	—		$	326.2
Three months ended September 30, 2010	277.1		17.4		30.9		—			325.4
Service revenues, net:
Three months ended September 30, 2011	$	5.3	$	54.5	$	21.7	$	—		$	81.5
Three months ended September 30, 2010	12.8		53.5		19.8		—			86.1
Intersegment revenues:
Three months ended September 30, 2011	$	—	$	—	$	0.3	$	(0.3	)	$	—
Three months ended September 30, 2010	—		—		2.6		(2.6		)	—
Operating income (loss): ⁽⁴⁾
Three months ended September 30, 2011	$	65.8	$	13.2	$	12.1	$	(3.5	)	$	87.6
Three months ended September 30, 2010	51.0		13.8		7.9		(3.5		)	69.2
Depreciation and amortization (excluding amortization of deferred financing fees):
Three months ended September 30, 2011	$	22.9	$	6.8	$	11.3	$	—		$	41.0
Three months ended September 30, 2010	25.0		7.1		6.6		—			38.7
Capital expenditures (excluding capital leases):
Three months ended September 30, 2011	$	9.7	$	1.8	$	2.9	$	—		$	14.4
Three months ended September 30, 2010	5.7		1.6		1.3		—			8.6

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Harland Clarke Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(dollars in millions)

(unaudited)

Selected summarized financial information for the nine months ended September 30, 2011 and 2010 is as follows:



	Harland Clarke		Harland Financial Solutions⁽¹⁾		Scantron⁽²⁾			Corporate and Other⁽³⁾			Total
Product revenues, net:
Nine months ended September 30, 2011	$	831.4	$	56.1	$	87.8		$	—		$	975.3
Nine months ended September 30, 2010	877.6		51.2		87.0			—			1,015.8
Service revenues, net:
Nine months ended September 30, 2011	$	13.8	$	163.6	$	64.6		$	—		$	242.0
Nine months ended September 30, 2010	29.2		159.1		60.7			—			249.0
Intersegment revenues:
Nine months ended September 30, 2011	$	0.1	$	—	$	0.5		$	(0.6	)	$	—
Nine months ended September 30, 2010	0.1		—		5.8			(5.9		)	—
Operating income (loss): ⁽⁴⁾
Nine months ended September 30, 2011	$	185.4	$	45.4	$	(4.6	)	$	(11.8	)	$	214.4
Nine months ended September 30, 2010	182.9		36.6		19.0			(10.0		)	228.5
Depreciation and amortization (excluding amortization of deferred financing fees):
Nine months ended September 30, 2011	$	68.8	$	19.9	$	33.3		$	—		$	122.0
Nine months ended September 30, 2010	77.7		21.3		19.5			—			118.5
Capital expenditures (excluding capital leases):
Nine months ended September 30, 2011	$	24.7	$	5.1	$	9.6		$	—		$	39.4
Nine months ended September 30, 2010	15.5		3.9		3.8			—			23.2
Total assets:
September 30, 2011	$	942.2	$	295.1	$	356.4		$	1,833.8		$	3,427.5
December 31, 2010	987.8		342.0		311.6			1,694.7			3,336.1

_______________________


(1)	Includes results of the acquired Parsam business from the date of acquisition.


(2)	Includes results of the acquired Spectrum K12 and GlobalScholar businesses from their respective dates of acquisition.


(3)	Total assets include goodwill of $1,617.3 and $1,526.8 as of September 30, 2011 and December 31, 2010, respectively, which is not assigned to the operating segments.

(4)

Includes gain (loss) from revaluation of contingent consideration arrangements of $19.5 and $(0.3) for the three months ended September 30, 2011 and 2010, respectively, and $24.6 and $(0.2) for the nine months ended September 30, 2011 and 2010, respectively; restructuring costs of $2.3 and $5.0 for the three months ended September 30, 2011 and 2010, respectively, and $8.3 and $15.2 for the nine months ended September 30, 2011 and 2010, respectively, (see Note 16); and non-cash impairment charges of $0.1 and $1.9 for the three months ended September 30, 2011 and 2010, respectively, and $2.4 and $2.5 for the nine months ended September 30, 2011 and 2010, respectively.

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Harland Clarke Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(dollars in millions)

(unaudited)

8. Comprehensive Income

Total comprehensive income for the three and nine months ended September 30, 2011 and 2010 is as follows:



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Net income	$	46.6		$	27.6		$	103.1		$	87.8
Other comprehensive (loss) income:
Foreign currency translation adjustments	(1.4		)	0.7			(0.2		)	(0.4		)
Derivative fair-value adjustments, net of taxes of $0.8, $2.3, $1.8 and $3.2	1.4			(3.6		)	2.9			(5.0		)
Unrealized gains on investments, net of taxes of $0.0, $0.7, $0.2 and $0.8	—			1.2			0.3			1.3
Reclassification of gains on investments included in net income, net of taxes of $0.0, $0.0, $5.1 and $0.0	—			—			(8.1		)	—
Change in unrecognized amounts included in pension and postretirement obligations, net of taxes of $0.0, $2.7, $0.1 and $2.7	(0.1		)	4.3			(0.2		)	4.3
Comprehensive income	$	46.5		$	30.2		$	97.8		$	88.0

9. Postretirement Defined Benefit Plans

The Company sponsors two unfunded postretirement defined benefit plans that cover certain former salaried and non-salaried employees. One plan provides healthcare benefits and the other provides life insurance benefits. The medical plan is contributory and contributions are adjusted annually based on actual claims experience. For retirees who retired prior to December 31, 2002 with twenty or more years of service at December 31, 2000, the Company contributes a portion of the cost of the medical plan. For all other retirees, the Company's intent is that the retirees provide the majority of the actual cost of the medical plan. The life insurance plan is noncontributory for those employees that retired by December 31, 2002.

The components of net periodic postretirement benefit cost for these plans consist of the following:



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2011			2010		2011			2010
Interest cost	$	0.1		$	0.3	$	0.4		$	0.8
Amortization of prior service credits	(0.1		)	—		(0.3		)	—
Net postretirement benefit cost	$	—		$	0.3	$	0.1		$	0.8

10. Income Taxes

The Company is subject to taxation in the United States and various state and foreign jurisdictions. The statute of limitations for the Company's federal and state tax returns for the tax years 2008 through 2010 generally remain open. In addition, open tax years related to foreign jurisdictions remain subject to examination but are not considered material.

There are no events that have occurred since December 31, 2010 that had a material impact on amounts accrued for the Company's uncertain tax positions.

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Harland Clarke Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(dollars in millions)

(unaudited)

11. Long-Term Debt



	September 30, 2011			December 31, 2010
$1,900.0 Senior Secured Credit Facilities	$	1,723.5		$	1,737.0
Senior Floating Rate Notes due 2015	206.8			206.8
9.50% Senior Fixed Rate Notes due 2015	271.3			271.3
Capital lease obligations and other indebtedness	3.5			4.6
	2,205.1			2,219.7
Less: current maturities	(19.1		)	(19.4		)
Long-term debt, net of current maturities	$	2,186.0		$	2,200.3

$1,900.0 Senior Secured Credit Facilities

On April 4, 2007, the Company and substantially all of its subsidiaries as co-borrowers entered into a credit agreement (the "Credit Agreement"). The Credit Agreement provides for a $1,800.0 senior secured term loan (the "Term Loan"), which was fully drawn at closing on May 1, 2007 and matures on June 30, 2014. The Company is required to repay the Term Loan in equal quarterly installments in aggregate annual amounts equal to 1% of the original principal amount. In addition, the Credit Agreement requires that a portion of the Company's excess cash flow be applied to prepay amounts borrowed, as further described below. The Credit Agreement also provides for a $100.0 revolving credit facility (the "Revolver") that matures on June 28, 2013. The Revolver includes an up to $60.0 subfacility in the form of letters of credit and an up to $30.0 subfacility in the form of short-term swing line loans. The weighted average interest rate on borrowings outstanding under the Term Loan was 2.8% at September 30, 2011. As of September 30, 2011, there were no outstanding borrowings under the Revolver and there was $92.0 available for borrowing (giving effect to the issuance of $8.0 of letters of credit).

Under certain circumstances, the Company is permitted to incur additional term loan and/or revolving credit facility indebtedness in an aggregate principal amount of up to $250.0. In addition, the terms of the Credit Agreement and the 2015 Senior Notes (as defined below) allow the Company to incur substantial additional debt.

Loans under the Credit Agreement bear, at the Company's option, interest at:


•	A rate per annum equal to the higher of (a) the prime rate of Credit Suisse and (b) the Federal Funds rate plus 0.50%, in each case plus an applicable margin of 1.50% per annum for revolving loans and for term loans; or


•	A rate per annum equal to a reserve-adjusted LIBOR rate, plus an applicable margin of 2.50% per annum for revolving loans and for term loans.

The Credit Agreement has a commitment fee of 0.50% for the unused portion of the Revolver and a weighted average commitment fee of 2.52% for issued letters of credit. Interest rate margins and commitment fees under the Revolver are subject to reduction in increments based upon the Company achieving certain consolidated leverage ratios.

The Company and each of its existing and future domestic subsidiaries, other than unrestricted subsidiaries and certain immaterial subsidiaries, are guarantors and may also be co-borrowers under the Credit Agreement. In addition, the Company's direct parent, CA Acquisition Holdings, Inc., is a guarantor under the Credit Agreement. The senior secured credit facilities are secured by a perfected first priority security interest in substantially all of the Company's, each of the co-borrowers' and the guarantors' tangible and intangible assets and equity interests (other than voting stock in excess of 65.0% of the outstanding voting stock of each direct foreign subsidiary and certain other excluded property).

The Credit Agreement contains customary affirmative and negative covenants including, among other things, restrictions on indebtedness, liens, mergers and consolidations, sales of assets, loans, acquisitions, restricted payments, transactions with affiliates, dividends and other payment restrictions affecting subsidiaries and sale-leaseback transactions. The Credit Agreement requires the Company to maintain a maximum consolidated leverage ratio for the benefit of lenders under the Revolver only. The Company has the right to prepay the Term Loan at any time without premium or penalty, subject to certain breakage costs, and the Company may also reduce any unutilized portion of the Revolver at any time, in minimum principal amounts set forth in the Credit Agreement. The Company is required to prepay the Term Loan with 50% of excess cash flow (as defined in the Credit Agreement, with certain reductions set forth in the Credit Agreement, based on achievement and maintenance of leverage ratios) and 100% of the net proceeds of certain issuances, offerings or placements of debt obligations of the Company or any of its subsidiaries (other than permitted debt). Each such prepayment will be applied first to the next eight unpaid

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Harland Clarke Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(dollars in millions)

(unaudited)

quarterly amortization installments on the term loans and second to the remaining amortization installments on the term loans on a pro rata basis. An excess cash flow payment of $3.5 was paid in March 2011 with respect to 2010 and under the terms of the Credit Agreement was applied against other mandatory payments due in 2011. No such excess cash flow payment was required to be paid in 2010 with respect to 2009.

The Credit Agreement also contains certain customary affirmative covenants and events of default. Such events of default include, but are not limited to: non-payment of amounts when due; violation of covenants; material inaccuracy of representations and warranties; cross default and cross acceleration with respect to other material debt; bankruptcy and other insolvency events; certain ERISA events; invalidity of guarantees or security documents; and material judgments. Some of these events of default allow for grace periods.

If a change of control (as defined in the Credit Agreement) occurs, the Company will be required to make an offer to prepay all outstanding term loans under the Credit Agreement at 101% of the outstanding principal amount thereof plus accrued and unpaid interest, and lenders holding a majority of the revolving credit commitments may elect to terminate the revolving credit commitments in full. The Company is also required to offer to prepay outstanding term loans at 100% of the principal amount to be prepaid, plus accrued and unpaid interest, with the proceeds of certain asset sales under certain circumstances.

Senior Notes due 2015

On May 1, 2007, the Company issued $305.0 aggregate principal amount of Senior Floating Rate Notes due 2015 (the "Floating Rate Notes") and $310.0 aggregate principal amount of 9.50% Senior Fixed Rate Notes due 2015 (the "Fixed Rate Notes" and, together with the Floating Rate Notes, the "2015 Senior Notes"). The 2015 Senior Notes mature on May 15, 2015. The Fixed Rate Notes bear interest at a rate per annum of 9.50%, payable on May 15 and November 15 of each year. The Floating Rate Notes bear interest at a rate per annum equal to the Applicable LIBOR Rate (as defined in the indenture governing the 2015 Senior Notes (the "Indenture")), subject to a floor of 1.25%, plus 4.75%, payable on February 15, May 15, August 15 and November 15 of each year. The interest rate on the Floating Rate Notes was 6.0% at September 30, 2011. The Senior Notes are unsecured and are therefore effectively subordinated to all of the Company's senior secured indebtedness, including outstanding borrowings under the Credit Agreement. The Company and each of its existing subsidiaries, other than unrestricted subsidiaries and certain immaterial subsidiaries, are guarantors and may also be co-issuers under the 2015 Senior Notes.

The Indenture contains customary restrictive covenants, including, among other things, restrictions on the Company's ability to incur additional debt, pay dividends and make distributions, make certain investments, repurchase stock, incur liens, enter into transactions with affiliates, enter into sale and lease back transactions, merge or consolidate and transfer or sell assets. The Company must offer to repurchase all of the 2015 Senior Notes upon the occurrence of a "change of control," as defined in the Indenture, at a purchase price equal to 101% of their aggregate principal amount, plus accrued and unpaid interest. The Company must also offer to repurchase the 2015 Senior Notes with the proceeds from certain sales of assets, if it does not apply those proceeds within a specified time period after the sale, at a purchase price equal to 100% of their aggregate principal amount, plus accrued and unpaid interest.

Capital Lease Obligations and Other Indebtedness

The Company has outstanding capital lease obligations and other indebtedness with principal balances totaling $3.5 and $4.6 at September 30, 2011 and December 31, 2010, respectively. These obligations have imputed interest rates ranging from 0.0% to 9.6% and have required payments, including interest, of $0.3 remaining in 2011, $1.4 in 2012, $1.3 in 2013, $1.0 in 2014 and $0.1 in 2015.

12. Derivative Financial Instruments

Interest Rate Hedges

The Company uses hedge transactions, which are accounted for as cash flow hedges, to limit the Company's risk on a portion of its variable-rate debt.

During June 2007, the Company entered into an interest rate derivative transaction in the form of a three-year interest rate swap with a notional amount of $255.0, which became effective on June 29, 2007. This hedge, which expired on June 30, 2010, swapped the underlying variable rate for a fixed rate of 5.362%.

During June 2009, the Company entered into an interest rate derivative transaction in the form of a three-year interest rate swap with a notional amount of $350.0, which became effective on June 30, 2009. This hedge swaps the underlying variable rate for a fixed rate of 2.353%. During September 2009, the Company entered into an additional interest rate derivative transaction in the form of a three-year interest rate swap with a notional amount of $250.0, which became effective on

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Harland Clarke Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(dollars in millions)

(unaudited)

September 30, 2009. This hedge swaps the underlying variable rate for a fixed rate of 2.140%.

During June 2010, the Company entered into an interest rate derivative transaction in the form of a three-year interest rate swap with a notional amount of $255.0, which became effective on June 30, 2010. This hedge swaps the underlying variable rate for a fixed rate of 1.264%.

The following presents the fair values of these derivative instruments and the classification in the consolidated balance sheets.



Derivatives Designated as Cash Flow Hedging Instruments:	Balance Sheet Classification	September 30, 2011		December 31, 2010
Interest rate swaps	Other current liabilities	$	9.0	$	—
	Other liabilities	4.1		17.8

Fair value of interest rate swaps is based on forward-looking interest rate curves as provided by the counterparty, adjusted for the Company's credit risk.

These derivative instruments had no ineffective portions during the three and nine months ended September 30, 2011 and 2010. Accordingly, no amounts were required to be reclassified from accumulated other comprehensive loss to the consolidated statements of income due to ineffectiveness. The following presents the effect of these derivative instruments (effective portion) on other comprehensive income and amounts reclassified from accumulated other comprehensive loss into interest expense.



	Loss Recognized in Other Comprehensive Income								Loss Reclassified from Accumulated Other Comprehensive Loss into Interest Expense
	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
Derivatives Designated as Cash Flow Hedging Instruments:	2011		2010		2011		2010		2011		2010		2011		2010
Interest rate swaps	$	1.6	$	9.3	$	6.5	$	24.1	$	3.9	$	3.5	$	11.2	$	16.0

The Company expects to reclassify approximately $12.8 into net income as additional interest expense during the twelve months ending September 30, 2012.

The following presents the balances and net changes in the accumulated other comprehensive loss related to these derivative instruments, net of income taxes.



	Nine Months Ended
	September 30,
Balances and Net Changes:	2011			2010
Balance at beginning of period	$	10.9		$	8.6
Loss reclassified from accumulated other comprehensive loss into interest expense, net of taxes of $4.4 and $6.3	(6.8		)	(9.7		)
Net change in fair value of interest rate swaps, net of taxes of $2.6 and $9.4	3.9			14.7
Balance at end of period	$	8.0		$	13.6

See Note 8 for additional information regarding the effect of these derivative instruments on other comprehensive income.

13. Fair Value Measurements

Nonrecurring Fair Value Measurements

During the nine months ended September 30, 2011, the Company recorded non-cash impairment charges of $1.9 for the Scantron segment and $0.5 for the Harland Clarke segment primarily related to assets that were determined to have limited future use. During the nine months ended September 30, 2010, the Company recorded non-cash impairment charges of $2.5 for the Harland Clarke segment primarily related to the abandonment of a development project and to adjust the carrying value of certain held for sale facilities to reflect an updated estimate for the fair values less costs to sell.

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Harland Clarke Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(dollars in millions)

(unaudited)

Recurring Fair Value Measurements

Fair values of financial instruments subject to recurring fair value measurements as of September 30, 2011 and December 31, 2010 are as follows:



	Balance at
	September 30, 2011		(Level 1)		(Level 2)		(Level 3)
Corporate equity securities	$	0.2	$	0.2	$	—	$	—
Liability for interest rate swaps	13.1		—		13.1		—
Liability for contingent consideration related to business combinations	0.3		—		—		0.3



	Balance at
	December 31, 2010		(Level 1)		(Level 2)		(Level 3)
Corporate equity securities	$	13.1	$	13.1	$	—	$	—
Liability for interest rate swaps	17.8		—		17.8		—
Liability for contingent consideration related to business combinations	8.2		—		—		8.2

Fair value of interest rate swaps is based on forward-looking interest rate curves as provided by the counterparty, adjusted for the Company's credit risk. Fair value of corporate equity securities are based on quoted market prices. Fair value of the liability for contingent consideration related to business combinations is estimated utilizing a discounted cash flow analysis and considers, among other things, estimates of future revenues and the timing of expected future contingent consideration payments. The liability for contingent consideration that is considered to be incentive compensation is recorded as compensation expense as earned.

The following table presents the Company's liability for contingent consideration related to business combinations measured at fair value on a recurring basis using significant unobservable inputs (Level 3):



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2011			2010		2011			2010
Balance at beginning of period	$	19.8		$	1.7	$	8.2		$	1.8
Businesses acquired	—			4.0		17.0			4.0
Net changes in fair value	(19.5		)	0.3		(24.6		)	0.2
Payment of contingent consideration	—			—		(0.3		)	—
Balance at end of period	$	0.3		$	6.0	$	0.3		$	6.0

Fair Value of Financial Instruments

Most of the Company's clients are in the financial services and educational industries. The Company performs ongoing credit evaluations of its clients and maintains allowances for potential credit losses. The Company does not generally require collateral. Actual losses and allowances have been within management's expectations.

The carrying amounts for cash and cash equivalents, trade accounts receivable, accounts payable and accrued liabilities approximate fair value. The estimated fair value of long-term debt is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar issues as of the measurement date. The estimated fair value of long-term debt at September 30, 2011 and December 31, 2010 was approximately $1,799.2 and $2,009.2, respectively. The carrying value of long-term debt at September 30, 2011 and December 31, 2010 was $2,205.1 and $2,219.7, respectively.

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Harland Clarke Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(dollars in millions)

(unaudited)

14. Marketable Securities

The Company's marketable securities are classified as available-for-sale and are reported at their fair values, which are as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Balance at September 30, 2011:
Corporate equity securities	$	0.2	$	0.1	$	(0.1	)	$	0.2
Balance at December 31, 2010:
Corporate equity securities	$	0.3	$	12.9	$	(0.1	)	$	13.1

During the nine months ended September 30, 2011, the Company sold certain corporate equity securities for $13.4 in cash and recognized a gain of $13.2, which is included in other income, net in the accompanying consolidated statements of income.

The following presents the gross unrealized losses and fair values of the Company's investments in individual securities that have been in a continuous unrealized position deemed to be temporary for less than 12 months and for more than 12 months, aggregated by category:



	Less Than 12 Months				More Than 12 Months
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
At September 30, 2011:
Corporate equity securities	$	—	$	—	$	—	$	0.1
At December 31, 2010:
Corporate equity securities	$	—	$	—	$	0.1	$	0.1

The Company has determined that the gross unrealized losses on its corporate equity securities at September 30, 2011 are temporary in nature. Accordingly, the Company does not consider such investments to be other-than-temporarily impaired at September 30, 2011.

15. Commitments and Contingencies

Honeywell Indemnification

Certain of the intermediate holding companies of the predecessor of the Company had issued guarantees on behalf of operating companies formerly owned by these intermediate holding companies, which operating companies are not part of the Company's businesses. In the stock purchase agreement executed in connection with M & F Worldwide's acquisition of the Company in 2005, Honeywell agreed to use its commercially reasonable efforts to assume, replace or terminate such guarantees and indemnify M & F Worldwide and its affiliates, including the Company and its subsidiaries, with respect to all liabilities arising under such guarantees. Honeywell has been fulfilling its obligation to indemnify M & F Worldwide and its affiliates with regard to the guarantees and certain tax matters. The Company believes it is remote that it will incur any material liability related to the guarantees and tax matters.

Other

A series of commercial borrowers in various states that allegedly obtained loans from banks employing HFS's LaserPro software have commenced individual or class actions against their banks alleging that the loans were deceptive or usurious in that they failed to disclose properly the effect of the "365/360" method of calculating interest. In some cases, the banks have made warranty claims against HFS related to these actions. Some of these actions have already been dismissed, and many of the remainder, and the related warranty claims, are at early stages, so that the likely progress of the matters still pending is not yet clear. HFS settled one warranty claim in 2009 for an immaterial amount without any admission of liability. The Company has not accepted any of the remaining warranty claims and believes it is remote that any of the remaining warranty claims will result in a material liability for the Company.

Various other legal proceedings, claims and investigations are pending against the Company, including those relating to commercial transactions, environmental matters, employment matters and other matters. Certain of these matters are covered by insurance, subject to deductibles and maximum limits. In the opinion of management, based upon the information available at this time, the outcome of the matters referred to above will not have a material adverse effect on the Company's financial position or results of operations.

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Harland Clarke Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(dollars in millions)

(unaudited)

16. Restructuring

Harland Clarke and Corporate

The Company adopted plans during 2011 and 2010 to realize additional cost savings in the Harland Clarke segment by further consolidating printing plants, contact centers and selling, general and administrative functions.

The following table details the components of the Company's restructuring accruals under its plans related to the Harland Clarke segment and Corporate for the nine months ended September 30, 2011 and 2010:



	Beginning Balance		Expensed		Paid in Cash			Non-Cash Utilization			Ending Balance
Nine months ended September 30, 2011:
Severance and severance-related	$	1.5	$	2.0	$	(2.9	)	$	—		$	0.6
Facilities closures and other costs	4.5		1.7		(2.4		)	(0.2		)	3.6
Total	$	6.0	$	3.7	$	(5.3	)	$	(0.2	)	$	4.2
Nine months ended September 30, 2010:
Severance and severance-related	$	2.5	$	4.7	$	(4.1	)	$	—		$	3.1
Facilities closures and other costs	2.5		2.8		(1.5		)	(2.0		)	1.8
Total	$	5.0	$	7.5	$	(5.6	)	$	(2.0	)	$	4.9

The non-cash utilization of $0.2 and $2.0 in 2011 and 2010, respectively, in the table above includes adjustments to the carrying value of other property, plant and equipment. The Company expects to incur in future periods an additional $1.0 for costs related to these plans. Ongoing lease commitments related to these plans continue through 2017.

Harland Financial Solutions

During 2009, the Company initiated a multi-year plan to reorganize certain operations and sales and support functions within the Harland Financial Solutions segment. The plan, which is expected to be completed by the end of 2011, focuses on moving from a product-centric organization to a functional organization in order to enhance customer support.

The following table details the Company's restructuring accruals related to the Harland Financial Solutions segment for the nine months ended September 30, 2011 and 2010:



	Beginning Balance		Expensed		Paid in Cash			Ending Balance
Nine months ended September 30, 2011:
Severance and severance-related	$	0.1	$	0.2	$	(0.3	)	$	—
Facilities and other costs	2.2		0.1		(0.6		)	1.7
Total	$	2.3	$	0.3	$	(0.9	)	$	1.7
Nine months ended September 30, 2010:
Severance and severance-related	$	1.0	$	0.5	$	(1.2	)	$	0.3
Facilities and other costs	0.1		0.1		(0.1		)	0.1
Total	$	1.1	$	0.6	$	(1.3	)	$	0.4

The Company currently does not expect to incur significant additional costs related to these plans.

Scantron

The Company adopted plans during 2011 and 2010 to realize additional cost savings in the Scantron segment by consolidating certain operations and eliminating certain selling, general and administrative expenses.

The following table details the components of the Company's restructuring accruals related to the Scantron segment for the nine months ended September 30, 2011 and 2010:

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Notes to Consolidated Financial Statements (Continued)

(dollars in millions)

(unaudited)



	Beginning Balance		Expensed			Paid in Cash			Non-Cash Utilization		Ending Balance
Nine months ended September 30, 2011:
Severance and severance-related	$	0.1	$	5.1		$	(2.8	)	$	—	$	2.4
Facilities and other costs	3.7		(0.8		)	(1.3		)	0.1		1.7
Total	$	3.8	$	4.3		$	(4.1	)	$	0.1	$	4.1
Nine months ended September 30, 2010:
Severance and severance-related	$	0.5	$	2.5		$	(2.6	)	$	—	$	0.4
Facilities and other costs	—		4.6			(0.7		)	0.2		4.1
Total	$	0.5	$	7.1		$	(3.3	)	$	0.2	$	4.5

Ongoing lease commitments related to these plans continue to 2013.

Restructuring accruals for all of the segments’ plans are reflected in other current liabilities and other liabilities in the accompanying consolidated balance sheets. The Company expects to pay the remaining severance, facilities and other costs related to the segments’ restructuring plans through 2017.

17. Transactions with Related Parties

Notes Receivable

In 2008, Harland Clarke Holdings acquired the senior secured credit facility and outstanding note of Delphax Technologies, Inc. ("Delphax"), the supplier of Imaggia printing machines and related supplies and service for the Harland Clarke segment. The senior secured credit facility is comprised of a revolving credit facility of up to $14.0, subject to borrowing limitations set forth therein that originally matured in September 2011. The senior secured credit facility is collateralized by a perfected security interest in substantially all of Delphax's assets. The revolving facility has a borrowing base calculated based on Delphax's eligible accounts receivable and inventory. The senior secured credit facility has an interest rate equal to the sum of Wells Fargo N. A. prime rate plus 2.5%, with accrued interest payable quarterly. The note had an original principal amount of $7.0, matures in September 2012 and originally bore interest at an annual rate of 12%, payable quarterly either in cash or in a combination of cash and up to 25% Delphax stock. Contemporaneous with its acquisition of the senior secured credit facility and the note, Harland Clarke Holdings also acquired 250,000 shares of Delphax common stock from the previous holder of the Delphax note. In January 2010, the note was restated to reduce the interest rate to 9%, payable solely in cash, effective October 1, 2009, and to require the repayment of $3.0 of principal in 2010. In May 2011, the note was restated to reduce the interest rate to 8.0%, effective October 1, 2010, and to require the repayment of $1.0 of principal in 2011 and the senior secured credit facility was extended to mature in September 2012.

During the nine months ended September 30, 2011, the Company received $1.0 in payments on the note, bringing the principal balance of the note and the senior secured credit facility to $3.0 and $0.0, respectively, at September 30, 2011. The outstanding balance on the note is included in other current assets and other assets in the accompanying consolidated balance sheets. Interest income of $0.1 and $0.2 was recorded during the three and nine months and ended September 30, 2011, respectively. Interest income of $0.1 and $0.3 was recorded during the three and nine months and ended September 30, 2010, respectively.

Other

The Company expensed $0.6 and $2.0 during the three and nine months ended September 30, 2011, respectively, and $0.6 and $2.0 during the three and nine months ended September 30, 2010, respectively, for services provided to the Company by M & F Worldwide. This amount is reflected in selling, general and administrative expenses.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion regarding our financial condition and results of operations for the three and nine months ended September 30, 2011 and 2010 should be read in conjunction with the more detailed financial information contained in our consolidated financial statements and their notes included elsewhere in this Quarterly Report on Form 10-Q.

Overview of Business

Harland Clarke Holdings Corp. ("Harland Clarke Holdings" and, together with its subsidiaries, the "Company") is a holding company that conducts its operations through its direct and indirect wholly owned subsidiaries and was incorporated in Delaware on October 19, 2005. On December 15, 2005, CA Investment Corp., an indirect wholly owned operating subsidiary of M & F Worldwide Corp. ("M & F Worldwide"), purchased 100% of the capital stock of Novar USA Inc. ("Novar"). Novar was renamed Clarke American Corp., which was the successor by merger to Novar, which indirectly wholly owned the operating subsidiaries of the Clarke American Corp. business. On May 1, 2007, the Company completed the acquisition of John H. Harland Company ("Harland") and changed its name on May 2, 2007 from Clarke American Corp. to Harland Clarke Holdings. The Company's businesses are organized along three business segments together with a corporate group for certain support services.

The GlobalScholar Acquisition

On January 3, 2011, Scantron Corporation ("Scantron"), a wholly owned subsidiary of the Company, purchased all of the outstanding capital stock or membership interests of KUE Digital Inc., KUED Sub I LLC and KUED Sub II LLC (collectively referred to as "GlobalScholar"). GlobalScholar's instructional management platform supports all aspects of managing education at K-12 schools, including student information systems; performance-based scheduler; gradebook; learning management system; longitudinal data collection, analysis and reporting; teacher development and performance tracking; and online communication and tutoring portals. GlobalScholar's instructional management platform complements Scantron's testing and assessment, response to intervention, student achievement management and special education software solutions thereby expanding Scantron's web-based education solutions. The acquisition-date purchase price was $134.9 million in cash, net of cash acquired and after giving effect to working capital adjustments. In addition, the Company recorded the fair value of contingent consideration of $18.5 million, which resulted in total estimated consideration of $153.4 million as of the acquisition date. Contingent consideration would be payable in 2012 upon achievement of certain revenue targets of GlobalScholar during calendar year 2011 (see Note 3 to the Company's consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q). The Company financed the acquisition and related fees and expenses with cash on hand.

The Parsam Acquisition

On December 6, 2010, Harland Financial Solutions, Inc. ("HFS"), a wholly owned subsidiary of the Company, acquired all of the outstanding membership interests of Parsam Technologies, LLC and the equity of SRC Software Private Limited (collectively referred to as "Parsam"). Parsam's solutions allow financial institutions to provide services online, in branches and at call centers, from new account opening and funding to account-to-account money transfers, person-to-person payments, account and adviser-client relationship management and bill presentment and payment. HFS is integrating Parsam's solutions into its existing solution offerings. The acquisition-date purchase price was $32.8 million in cash, net of cash acquired and after giving effect to working capital adjustments. In addition, the Company recorded the fair value of contingent consideration of $1.2 million, which resulted in total estimated consideration of $34.0 million as of the acquisition date. Contingent consideration would be payable upon achievement of certain revenue targets of Parsam during calendar years 2011 and 2012 with a maximum contingent consideration of $25.0 million if the revenue targets are met (see Note 3 to the Company's consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q). The Company financed the

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acquisition and related fees and expenses with cash on hand.

The Spectrum K12 Acquisition

On July 21, 2010, Scantron acquired Spectrum K12 School Solutions, Inc. ("Spectrum K12"). Spectrum K12 develops, markets and sells student achievement management, response to intervention and special education software solutions. Spectrum K12's software solutions complement Scantron's software solutions for education assessments, content and data management. The acquisition-date purchase price was $28.6 million in cash, net of cash acquired and after giving effect to working capital adjustments. In addition, the Company recorded the fair value of contingent consideration of $4.0 million, which resulted in total estimated consideration of $32.7 million as of the acquisition date. Contingent consideration would be payable upon achievement of certain revenue targets of Spectrum K12 during the twelve-month periods ending June 30, 2011 and 2012 with a maximum aggregate contingent consideration of $20.0 million if the revenue targets are met (see Note 3 to the Company's consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q). The Company financed the acquisition and related fees and expenses with cash on hand.

Economic and Other Factors Affecting the Businesses of the Company

Harland Clarke

While total non-cash payments - including checks, credit cards, debit cards and other electronic forms of payment - are growing, the number of checks written has declined and is expected to continue to decline. Harland Clarke believes the number of checks printed is driven by the number of checks written, the number of new checking accounts opened and reorders reflecting changes in consumers' personal situations, such as name or address changes. In recent years, Harland Clarke has experienced check unit declines at a higher rate than in the past, as evidenced by recent period-over-period declines in Harland Clarke revenue which are discussed in more detail elsewhere in this report. Harland Clarke is unable to determine at this time whether these higher rates of decline are attributable to recent economic and financial market difficulties, the depth and length of the economic downturn, higher unemployment, decreased openings of checking accounts, changing business strategies of our financial institution clients, decreased consumer spending and/or a further acceleration in the use of alternative non-cash payments. Harland Clarke expects that check unit volume will continue to decline at rates that are higher than it had previously experienced in recent years, resulting in a corresponding decrease in check revenues and depending on the nature and relative magnitude of the causes for the decreases, such decreases may not be mitigated when overall economic conditions improve. Harland Clarke is focused on growing its non-check related products and services, including marketing services, and optimizing its existing catalog of offerings to better serve its clients, as well as managing its costs, overhead and facilities to reflect the decline in check unit volumes. Harland Clarke does not believe that revenues from non-check related products and services will fully offset revenue declines from declining check unit volumes. In the future, Harland Clarke may not be able to mitigate the revenue declines from declining check unit volumes through cost management, which could negatively affect Harland Clarke's margins.

Harland Clarke's primary competition comes from alternative payment methods such as debit cards, credit cards, ACH, and other electronic and online payment options. Harland Clarke also competes with large providers that offer a wide variety of products and services including Deluxe Corporation, Harte-Hanks, Inc., and R.R. Donnelley & Sons Company. There are also many other competitors that specialize in providing one or more of the products and services Harland Clarke offers to its clients. Harland Clarke competes on the basis of service, convenience, quality, product range and price.

The Harland Clarke segment's operating results are also affected by consumer confidence and employment. Consumer confidence directly correlates with consumer spending, while employment also affects revenues through the number of new checking accounts being opened. The Harland Clarke segment's operating results may be negatively affected by slow or negative growth of, or downturns in, the United States economy. Business confidence affects a portion of the Harland Clarke segment. In addition, if Harland Clarke's financial institution customers fail or merge with other financial institutions, Harland Clarke may lose any or all revenue from such financial institutions and/or experience further pricing pressure, which would negatively affect Harland Clarke's operating results.

Harland Financial Solutions

Harland Financial Solutions' operating results are affected by the overall demand for our products, software and related services, which is based upon the technology budgets of our clients and prospects. Economic downturns in one or more of the countries in which we do business and enhanced regulatory burdens, including through increased fees and assessments charged to financial institutions by the Federal Deposit Insurance Corporation and National Credit Union Association or due to recently enacted federal legislation for additional taxes on certain financial institutions, could result in reductions in the information technology budgets for some portion of our clients and potentially longer lead-times for acquiring Harland Financial Solutions products and services. In addition, if Harland Financial Solutions' financial institution customers fail or merge with other financial institutions, Harland Financial Solutions may lose any or all revenue from such financial institutions and/or experience further pricing pressure, which would negatively affect Harland Financial Solutions' operating results.

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Harland Financial Solutions' business is affected by technological change, evolving industry standards, regulatory changes in client requirements and frequent new product introductions and enhancements. The business of providing technological solutions to financial institutions and other enterprises requires that we continually improve our existing products and create new products while at the same time controlling our costs to remain price competitive.

Providing technological solutions to financial institutions is highly competitive and fragmented. Harland Financial Solutions competes with several large and diversified financial technology providers, including, among others, Fidelity National Information Services, Inc., Fiserv, Inc., Jack Henry & Associates, Inc., Open Solutions Inc., Computer Services Inc. and many regional providers. Many multi-national and international providers of technological solutions to financial institutions also compete with Harland Financial Solutions both domestically and internationally, including Temenos Group AG, Misys plc, Infosys Technologies Limited, Tata Consultancy and Oracle Financial Services. There are also many other competitors that offer one or more specialized products or services that compete with products and services offered by Harland Financial Solutions. Management believes that competitive factors influencing buying decisions include product features and functionality, client support, price and vendor financial stability.

Scantron

While the number of tests given annually in K-12 and higher education continues to grow, the demand for optical mark reader paper-based testing has declined and is expected to continue to decline. Changes in educational funding can affect the rate at which schools adopt new technology thus slowing the decline for paper-based testing but also slowing the demand for Scantron's on-line testing products. Educational funding changes may also reduce the rate of consumption of Scantron's forms and purchase of additional hardware to process these forms. Scantron's education-based customers may turn to lower cost solutions for paper-based forms and hardware in furtherance of addressing their budget needs. A weak economy in the United States may negatively affect education budgets and spending, which would have an adverse effect on Scantron's operating results. Data collection is also experiencing a conversion to non-paper based methods of collection. Scantron believes this trend will also continue as the availability of these alternative technologies becomes more widespread. While Scantron's non-paper data collection business could benefit from this trend, Scantron's paper-based data collection business could be negatively affected by this trend. Changes in the overall economy can affect the demand for data collection to the extent that Scantron's customers adjust their research or testing expenditures.

Scantron enters into contracts with customers that provide for multiple products and services or "elements," such as software, installation, configuration, training and maintenance (referred to as "multiple-element contracts"). In order to recognize revenue for each element of the contract separately as earned, the relevant accounting guidance requires that the Company have "vendor-specific objective evidence", or "VSOE", of fair value of each element. VSOE of fair value of each element is typically based on the price charged when sold separately. The Company does not yet have sufficient history with GlobalScholar and Spectrum K12 sales to establish VSOE for elements within their contracts. As a result, for such contracts, the entire contract is bundled as a single unit for accounting purposes with revenue being recognized ratably over the initial term of the contract commencing with the delivery of the software or the completion of implementation services if such services are essential to the functionality of the software. This methodology results in substantial deferral of revenue into future periods, while the related costs, with the exception of direct implementation costs, are expensed as incurred rather than deferred. In addition, revenue from contracts that are subject to substantive customer acceptance provisions is deferred until the acceptance provisions have been met. As a result of these factors that cause deferral of significant revenue into future periods for amounts that are billed and collected, the Company expects to record operating losses for the acquired GlobalScholar and Spectrum K12 operations in 2011.

See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in the Company's Annual Report on Form 10-K for the year ended December 31, 2010 for additional information regarding revenue recognition policies.

Restructuring

The Company has taken restructuring actions in the past in an effort to achieve manufacturing and contact center efficiencies and other cost savings. Past restructuring actions have related to both acquisitions and ongoing cost reduction initiatives and have included manufacturing plant closures, contact center closures and workforce rationalization. The Company anticipates future restructuring actions, where appropriate, to realize process efficiencies, to continue to align its cost structure with business needs and remain competitive in the marketplace. The Company expects to incur severance and severance-related costs, facilities closures costs and other costs such as inventory write-offs, training, hiring and travel in connection with future restructuring actions.

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Consolidated Operating Results

The Company has organized its businesses along three reportable segments together with a corporate group for certain support services. The Company's operations are aligned on the basis of products, services and industry. Management measures and evaluates the reportable segments based on operating income.

In the tables below, dollars are in millions.

Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010

The operating results for the three months ended September 30, 2011, as reflected in the accompanying consolidated statements of income and described below, include the operating results of the acquired GlobalScholar, Spectrum K12 and Parsam businesses from their respective dates of acquisition.

Net Revenues:



	Three Months Ended
	September 30,
	2011			2010
Consolidated Net Revenues:
Harland Clarke segment	$	283.2		$	289.9
Harland Financial Solutions segment	72.4			70.9
Scantron segment	52.4			53.3
Eliminations	(0.3		)	(2.6		)
Total	$	407.7		$	411.5

Net revenues decreased by $3.8 million, or 0.9%, to $407.7 million in the 2011 period from $411.5 million in the 2010 period.

Net revenues for the Harland Clarke segment decreased by $6.7 million, or 2.3%, to $283.2 million in the 2011 period from $289.9 million in the 2010 period. The decrease was primarily due to volume declines, net of client additions and losses, in check and related products that reduced net revenues by $6.4 million, as well as a decline in non-check revenues, primarily resulting from a decline in sales of a survey solution to assist financial institutions with the implementation of new federal regulations in 2010 that also reduced net revenues by $6.1 million. The decline was partially offset by an increase in revenues per unit, which increased net revenues by $6.7 million.

Net revenues for the Harland Financial Solutions segment increased by $1.5 million, or 2.1%, to $72.4 million in the 2011 period from $70.9 million in the 2010 period. The increase was primarily due to revenues from the Parsam acquisition completed in December 2010, which increased net revenues by $1.6 million, as well as a $1.2 million increase in services revenues resulting from new customers. The increases were partially offset by a $1.0 million decrease in maintenance revenues due to customers converting to perpetual license agreements, as well as industry trends to hosted versus in-house solutions.

Net revenues for the Scantron segment decreased by $0.9 million, or 1.7%, to $52.4 million in the 2011 period from $53.3 million in the 2010 period. The decrease was primarily due to a decline in sales of a survey solution to assist financial institutions with implementation of new federal regulations in 2010 that reduced net revenues by $2.3 million, as well as a $1.2 million reduction in net revenues from volume declines in sales of forms. The revenue decreases were partially offset by $2.5 million of revenues resulting from the acquisitions of GlobalScholar and Spectrum K12. Net revenues in the 2011 period also included charges of $1.5 million for non-cash fair value acquisition accounting adjustments to deferred revenue related to the GlobalScholar and Spectrum K12 acquisitions. In addition, as further discussed in "Economic and Other Factors Affecting the Businesses of the Company," GlobalScholar and Spectrum K12 have not established VSOE of fair value for their multiple-element contracts and also have contracts with substantive customer acceptance provisions, resulting in a substantial deferral of revenues into future periods. Deferred revenues related to GlobalScholar and Spectrum K12 increased by $6.5 million during the third quarter of 2011.

Elimination of net revenues decreased to $0.3 million in the 2011 period from $2.6 million in the 2010 period primarily due to intersegment sales from the Scantron segment to the Harland Clarke segment in the 2010 period. These intersegment sales were related to solutions that assisted financial institutions with the implementation of changes to federal regulations during 2010.

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Cost of Revenues:



	Three Months Ended
	September 30,
	2011			2010
Consolidated Cost of Revenues:
Harland Clarke segment	$	171.5		$	181.7
Harland Financial Solutions segment	30.3			30.9
Scantron segment	36.5			29.2
Eliminations	(0.3		)	(2.6		)
Total	$	238.0		$	239.2

Cost of revenues decreased by $1.2 million, or 0.5%, to $238.0 million in the 2011 period from $239.2 million in the 2010 period.

Cost of revenues for the Harland Clarke segment decreased by $10.2 million, or 5.6%, to $171.5 million in the 2011 period from $181.7 million in the 2010 period. The decrease was primarily due to labor cost reductions of $3.8 million resulting mostly from restructuring activities, decreases in depreciation and amortization expense of $2.4 million, and lower delivery, materials and other variable overhead expenses of $2.3 million due to lower volumes. Cost of revenues as a percentage of revenues for the Harland Clarke segment was 60.6% in the 2011 period as compared to 62.7% in the 2010 period. The decrease in cost of revenues as a percentage of revenues was primarily a result of restructuring and other cost reduction activities.

Cost of revenues for the Harland Financial Solutions segment decreased by $0.6 million, or 1.9%, to $30.3 million in the 2011 period from $30.9 million in the 2010 period. The decrease was primarily due to decreases in depreciation and amortization expense of $0.6 million, as well as occupancy and telecom cost reductions totaling $0.6 million resulting from restructuring, consolidation of facilities and favorable pricing. The decrease in cost of revenues was partially offset by costs of $0.5 million associated with the business acquired in the Parsam acquisition completed in December 2010. Cost of revenues as a percentage of revenues for the Harland Financial Solutions segment was 41.9% in the 2011 period as compared to 43.6% in the 2010 period. The decrease in cost of revenues as a percentage of revenues was primarily due to cost reduction activities and growth in revenues.

Cost of revenues for the Scantron segment increased by $7.3 million, or 25.0%, to $36.5 million in the 2011 period from $29.2 million in the 2010 period. The increase was primarily due to costs of $7.4 million associated with the businesses acquired in the Spectrum K12 and GlobalScholar acquisitions, including a $4.4 million increase in amortization expense in the 2011 period resulting from intangible assets recorded in connection with these acquisitions. Cost of revenues as a percentage of revenues for the Scantron segment was 69.7% in the 2011 period as compared to 54.8% in the 2010 period. The increase in cost of revenues as a percentage of revenues was primarily due to the increased amortization expense and other costs associated with the acquisitions, non-cash acquisition accounting adjustments that reduced net revenues by $1.5 million and the deferral of revenue for certain amounts billed and collected as further described above in the Net Revenues section.

Elimination of cost of revenues decreased to $0.3 million in the 2011 period from $2.6 million in the 2010 period primarily due to intersegment sales from the Scantron segment to the Harland Clarke segment in the 2010 period. These intersegment sales were related to solutions that assisted financial institutions with the implementation of changes to federal regulations during 2010.

Selling, General and Administrative Expenses:



	Three Months Ended
	September 30,
	2011		2010
Consolidated Selling, General and Administrative Expenses:
Harland Clarke segment	$	45.4	$	51.0
Harland Financial Solutions segment	29.2		26.0
Scantron segment	21.1		15.4
Corporate	3.5		3.5
Total	$	99.2	$	95.9

Selling, general and administrative expenses increased by $3.3 million, or 3.4%, to $99.2 million in the 2011 period from $95.9 million in the 2010 period.

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Selling, general and administrative expenses for the Harland Clarke segment decreased by $5.6 million, or 11.0%, to $45.4 million in the 2011 period from $51.0 million in the 2010 period. The decrease was primarily due to labor cost reductions of $2.9 million resulting mostly from restructuring activities and a $2.8 million decline in other general overhead expenses, including lower professional fees of $0.7 million and travel costs of $0.5 million. Selling, general and administrative expenses as a percentage of revenues for the Harland Clarke segment were 16.0% in the 2011 period as compared to 17.6% in the 2010 period. The decrease in selling, general and administrative expenses as a percentage of revenues was primarily a result of restructuring and other cost reduction activities.

Selling, general and administrative expenses for the Harland Financial Solutions segment increased by $3.2 million, or 12.3%, to $29.2 million in the 2011 period from $26.0 million in the 2010 period. The increase was primarily due to costs of $1.0 million associated with the business acquired in the Parsam acquisition completed in December 2010, increased foreign currency transaction losses of $0.6 million, an increase in incentive compensation accruals of $0.5 million and an increase in travel costs of $0.5 million due to expanded selling efforts. Partially offsetting these increases was a decrease in compensation expense of $0.3 million related to an incentive agreement for an acquisition in 2007. Selling, general and administrative expenses as a percentage of revenues for the Harland Financial Solutions segment was 40.3% in the 2011 period as compared to 36.7% in the 2010 period. The increase in selling, general and administrative expenses as a percentage of revenues was primarily due to the increases in expenses.

Selling, general and administrative expenses for the Scantron segment increased by $5.7 million, or 37.0%, to $21.1 million in the 2011 period from $15.4 million in the 2010 period. The increase was primarily due to costs of $6.8 million from the businesses acquired in the Spectrum K12 and GlobalScholar acquisitions, partially offset by cost reductions resulting from restructuring activities and other integration efforts related to the acquisitions. Selling, general and administrative expenses as a percentage of revenues for the Scantron segment was 40.3% in the 2011 period as compared to 28.9% in the 2010 period. The increase in selling, general and administrative expenses as a percentage of revenues was primarily due to costs associated with the acquisitions, non-cash acquisition accounting adjustments that reduced net revenues by $1.5 million and the deferral of revenue for certain amounts billed as further described in the Net Revenues section above.

Revaluation of Contingent Consideration

Operating expenses decreased by $19.5 million in the 2011 period due to a decrease in the fair value of accrued contingent consideration related primarily to the GlobalScholar acquisition, which resulted from revenue projections that fall below the threshold amount that would trigger a payment. Operating expenses increased by $0.3 million in the 2010 period due to an increase in the fair value of accrued contingent consideration related to the Spectrum K12 and SubscriberMail acquisitions, which resulted primarily from accruals for the incentive compensation component of the arrangements.

Asset Impairment Charges

During the 2011 and 2010 periods, the Company recorded non-cash impairment charges of $0.1 million and $1.9 million, respectively. The charges in the 2011 period primarily related to assets that were determined to have limited future use for the Harland Clarke segment. The charges recorded in the 2010 period were primarily related to the abandonment of a development project for the Harland Clarke segment.

Restructuring Costs

The Company has adopted plans to strengthen operating margins and leverage incremental synergies within the printing plants, contact centers and selling, general and administrative areas by relying on the Company's shared services capabilities and reorganizing certain operations and sales and support functions.

In the 2011 period, the Company recorded restructuring costs of $0.4 million for the Harland Clarke segment and $1.9 million for the Scantron segment related to these plans. In the 2010 period, the Company recorded restructuring costs of $4.2 million for the Harland Clarke segment, $0.2 million for the Harland Financial Solutions segment and $0.6 million for the Scantron segment related to these plans.

Interest Expense

Interest expense was $27.4 million in the 2011 period as compared to $27.7 million in the 2010 period. The decrease in interest expense was largely due to lower fixed rates on interest rate hedge transactions as well as lower effective interest rates and a decrease in total debt outstanding.

Provision for Income Taxes

The Company's effective tax rate was 22.7% in the 2011 period and 33.7% in the 2010 period. The effective tax rate for the 2011 period is lower than the 2010 period primarily due to a $19.2 million reduction of contingent consideration in the 2011 period related to an acquisition that is not subject to income taxes. The effective tax rate for the 2010 period reflects a release of a reserve for uncertain tax positions of $1.6 million.

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Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

The operating results for the nine months ended September 30, 2011, as reflected in the accompanying consolidated statements of income and described below, include the operating results of the acquired GlobalScholar, Spectrum K12 and Parsam businesses from their respective dates of acquisition.

Net Revenues:



	Nine Months Ended
	September 30,
	2011			2010
Consolidated Net Revenues:
Harland Clarke segment	$	845.3		$	906.9
Harland Financial Solutions segment	219.7			210.3
Scantron segment	152.9			153.5
Eliminations	(0.6		)	(5.9		)
Total	$	1,217.3		$	1,264.8

Net revenues decreased by $47.5 million, or 3.8%, to $1,217.3 million in the 2011 period from $1,264.8 million in the 2010 period.

Net revenues for the Harland Clarke segment decreased by $61.6 million, or 6.8%, to $845.3 million in the 2011 period from $906.9 million in the 2010 period. The decrease was primarily due to volume declines, net of client additions and losses, in check and related products that reduced net revenues by $46.0 million, as well as a decline in non-check revenues, primarily resulting from a decline in sales of a survey solution to assist financial institutions with the implementation of new federal regulations in 2010 that reduced net revenues by $12.2 million. In addition, a decrease in revenues per unit reduced net revenues by $1.8 million. The 2010 period also included revenue for a one-time payment of $4.8 million resulting from the loss of a client. The decline in net revenues was partially offset by one additional workday in the 2011 period.

Net revenues for the Harland Financial Solutions segment increased by $9.4 million, or 4.5%, to $219.7 million in the 2011 period from $210.3 million in the 2010 period. The increase was primarily due to revenues from the Parsam acquisition completed in December 2010, which increased net revenues by $4.4 million, as well as a $4.2 million increase in software revenues for perpetual license agreements and a $2.6 million increase in services revenues resulting from new clients. The increases were partially offset by a $2.6 million decrease in maintenance revenues due to certain customers converting to perpetual license agreements, industry trends to hosted versus in-house solutions and customers converting from enterprise to term agreements. Net revenues in the 2011 period included charges of $0.9 million for non-cash fair value acquisition accounting adjustments to deferred revenue related to the Parsam acquisition.

Net revenues for the Scantron segment decreased by $0.6 million, or 0.4%, to $152.9 million in the 2011 period from $153.5 million in the 2010 period. The decrease was primarily due to a decline in sales of a survey solution to assist financial institutions with the implementation of new federal regulations in 2010 that reduced net revenues by $5.1 million, as well as a $2.4 million reduction in net revenues from volume declines in sales of forms. The revenue decrease was substantially offset by $7.2 million of revenues resulting from the acquisitions of GlobalScholar and Spectrum K12. Net revenues in the 2011 period also included charges of $6.8 million for non-cash fair value acquisition accounting adjustments to deferred revenues related to the GlobalScholar and Spectrum K12 acquisitions. In addition, as further discussed in "Economic and Other Factors Affecting the Businesses of the Company," GlobalScholar and Spectrum K12 have not established VSOE of fair value for their multiple-element contracts and also have contracts with substantive customer acceptance provisions, resulting in a substantial deferral of revenues into future periods. Deferred revenues related to GlobalScholar and Spectrum K12 increased by $17.3 million during the nine months ended September 30, 2011.

Elimination of net revenues decreased to $0.6 million in the 2011 period from $5.9 million in the 2010 period primarily due to intersegment sales from the Scantron segment to the Harland Clarke segment in the 2010 period. These intersegment sales were related to solutions that assisted financial institutions with the implementation of changes to federal regulations during 2010.

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Harland Clarke Holdings Corp. and Subsidiaries

Cost of Revenues:



	Nine Months Ended
	September 30,
	2011			2010
Consolidated Cost of Revenues:
Harland Clarke segment	$	518.3		$	557.5
Harland Financial Solutions segment	89.7			91.5
Scantron segment	104.9			84.8
Eliminations	(0.6		)	(5.9		)
Total	$	712.3		$	727.9

Cost of revenues decreased by $15.6 million, or 2.1%, to $712.3 million in the 2011 period from $727.9 million in the 2010 period.

Cost of revenues for the Harland Clarke segment decreased by $39.2 million, or 7.0%, to $518.3 million in the 2011 period from $557.5 million in the 2010 period. The decrease was primarily due to lower delivery, materials and other variable overhead expenses of $15.9 million due to lower volumes, labor cost reductions of $9.8 million primarily resulting from restructuring activities and decreases in depreciation and amortization expense of $9.1 million. Cost of revenues as a percentage of revenues for the Harland Clarke segment was 61.3% in the 2011 period as compared to 61.5% in the 2010 period.

Cost of revenues for the Harland Financial Solutions segment decreased by $1.8 million, or 2.0%, to $89.7 million in the 2011 period from $91.5 million in the 2010 period. The decrease was primarily due to occupancy and telecom cost reductions totaling $2.1 million resulting from restructuring, consolidation of facilities and favorable pricing, as well as a $1.9 million decrease in depreciation and amortization expense. In addition, labor costs declined by $0.6 million due to lower employee benefit costs. The decrease was partially offset by costs of $1.8 million associated with the Parsam acquisition completed in December 2010. Cost of revenues as a percentage of revenues for the Harland Financial Solutions segment was 40.8% in the 2011 period as compared to 43.5% in the 2010 period. The decrease in cost of revenues as a percentage of revenues was primarily due to cost reduction activities and higher margins from growth in license revenues.

Cost of revenues for the Scantron segment increased by $20.1 million, or 23.7%, to $104.9 million in the 2011 period from $84.8 million in the 2010 period. The increase was due to costs of $21.4 million associated with the businesses acquired in the Spectrum K12 and GlobalScholar acquisitions, including a $13.2 million increase in amortization expense in the 2011 period resulting from intangible assets recorded in connection with these acquisitions. Cost of revenues as a percentage of revenues for the Scantron segment was 68.6% in the 2011 period as compared to 55.2% in the 2010 period. The increase in cost of revenues as a percentage of revenues was primarily due to the increased amortization expense and other costs associated with the acquisitions, non-cash acquisition accounting adjustments that reduced net revenues by $6.8 million and the deferral of revenue for certain amounts billed and collected as further described above in the Net Revenues section.

Elimination of cost of revenues decreased to $0.6 million in the 2011 period from $5.9 million in the 2010 period primarily due to intersegment sales from the Scantron segment to the Harland Clarke segment in the 2010 period. These intersegment sales were related to solutions that assisted financial institutions with the implementation of changes to federal regulations during 2010.

Selling, General and Administrative Expenses:



	Nine Months Ended
	September 30,
	2011		2010
Consolidated Selling, General and Administrative Expenses:
Harland Clarke segment	$	138.2	$	156.5
Harland Financial Solutions segment	85.3		81.6
Scantron segment	69.2		42.4
Corporate	11.8		10.0
Total	$	304.5	$	290.5

Selling, general and administrative expenses increased by $14.0 million, or 4.8%, to $304.5 million in the 2011 period from $290.5 million in the 2010 period.

Selling, general and administrative expenses for the Harland Clarke segment decreased by $18.3 million, or 11.7%, to $138.2 million in the 2011 period from $156.5 million in the 2010 period. The decrease was primarily due to labor cost

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Harland Clarke Holdings Corp. and Subsidiaries

reductions of $9.2 million mostly resulting from restructuring activities, lower travel costs of $4.1 million, a decline in other general overhead expenses of $3.1 million, and lower professional fees of $1.8 million. Selling, general and administrative expenses as a percentage of revenues for the Harland Clarke segment were 16.3% in the 2011 period as compared to 17.3% in the 2010 period. The decrease in selling, general and administrative expenses as a percentage of revenues was primarily a result of restructuring and other cost reduction activities.

Selling, general and administrative expenses for the Harland Financial Solutions segment increased by $3.7 million, or 4.5%, to $85.3 million in the 2011 period from $81.6 million in the 2010 period. The increase was primarily due to costs of $2.3 million associated with the business acquired in the Parsam acquisition completed in December 2010, as well as increases in travel costs of $1.0 million and selling expense of $0.9 million, both due to expanded selling efforts. Partially offsetting these increases were a decrease in professional fees of $1.1 million and a decrease in compensation expense of $1.1 million related to an incentive agreement for an acquisition in 2007. Selling, general and administrative expenses as a percentage of revenues for the Harland Financial Solutions segment was 38.8% in the 2011 period, unchanged from the 2010 period.

Selling, general and administrative expenses for the Scantron segment increased by $26.8 million, or 63.2%, to $69.2 million in the 2011 period from $42.4 million in the 2010 period. The increase was primarily due to costs of $24.3 million associated with the businesses acquired in the Spectrum K12 and GlobalScholar acquisitions and investments in growth initiatives. Selling, general and administrative expenses as a percentage of revenues for the Scantron segment was 45.3% in the 2011 period as compared to 27.6% in the 2010 period. The increase in selling, general and administrative expenses as a percentage of revenues was primarily due to costs associated with the acquisitions, non-cash acquisition accounting adjustments that reduced net revenues by $6.8 million, the deferral of revenue for certain amounts billed as further described in the Net Revenues section above and increased product development expenses

Corporate selling, general and administrative expenses increased by $1.8 million, or 18.0%, to $11.8 million in the 2011 period from $10.0 million in the 2010 period primarily due to professional fees of $1.1 million related to corporate finance and acquisition related activities as well as increases in general overhead costs.

Revaluation of Contingent Consideration

Operating expenses decreased by $24.6 million in the 2011 period due to decreases in the fair value of accrued contingent consideration related to the GlobalScholar, Spectrum K12, Parsam and SubscriberMail acquisitions, which resulted from revenue projections that fall below the threshold amounts that would trigger a payment. Operating expenses increased by $0.2 million in the 2010 period due to an increase in the fair value of accrued contingent consideration related to the Spectrum K12 acquisition, which resulted from accruals for the incentive compensation component of the arrangement.

Asset Impairment Charges

During the 2011 period, the Company recorded non-cash impairment charges of $1.9 million for the Scantron segment and $0.5 million for the Harland Clarke segment primarily related to assets that were determined to have limited future use. During the 2010 period, the Company recorded non-cash impairment charges of $2.5 million for the Harland Clarke segment primarily related to the abandonment of a development project and to adjust the carrying value of certain held for sale facilities to reflect an updated estimate for the fair values less costs to sell.

Restructuring Costs

In the 2011 period, the Company recorded restructuring costs of $3.7 million for the Harland Clarke segment, $0.3 million for the Harland Financial Solutions segment and $4.3 million for the Scantron segment related to these plans. In the 2010 period, the Company recorded restructuring costs of $7.5 million for the Harland Clarke segment, $0.6 million for the Harland Financial Solutions segment and $7.1 million for the Scantron segment related to these plans.

Interest Income

Interest income was $0.3 million in the 2011 period as compared to $0.5 million in the 2010 period. The decrease in interest income was primarily due to lower average cash equivalents balances in the 2011 period as compared to the 2010 period.

Interest Expense

Interest expense was $82.0 million in the 2011 period as compared to $87.9 million in the 2010 period. The decrease in interest expense was largely due to lower fixed rates on interest rate hedge transactions as well as lower effective interest rates and a decrease in total debt outstanding.

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Harland Clarke Holdings Corp. and Subsidiaries

Other Income, Net

Other income, net was $13.2 million in the 2011 period as compared to $0.1 million in the 2010 period due to gains on the sale of marketable securities in the 2011 period.

Provision for Income Taxes

The Company's effective tax rate was 29.3% in the 2011 period and 37.8% in the 2010 period. The effective tax rate for the 2011 period is lower than the 2010 period primarily due to $22.8 million of reductions of contingent consideration in the 2011 period related to acquisitions that are not subject to income taxes. The provision for income taxes in the 2011 period also reflects a release of a reserve for uncertain tax positions of $1.2 million and a release of a $0.9 million valuation allowance reserve for capital loss carryovers utilized. The 2010 period reflects a charge of $0.9 million for a change in federal tax law relating to the deductibility of retiree prescription drug subsidies, offset in part by the release of a reserve for uncertain tax positions of $1.9 million.

Liquidity and Capital Resources

Cash Flow Analysis

The Company's net cash provided by operating activities during the nine months ended September 30, 2011 was $173.5 million as compared to $214.7 million during the nine months ended September 30, 2010. The decrease in net cash provided by operating activities of $41.2 million was due to a decrease in cash flow from operations and changes in working capital. The decrease in cash flow from operations was primarily due to a decrease in net income after excluding a gain from revaluation of contingent consideration arrangements and a gain on sale of marketable securities in the nine months ended September 30, 2011. The changes in working capital were primarily due to payments under long-term incentive compensation plans of $17.5 million at the end of the plans' three-year cycle and increases in payments for other annual incentive compensation plans of $4.0 million, partially offset by an $11.1 million increase in deferred revenues during the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.

The Company's net cash used in investing activities was $165.0 million during the nine months ended September 30, 2011 as compared to $24.5 million during the nine months ended September 30, 2010. The increase in cash used in investing activities during the nine months ended September 30, 2011 compared to the same period in 2010 was primarily due to the GlobalScholar acquisition, higher capital expenditures and a decrease in proceeds from the sale of marketable securities.

The Company's net cash used in financing activities was $15.1 million during the nine months ended September 30, 2011 as compared to $14.8 million during the nine months ended September 30, 2010. The increase in net cash used in financing activities was due to payments of contingent consideration arrangements during the nine months ended September 30, 2011.

The Company's Consolidated Contractual Obligations and Commitments

There were no material changes to the Company's contractual obligations and commitments as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2010 during the three months ended September 30, 2011.

Liquidity Assessment

The Company believes that its cash and cash equivalents, borrowings available under its credit agreement (as further discussed in Note 11 to the Company's consolidated financial statements included in this Quarterly Report on Form 10-Q) and anticipated cash flow from operating activities will be sufficient to meet the Company's expected operating needs, investment and capital spending requirements and debt service requirements for the foreseeable future. During the third quarter of 2011, the Company entered into a settlement agreement related to a contract termination with a financial institution client, which provides for a payment of $6.5 million to the Company. The Company's policy is to record contract settlements upon receipt, which is anticipated in the fourth quarter of 2011.

In addition to normal operating cash, working capital requirements and service of indebtedness, the Company also requires cash to fund capital expenditures, make contract acquisition payments to financial institution clients and enable cost reductions through restructuring projects as follows:

•

Capital Expenditures. The Company's capital expenditures are primarily related to infrastructure investments, internally developed software, cost reduction programs, marketing initiatives and other projects that support future revenue growth. During the nine months ended September 30, 2011 and 2010, the Company incurred $39.4 million and $23.2 million of capital expenditures and $0.2 million and $0.1 million of capitalized interest, respectively. The Company's capital expenditures are estimated to be in the range of $40.0 million to $50.0 million for the fiscal year ending December 31, 2012.


•	Contract Acquisition Payments. During the nine months ended September 30, 2011 and 2010, the Company made $33.7 million and $28.3 million of contract acquisition payments to its clients, respectively.

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Harland Clarke Holdings Corp. and Subsidiaries

•

Restructuring/Cost Reductions. Restructuring accruals have been established for anticipated severance payments, costs related to facilities closures and other expenses related to the planned restructuring or consolidation of some of the Company's operations. During the nine months ended September 30, 2011 and 2010, the Company made $10.3 million and $10.2 million of payments for restructuring, respectively.

The Company may also, from time to time, seek to use its cash to make acquisitions or investments, and also to retire or purchase its outstanding debt in open market purchases, in privately negotiated transactions, or otherwise. Such retirement or purchase of debt may be funded from the operating cash flows of the business or other sources and will depend upon prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material. The Company used cash on hand to fund the $134.9 million acquisition-date cash purchase price for the acquisition of GlobalScholar, net of cash acquired and working capital adjustments that was consummated on January 3, 2011.

Cash Flow Risks

The Company's ability to meet its debt service obligations and reduce its total debt will depend upon its ability to generate cash in the future which, in turn, will be subject to general economic, financial, business, competitive, legislative, regulatory and other conditions, many of which are beyond the Company's control. The Company may not be able to generate sufficient cash flow from operations or borrow under its credit facility in an amount sufficient to repay its debt or to fund other liquidity needs. As of September 30, 2011, the Company had $92.0 million of availability under its revolving credit facility (after giving effect to the issuance of $8.0 million of letters of credit). The Company may also use its revolving credit facility to fund potential future acquisitions or investments. If future cash flow from operations and other capital resources are insufficient to pay the Company's obligations as they mature or to fund its liquidity needs, the Company may be forced to reduce or delay business activities and capital expenditures, sell assets, obtain additional debt or equity capital or restructure or refinance all or a portion of its debt on or before maturity. The Company may not be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all. In addition, the terms of the Company's existing and future indebtedness may limit its ability to pursue any of these alternatives.

Critical Accounting Policies and Estimates

There were no material changes to the Company's Critical Accounting Policies and Estimates included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010 as filed on March 4, 2011 with the United States Securities and Exchange Commission ("SEC"), which is available on the SEC's website at www.sec.gov.

Forward-Looking Statements

This Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, as well as certain of the Company's other public documents and statements and oral statements, contains forward-looking statements that reflect management's current assumptions and estimates of future performance and economic conditions. When used in this Quarterly Report on Form 10-Q, the words "believes," "anticipates," "plans," "expects," "intends," "estimates" or similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Although the Company believes that its plans, intentions and expectations reflected in or suggested by the forward-looking statements are reasonable, such plans, intentions or expectations may not be achieved. Such forward-looking statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company cautions investors that any forward-looking statements are subject to risks and uncertainties that may cause actual results and future trends to differ materially from those projected, stated or implied by the forward-looking statements. In addition, the Company encourages investors to read the summary of the Company's critical accounting policies and estimates included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010 under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates."

In addition to factors described in the Company's SEC filings and others, the following factors could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by the Company:


•	our substantial indebtedness;

•

further adverse changes in or worsening of general economic and industry conditions, including the depth and length of the economic downturn and higher unemployment, which could result in more rapid declines in product sales of and/or pricing pressure on the Harland Clarke and Scantron segments, and reductions in information technology budgets, which could result in adverse impacts on the Harland Financial Solutions segment;


•	weak economic conditions and declines in the financial performance of our business that may result in material impairment charges, which could have a negative effect on the Company's earnings, total assets and market prices of the Company's outstanding securities;


•	our ability to generate sufficient cash in the future that affects our ability to make payments on our indebtedness;

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Harland Clarke Holdings Corp. and Subsidiaries


•	our ability to incur substantially more debt that could exacerbate the risks associated with our substantial leverage;


•	covenant restrictions under our indebtedness that may limit our ability to operate our businesses and react to market changes;


•	increases in interest rates;


•	the maturity of the paper check industry, including a faster than anticipated decline in check usage due to increasing use of alternative payment methods, decreased consumer spending and other factors and our ability to grow non-check related product lines;


•	consolidation among financial institutions;


•	adverse changes or failures or consolidation of the large financial institution clients on which we depend, resulting in decreased revenues and/or pricing pressure;


•	intense competition in all areas of our businesses;


•	our ability to successfully integrate and manage recent acquisitions as well as future acquisitions;


•	our ability to implement any or all components of our business strategy;


•	interruptions or adverse changes in our vendor or supplier relationships;


•	increased production and delivery costs;


•	fluctuations in the costs of raw materials and other supplies;


•	our ability to attract, hire and retain qualified personnel;


•	technological improvements that may reduce any advantage over other providers in our respective industries;


•	our ability to protect customer or consumer data against data security breaches;


•	changes in legislation relating to consumer privacy protection that could increase our costs or limit our future business opportunities;


•	contracts with our clients relating to consumer privacy protection that could restrict our business;


•	our ability to protect our intellectual property rights;


•	our reliance on third-party providers for certain significant information technology needs;


•	software defects or cyber attacks that could harm our businesses and reputation;


•	sales and other taxes that could have adverse effects on our businesses;


•	environmental risks;


•	the ability of our Harland Financial Solutions segment to achieve organic growth;


•	regulations governing the Harland Financial Solutions segment;


•	our ability to develop new products for our Scantron segment and to grow Scantron's web-based education business;


•	our ability to achieve VSOE of fair value for multiple-element arrangements for software businesses we have acquired or will acquire, which could affect the timing of recognition of revenue;


•	changes in contingent consideration estimates related to acquisition earn-out arrangements;


•	future warranty or product liability claims which could be costly to resolve and result in negative publicity;


•	government and school clients' budget deficits, which could have an adverse impact on our Scantron segment;


•	softness in direct mail response rates;


•	lower than expected cash flow from operations;


•	unfavorable foreign currency fluctuations;


•	the loss of one of our significant customers;


•	work stoppages and other labor disturbances;


•	the failure of M & F Worldwide, our indirect parent company, and MacAndrews & Forbes Holdings Inc. to consummate the transactions contemplated by the merger agreement entered into by the parties thereto on

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Harland Clarke Holdings Corp. and Subsidiaries

September 12, 2011; and


•	unanticipated internal control deficiencies or weaknesses.

The Company encourages investors to read carefully the risk factors described in the Company's Annual Report on Form 10-K for the year ended December 31, 2010 in the section entitled "Risk Factors" for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company has exposure to market risk from changes in interest rates and foreign currency exchange rates, which could affect its business, results of operations and financial condition. The Company manages its exposure to these market risks through its regular operating and financing activities.

At September 30, 2011, the Company had $1,723.5 million of term loans outstanding under its credit agreement, $8.0 million of letters of credit outstanding under its revolving credit facility, $206.8 million of floating rate senior notes and $271.3 million of 9.50% fixed rate senior notes. All of these outstanding loans bear interest at variable rates, with the exception of the $271.3 million of fixed rate senior notes. Accordingly, the Company is subject to risk due to changes in interest rates. The Company believes that a hypothetical increase of 1 percentage point in the variable component of interest rates applicable to its floating rate debt outstanding at September 30, 2011 would have resulted in an increase in its interest expense for the nine months ended September 30, 2011 of approximately $6.5 million, including the effect of the interest rate derivative transactions discussed below.

In order to manage its exposure to fluctuations in interest rates on a portion of the outstanding variable rate debt, the Company entered into interest rate derivative transactions in 2009 and 2010 in the form of swaps with notional amounts totaling $855.0 million currently outstanding as further described in Note 12 to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. These derivatives currently swap the underlying variable rates for fixed rates ranging from 1.264% to 2.353%.

Item 7A of the Company's Annual Report on Form 10-K for the year ended December 31, 2010 presents additional quantitative and qualitative disclosures about exposure to risk in foreign currency exchange rates. There have been no material changes to the disclosures regarding foreign currency exchange rates as of September 30, 2011.

Item 4. Controls and Procedures

(a) Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective.

(b) Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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Harland Clarke Holdings Corp. and Subsidiaries

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Various legal proceedings, claims and investigations are pending against the Company, including those relating to commercial transactions, environmental matters, employment matters and other matters. Certain of these matters are covered by insurance, subject to deductibles and maximum limits.

The Company believes that the outcome of all pending legal proceedings in the aggregate will not have a material adverse effect on its consolidated financial position or results of operations.

Item 1A. Risk Factors

There was no material change to the Company's risk factors as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2010 during the three months ended September 30, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

There was no event of default upon senior securities during the three months ended September 30, 2011.

Item 4. Removed and Reserved

Item 5. Other Information

No additional information need be presented.

Item 6. Exhibits



31.1		Certification of Charles T. Dawson, Chief Executive Officer, dated November 3, 2011.

31.2		Certification of Peter A. Fera, Jr., Chief Financial Officer, dated November 3, 2011.

101.INS		XBRL Instance Document. ⁽¹⁾

101.SCH		XBRL Taxonomy Extension Schema. ⁽¹⁾

101.CAL		XBRL Taxonomy Extension Calculation Linkbase. ⁽¹⁾

101.DEF		XBRL Taxonomy Definition Linkbase. ⁽¹⁾

101.LAB		XBRL Taxonomy Extension Labels Linkbase. ⁽¹⁾

101.PRE		XBRL Taxonomy Extension Presentation Linkbase. ⁽¹⁾

(1	)	Furnished, not filed. Furnished with this Quarterly Report on Form 10-Q are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at September 30, 2011 and December 31, 2010, (ii) the Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010, (iii) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010, and (iv) Notes to Consolidated Financial Statements.

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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.



		HARLAND CLARKE HOLDINGS CORP.
Date:	November 3, 2011	By:	/s/ Peter A. Fera, Jr.
			Peter A. Fera, Jr.
			Executive Vice President and Chief Financial Officer (Principal Financial Officer)


Date:	November 3, 2011	By:	/s/ J. Michael Riley
			J. Michael Riley
			Vice President and Controller (Principal Accounting Officer)

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EXHIBIT INDEX



31.1		Certification of Charles T. Dawson, Chief Executive Officer, dated November 3, 2011.

31.2		Certification of Peter A. Fera, Jr., Chief Financial Officer, dated November 3, 2011.

101.INS		XBRL Instance Document. ⁽¹⁾

101.SCH		XBRL Taxonomy Extension Schema. ⁽¹⁾

101.CAL		XBRL Taxonomy Extension Calculation Linkbase. ⁽¹⁾

101.DEF		XBRL Taxonomy Definition Linkbase. ⁽¹⁾

101.LAB		XBRL Taxonomy Extension Labels Linkbase.⁽¹⁾

101.PRE		XBRL Taxonomy Extension Presentation Linkbase. ⁽¹⁾

(1	)	Furnished, not filed. Furnished with this Quarterly Report on Form 10-Q are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at September 30, 2011 and December 31, 2010, (ii) the Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010, (iii) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010, and (iv) Notes to Consolidated Financial Statements.

HARLAND CLARKE HOLDINGS CORP - FORM 10-Q - November 3, 2011

Attached files

HARLAND CLARKE HOLDINGS CORP Reports