10-Q 1 hchc-10q2013930.htm 10-Q HCHC-10Q 2013.9.30
 
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, 2013
or
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________

Commission file number: 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, 2013, 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.
 


HARLAND CLARKE HOLDINGS CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2013

PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 


i

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,
2013
 
December 31,
2012
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,037.8

 
$
102.0

Accounts receivable (net of allowances of $1.0 and $1.5)
111.1

 
132.1

Inventories
34.3

 
29.0

Income taxes receivable
0.4

 
23.7

Notes receivable - related party
30.0

 
30.0

Deferred tax assets
35.7

 
45.1

Prepaid expenses and other current assets
41.8

 
56.7

Total current assets
1,291.1

 
418.6

Property, plant and equipment
290.2

 
269.5

Less accumulated depreciation
(111.8
)
 
(79.5
)
Property, plant and equipment, net
178.4

 
190.0

Goodwill
483.0

 
761.6

Other intangible assets, net
1,189.0

 
1,535.6

Contract acquisition payments, net
23.3

 
17.6

Other assets
57.1

 
63.0

Total assets
$
3,221.9

 
$
2,986.4

LIABILITIES AND STOCKHOLDER'S EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
42.3

 
$
44.5

Deferred revenues
63.0

 
133.9

Current maturities of long-term debt
90.0

 
78.5

Accrued liabilities:
 
 
 
Salaries, wages and employee benefits
54.0

 
55.9

Income and other taxes payable
76.4

 
11.9

Customer incentives
49.5

 
52.0

Payable to parent
0.1

 
0.1

Other current liabilities
38.4

 
42.1

Total current liabilities
413.7

 
418.9

Long-term debt
1,839.3

 
1,769.3

Deferred tax liabilities
467.8

 
622.7

Deferred revenues
23.1

 
54.2

Other liabilities
61.8

 
86.1

Commitments and contingencies


 


Stockholder's equity:
 
 
 
Common stock — 200 shares authorized; par value $0.01; 100 shares issued and outstanding at September 30, 2013 and December 31, 2012
—

 
—

Additional paid-in capital
49.9

 
76.1

Retained earnings / (accumulated deficit)
367.5

 
(40.6
)
Accumulated other comprehensive (loss) income:
 
 
 
Foreign currency translation adjustments
(0.5
)
 
0.4

Unrecognized amounts included in postretirement obligations, net of taxes
(0.7
)
 
(0.7
)
Total accumulated other comprehensive loss, net of taxes
(1.2
)
 
(0.3
)
Total stockholder's equity
416.2

 
35.2

Total liabilities and stockholder's equity
$
3,221.9

 
$
2,986.4

See Notes to Consolidated Financial Statements


1

Harland Clarke Holdings Corp. and Subsidiaries
Consolidated Statements of Operations
(in millions)
(unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Product revenues, net
$
318.7

 
$
303.1

 
$
917.8

 
$
914.3

Service revenues, net
59.1

 
54.8

 
166.8

 
154.8

Total net revenues
377.8

 
357.9

 
1,084.6

 
1,069.1

Cost of products sold
197.4

 
188.0

 
560.2

 
595.1

Cost of services provided
41.4

 
39.7

 
119.4

 
117.6

Total cost of revenues
238.8

 
227.7

 
679.6

 
712.7

Gross profit
139.0

 
130.2

 
405.0

 
356.4

Selling, general and administrative expenses
72.8

 
68.2

 
210.0

 
221.5

Asset impairment charges
0.2

 
0.7

 
1.1

 
0.7

Restructuring costs
1.6

 
11.6

 
14.9

 
16.2

Operating income
64.4

 
49.7

 
179.0

 
118.0

Interest income
0.2

 
0.2

 
0.6

 
0.7

Interest expense
(53.5
)
 
(56.3
)
 
(165.4
)
 
(166.0
)
Loss on early extinguishment of debt
—

 
(34.2
)
 
(61.0
)
 
(34.2
)
Loss from equity method investment
(0.1
)
 
—

 
(0.5
)
 
—

Other expense, net
—

 
—

 
—

 
(0.2
)
Income (loss) from continuing operations before income taxes
11.0

 
(40.6
)
 
(47.3
)
 
(81.7
)
Provision (benefit) for income taxes on continuing operations
3.4

 
(15.9
)
 
(19.2
)
 
(31.4
)
Net income (loss) from continuing operations
7.6

 
(24.7
)
 
(28.1
)
 
(50.3
)
Net income from discontinued operations
412.3

 
5.7

 
439.2

 
0.7

Net income (loss)
$
419.9

 
$
(19.0
)
 
$
411.1

 
$
(49.6
)
See Notes to Consolidated Financial Statements


2



Harland Clarke Holdings Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(in millions)
(unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,

2013
 
2012
 
2013
 
2012
Net income (loss)
$
419.9

 
$
(19.0
)
 
$
411.1

 
$
(49.6
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
0.3

 
0.7

 
(0.6
)
 
0.3

Reclassification adjustments for foreign currency translation adjustments included in gain on sale of HFS
(0.3
)
 
—

 
(0.3
)
 
—

Reclassification adjustments for loss on derivative instruments included in net loss
—

 
—

 
—

 
0.1

Unrealized losses on investments:
 
 
 
 
 
 
 
Unrealized losses on investments during period
—

 
—

 
—

 
(0.2
)
Less reclassification adjustment for amounts included in net loss
—

 
—

 
—

 
0.1

Net change in unrealized losses on investments
—

 
—

 
—

 
(0.1
)
Total other comprehensive income (loss), net of tax
—

 
0.7

 
(0.9
)
 
0.3

Comprehensive income (loss)
$
419.9

 
$
(18.3
)
 
$
410.2

 
$
(49.3
)
 
 
 
 
 
 
 
 
Tax Expense of Other Comprehensive Income (Loss) Included in Above Amounts:
 
 
 
 
 
 
 
Less reclassification adjustment for amounts included in net loss
$
—

 
$
—

 
$
—

 
$
(0.1
)
Total net tax expense included in other comprehensive income (loss)
$
—

 
$
—

 
$
—

 
$
(0.1
)

See Notes to Consolidated Financial Statements



3

Harland Clarke Holdings Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(in millions)
(unaudited)

 
Nine Months Ended
 
September 30,
 
2013
 
2012
Operating activities
 
 
 
Net income (loss)
$
411.1

 
$
(49.6
)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
 
 
 
Depreciation
44.3

 
57.3

Amortization of intangible assets
94.7

 
102.9

Amortization of debt fair value adjustments, original issue discount, original issue premium and deferred financing fees
62.2

 
92.0

Gain on sale of discontinued operations
(647.0
)
 
—

Loss on early extinguishment of debt
61.0

 
34.2

Loss on sale of marketable securities
—

 
0.2

Deferred income taxes
(144.4
)
 
(127.6
)
Asset impairments
1.1

 
0.7

Changes in operating assets and liabilities, net of effect of business acquisitions and divestitures:
 
 
 
Accounts receivable
(23.0
)
 
(21.6
)
Inventories
(2.0
)
 
13.7

Prepaid expenses and other assets
(2.3
)
 
(12.5
)
Contract acquisition payments, net
(5.9
)
 
(13.7
)
Accounts payable and accrued liabilities
(8.9
)
 
8.6

Deferred revenues
0.5

 
70.0

Income and other taxes
88.2

 
8.6

Payable to parent
—

 
(0.2
)
Other, net
7.6

 
1.5

Net cash (used in) provided by operating activities
(62.8
)
 
164.5

Investing activities
 
 
 
Purchase of businesses, net of cash acquired
(35.2
)
 
(36.2
)
Proceeds from the sale of businesses included in discontinued operations, net of cash divested and costs to sell
1,181.9

 
—

Proceeds from sale of property, plant and equipment
0.9

 
0.1

Proceeds from sale of marketable securities
—

 
56.3

Capital expenditures
(53.8
)
 
(47.0
)
Capitalized interest
(0.5
)
 
(0.4
)
Computer software development
(8.1
)
 
(10.6
)
Net cash provided by (used in) investing activities
1,085.2

 
(37.8
)
Financing activities
 
 
 
Dividends paid to parent
(29.2
)
 
(25.8
)
Acquisition of business from parent
—

 
(33.8
)
Payments for derivative instruments
(1.3
)
 
(8.7
)
Issuance of notes
54.5

 
225.6

Redemption of notes
(50.0
)
 
—

Borrowings on credit agreements
742.5

 
25.0

Repayments of credit agreements and other borrowings
(786.5
)
 
(324.0
)
Debt issuance costs
(16.6
)
 
(12.3
)
Net cash used in financing activities
(86.6
)
 
(154.0
)
Net increase (decrease) in cash and cash equivalents
935.8

 
(27.3
)
Cash and cash equivalents at beginning of period
102.0

 
101.8

Cash and cash equivalents at end of period
$
1,037.8

 
$
74.5

Supplemental disclosure of cash paid for:
 
 
 
Interest, net of amounts capitalized
$
103.1

 
$
60.8

Income taxes, net of refunds
295.7

 
87.4

Non cash financing activities:
 
 
 
Extinguishment of Faneuil debt to parent
$
—

 
$
25.4


See Notes to Consolidated Financial Statements


4
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. The Company is an indirect, wholly owned subsidiary of M & F Worldwide Corp. ("M & F Worldwide"), which is, as of December 21, 2011, an indirect, wholly owned subsidiary of MacAndrews & Forbes Holdings Inc. ("MacAndrews"). MacAndrews is wholly owned by Ronald O. Perelman. On September 12, 2011, M & F Worldwide agreed, subject to various closing conditions, to merge with an indirect wholly owned subsidiary of MacAndrews, and, following a vote of stockholders of M & F Worldwide and the satisfaction or waiver of all other closing conditions, that merger was effected on December 21, 2011 (hereafter referred to as the "MacAndrews Acquisition").
As a result of the MacAndrews Acquisition, which resulted in a change in ownership of M & F Worldwide, the Company was required to use the acquisition method of accounting to revalue its assets and liabilities as of the date of the MacAndrews Acquisition. Such accounting results in a number of changes, including, but not limited to, decreased revenues as a result of fair value adjustments to deferred revenues, increased depreciation and amortization as a result of the revaluation of assets and increased non-cash interest expense that results from adjusting the Company's long-term debt to fair value as of the date of the MacAndrews Acquisition.
On August 16, 2013, the Company completed the sale of each of Harland Financial Solutions, Inc., Harland Financial Solutions Worldwide Limited and Harland Israel Ltd. (collectively, "HFS") to affiliates of Davis + Henderson Corporation. The consideration received by the Company for the sale was approximately $1,200.0 in cash. The Company entered into an ancillary agreement providing for certain transitional services for a limited time to the buyer on terms customary for a transaction of this type. Results of operations for HFS through August 16, 2013, including the related gain, are reported as discontinued operations in the accompanying consolidated statements of operations (see Note 4). Results of operations for HFS are not included in segment or consolidated results of operations other than as discontinued operations and prior periods have been reclassified to remove results of operations for HFS from results reported for continuing operations.
On May 31, 2013, the Company acquired NCP Solutions, LLC ("NCP Solutions") (see Note 3). NCP Solutions is a leading end-to-end communications solutions provider to consumer finance companies, banks, mortgage lenders, mortgage subservicers, credit unions, auto and equipment finance companies, auto service contract providers, direct marketing companies, healthcare and health insurance companies, check producers and various other customers. The NCP Solutions business is included in the Harland Clarke segment for financial reporting purposes.
On March 19, 2012, the Company purchased Faneuil, Inc. ("Faneuil") from affiliates of MacAndrews (see Note 3). Under accounting guidance for transactions among entities under common control, the Company has accounted for the purchase at historical cost and has retrospectively recasted prior periods under common control to include Faneuil operations. The Company and Faneuil came under common control on December 21, 2011, the date of the MacAndrews Acquisition. Faneuil is a separate business segment for financial reporting purposes. On October 18, 2013, the Company completed the sale of Faneuil (see Note 19).
The Company has organized its business and corporate structure along the following three business segments: Harland Clarke, Scantron and Faneuil.
During the second quarter of 2012, the Company transferred certain product and service lines from the Scantron segment to other segments. Specifically, Scantron transferred the Harland Technology Services and Medical Device Tracking businesses to the Faneuil segment and the Survey Services business to the Harland Clarke segment. Prior period segment information has been reclassified to reflect this change. With the October 18, 2013 sale of Faneuil, the Harland Technology Services business was transferred to and became part of the operations and results of Scantron from and after that date.
Harland Clarke Holdings delivers to multiple industries a robust portfolio of products and services designed to optimize customer relationships and generate revenue. Its business units have long been recognized as leading providers of best-in-class payment solutions, marketing services, data capture and analytics − delivered through multiple channels, including online, digital print technology, mobile and phone. Harland Clarke Holdings' portfolio offers retail products, high-value transactional print and electronic documentation, security solutions and business intelligence. Its skills in capturing, managing, analyzing and delivering data measurement and assessment information, through both print and digital channels, supports decision-making and improved outcomes for organizations worldwide. Harland Clarke Holdings serves the financial, insurance and investment services industries, as well as education, big-box retailing, accounting software, commercial, government and franchising. Its clients, including more than 8,500 financial institutions, range in size from major corporate brands and trade associations, to state and local governments, micro-businesses and individual consumers.


5
Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

The Harland Clarke segment offers to its more than 12,500 financial institution and commercial clients a range of solutions to support their success. These include payment solutions, security solutions, forms and treasury supplies and related delivery and fraud prevention products, as well as transactional print and electronic documentation, including statements, compliance documents and communications. It provides marketing services including inbound and outbound contact center solutions and direct marketing campaigns delivered through the multiple channels of online, digital print technology, mobile and phone. Harland Clarke offers a spectrum of solutions based upon business intelligence and analytic services that range from surveys, database mining, strategic planning, creative development and production through fulfillment. Harland Clarke offers online customized social and business stationery, cards, office products and promotional products directly to consumers, small and medium businesses and direct selling associations. It also services some of the largest accounting software firms and big-box retailers by developing and managing e-commerce sites for the online ordering of customizable printed materials.
The Scantron segment provides data management and decision support solutions and related services to educational, commercial and governmental entities worldwide. Scantron products and services provide solutions for testing and assessment, instruction and performance management and business operational data collection. Scantron's solutions combine a variety of data collection, analysis and management tools including online solutions, software, scanning equipment, and pre-printed and customizable forms.
The Faneuil segment provides business process outsourcing services including call center operations, back office operations, staffing services and toll collection services to government and regulated commercial clients. The Faneuil segment also provides patient information collection and tracking services, managed technical services and related field maintenance services to education, commercial, healthcare and governmental entities.
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 except for Faneuil as discussed above.
The Company and each of its existing domestic subsidiaries, other than unrestricted subsidiaries (of which there were none at September 30, 2013) and certain immaterial subsidiaries, are guarantors and in some instances may also be co-borrowers under the Term Loan and co-issuers under the 2015 Senior Notes and 2018 Senior Secured Notes (as defined hereinafter) (see Note 12). Harland Clarke Holdings is a holding company and has no significant assets at September 30, 2013 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 Notes 3, 4 and 19 for information regarding recent acquisitions and divestitures.
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, 2012.
All terms used but not defined elsewhere herein have the meaning ascribed to them in the Company's 2012 Annual Report on Form 10-K. All dollar amounts herein, unless otherwise specified, are given in millions.
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, 2012.
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
As a result of the sale of the HFS businesses (see Note 1), amounts related to the HFS businesses previously reported as operating income have been reclassified as discontinued operations (see Note 4). Prior period amounts relating to business


6
Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

segment changes (see Note 1) have been reclassified in Note 8. All reclassifications were made in accordance with applicable accounting guidance.
Recently Adopted Accounting Guidance
Effective January 1, 2013, the Company adopted amended guidance related to disclosures about offsetting assets and liabilities. The amendment enhances disclosures regarding assets and liabilities that are presented net or gross in the statement of financial position when the right of offset exists, or that are subject to an enforceable master netting arrangement. This amendment affects disclosures only, and therefore adoption did not affect the Company's consolidated financial position, results of operations or cash flows.
Effective January 1, 2013, the Company adopted amended guidance related to the presentation of amounts reclassified out of accumulated other comprehensive income by component. The amendment requires companies to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount reclassified is required under United States generally accepted accounting principles ("US GAAP") to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under US GAAP to be reclassified in their entirety to net income, companies are required to cross-reference to other disclosures required under US GAAP that provide additional detail about those amounts. This amendment affects presentation only, and therefore adoption did not affect the Company's consolidated financial position, results of operations or cash flows.
Effective January 1, 2013, the Company adopted amended guidance related to the testing of indefinite-lived intangible assets for impairment. Under the amendment, entities testing indefinite-lived intangible assets for impairment have the option to perform a qualitative assessment to determine whether further impairment testing is necessary. If an entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more-likely-than-not less than the carrying amount, a quantitative impairment test is required. Otherwise, no further impairment testing is required. This amendment affects testing steps only, and therefore adoption did not affect the Company's consolidated financial position, results of operations or cash flows.
New Accounting Guidance
In July 2013, the Financial Accounting Standards Board amended its guidance related to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Under this standard an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. For the Company, this amended guidance is effective beginning January 1, 2014 with early adoption permitted. As this amended guidance affects presentation only, the adoption of this amended guidance is not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.



7
Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

3. Acquisitions
NCP Solutions Acquisition
On May 31, 2013, the Company acquired 100% of the equity of NCP Solutions for an acquisition-date purchase price of $35.2, net of cash acquired of $0.3, and after giving effect to working capital adjustments of $0.5 (the "NCP Solutions Acquisition"). NCP Solutions is a leading end-to-end communications solutions provider to consumer finance companies, banks, mortgage lenders, mortgage subservicers, credit unions, auto and equipment finance companies, auto service contract providers, direct marketing companies, healthcare and health insurance companies, check producers and various other customers.
NCP Solutions delivers personalized, time-sensitive and confidential print and electronic business communications. These communications include billing, investment, demand deposit and sharedraft statements, event-triggered letters, installment loan and mortgage payment coupon books and direct marketing materials. NCP Solutions' vertically integrated production process and electronic and print competencies enable it to supply customers with a robust outsourced document management solution.
The allocation of purchase price resulted in identified intangible assets of $25.0, including customer relationships of $20.0, trademarks of $3.0, software of $2.0 and goodwill of $4.2. The remaining $6.3 of purchase price was allocated to tangible assets and liabilities. The goodwill arises because the total consideration for NCP Solutions, which reflects its future earnings and cash flow potential, exceeds the fair value of net assets acquired. The goodwill resulting from the acquisition was assigned to the Harland Clarke segment. Of the goodwill recognized, $2.8 is deductible for income tax purposes. NCP Solutions' results of operations have been included in the Company's operations since the date of its acquisition. The Company financed the acquisition with Harland Clarke Holdings' cash on hand. The pro forma effects of the NCP Solutions Acquisition on the consolidated results of operations were not material.
Faneuil Acquisition
On March 19, 2012, the Company entered into a Stock Purchase Agreement pursuant to which the Company purchased 100% of the issued and outstanding shares of capital stock of New Faneuil, Inc. ("New Faneuil") for $70.0 in cash (the "Faneuil Acquisition") from affiliates of MacAndrews. The Company financed the Faneuil Acquisition with Harland Clarke Holdings' cash on hand. New Faneuil, through its wholly owned subsidiary, Faneuil, provides business process outsourcing services including call center operations, back office operations, staffing services and toll collection services to government and regulated commercial clients across the United States.
Under accounting guidance for transactions among entities under common control, the Company has accounted for the purchase at historical cost and has retrospectively recasted prior periods under common control to include Faneuil operations. The Company and Faneuil came under common control on December 21, 2011, the date of the MacAndrews Acquisition. Cash paid in excess of the carrying amount of the assets and liabilities assumed in the amount of $33.8 is treated as an equity transaction with the parent in accordance with accounting guidance for transactions among entities under common control.


8
Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

The following table summarizes the historical cost of assets and liabilities assumed on March 19, 2012, the date of the Faneuil Acquisition:
Cash
 
 
$
2.3

Accounts receivable
 
 
11.8

Property, plant and equipment
 
 
10.3

Goodwill
 
 
13.0

Other intangible assets:               
 
 
 
Customer relationships
$
0.2

 
 
Tradenames
0.8

 
 
Software
0.3

 
 
Total other intangible assets
 
 
1.3

Other assets
 
 
7.2

Total assets acquired
 
 
45.9

Deferred revenues
 
 
1.2

Capital leases
 
 
1.0

Other liabilities
 
 
7.5

Net assets acquired
 
 
$
36.2

The pro forma effects of the Faneuil Acquisition on the consolidated results of operations were not material.
4. Discontinued Operations
On August 16, 2013, the Company completed the divestiture of HFS, which was previously reported as the Harland Financial Solutions business segment, and recognized an after tax gain on the divestiture. A total of approximately $1,200.0 of cash proceeds was received from the divestiture. In connection with the divestiture, the Company has reclassified the results of the Harland Financial Solutions segment as discontinued operations for all periods presented. As part of the purchase and sale agreement, the Company will perform and be compensated for customary transition services for a limited time related to certain administrative functions for HFS as performed for HFS prior to its divestiture and as set forth specifically in a transition services agreement. Cash flows from the transition services are considered to be indirect cash flows under applicable accounting guidance. The Company expects the transition services to be completed within one year from the date of the divestiture.
Operating results for discontinued operations are as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Net revenues
$
45.7

 
$
64.7

 
$
205.7

 
$
173.2

 
 
 
 
 
 
 
 
Income from discontinued operations before gain on sale and income taxes
7.2

 
7.9

 
49.5

 
1.1

Gain on sale of discontinued operations
647.0

 
—

 
647.0

 
—

Income from discontinued operations before income taxes
654.2

 
7.9

 
696.5

 
1.1

Provision for income taxes on discontinued operations
241.9

 
2.2

 
257.3

 
0.4

Net income from discontinued operations
$
412.3

 
$
5.7

 
$
439.2

 
$
0.7



9
Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

5. Inventories
Inventories consist of the following:
 
September 30,
2013
 
December 31,
2012
Finished goods
$
8.2

 
$
7.7

Work-in-process
11.8

 
8.2

Raw materials
14.3

 
13.1

 
$
34.3

 
$
29.0

6. Assets Held For Sale
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,
2013
 
December 31,
2012
Land
$
—

 
$
1.0

Buildings and improvements
—

 
2.1

 
$
—

 
$
3.1

At December 31, 2012, assets held for sale consisted 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, GA and relocated those operations into an existing facility. During the first quarter of 2013, the Company sold the information technology facility for $0.8 and realized a loss of $0.1. The other listed Atlanta facilities were closed as part of the Company's plan to exit duplicative facilities related to an acquisition.
During the first quarter of 2013, the Company announced plans to relocate its Atlanta regional office facilities within the Harland Clarke segment to another facility. In conjunction with this plan, the Company made a change to the marketing plan for the other Atlanta facilities included in assets held for sale. The new marketing plan combines the marketing of the Atlanta regional office facilities and facilities formerly classified as held for sale and the Company estimates it will take longer than twelve months to sell the facilities. Accordingly, the facilities formerly classified as assets held for sale were reclassified to property, plant and equipment during the first quarter of 2013.
7. Goodwill and Other Intangible Assets
The change in carrying amount of goodwill by business segment for the nine months ended September 30, 2013 is as follows:
 
Harland
Clarke
 
Scantron
 
Faneuil
 
Harland Financial Solutions
 
Total
Balance as of December 31, 2012
$
417.0

 
$
40.2

 
$
21.7

 
$
282.7

 
$
761.6

2013 acquisition
4.2

 
—

 
—

 
—

 
4.2

2013 divestiture
—

 
—

 
—

 
(282.7
)
 
(282.7
)
Effect of exchange rate changes
—

 
(0.1
)
 
—

 
—

 
(0.1
)
Balance as of September 30, 2013
$
421.2

 
$
40.1

 
$
21.7

 
$
—

 
$
483.0



10
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
 
Net Carrying Amount
 
Useful Life
(in years)
 
September 30, 2013
 
December 31, 2012
 
September 30, 2013
 
December 31, 2012
 
September 30, 2013
 
December 31, 2012
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
3 - 19
 
$
1,286.0

 
$
1,528.0

 
$
184.5

 
$
132.7

 
$
1,101.5

 
$
1,395.3

Trademarks and tradenames
15 - 25
 
81.4

 
101.4

 
7.6

 
5.3

 
73.8

 
96.1

Software
3 - 9
 
18.3

 
56.5

 
5.4

 
13.1

 
12.9

 
43.4

 
 
 
1,385.7

 
1,685.9

 
197.5

 
151.1

 
1,188.2

 
1,534.8

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Tradename
 
 
0.8

 
0.8

 
—

 
—

 
0.8

 
0.8

Total other intangible assets
 
 
$
1,386.5

 
$
1,686.7

 
$
197.5

 
$
151.1

 
$
1,189.0

 
$
1,535.6

Amortization expense was $30.2 and $94.7 for the three and nine months ended September 30, 2013, respectively, and $34.7 and $102.9 for the three and nine months ended September 30, 2012, respectively. These amounts include amortization expense for discontinued operations of $4.3 and $18.3 for the three and nine months ended September 30, 2013, respectively, and $7.3 and $21.8 for the three and nine months ended September 30, 2012, respectively. Amortization expense includes amortization of software of $3.0 and $10.0 for the three and nine months ended September 30, 2013, respectively, and $3.0 and $8.8 for the three and nine months ended September 30, 2012, respectively. These amounts include amortization of software for discontinued operations of $1.7 and $6.7 for the three and nine months ended September 30, 2013, respectively, and $2.7 and $7.9 for the three and nine months ended September 30, 2012, respectively.
The weighted average amortization period for all amortizable intangible assets recorded in connection with the NCP Solutions Acquisition was 12.9 years. The weighted average amortization period for each major class of amortizable intangible assets recorded in connection with the NCP Solutions Acquisition was as follows: customer relationships - 15 years, trademarks - 4 years and software - 5 years.
Estimated aggregate amortization expense for intangible assets through December 31, 2017 is as follows:
Three months ending December 31, 2013
$
26.0

Year ending December 31, 2014
97.1

Year ending December 31, 2015
91.0

Year ending December 31, 2016
82.8

Year ending December 31, 2017
80.2

During the nine months ended September 30, 2013, the Company recorded a non-cash impairment charge of $0.7 for the Scantron segment related to software that was determined to have no future use. That determination was the result of Scantron's decision to exit certain product lines in the education market (see Note 17). The impairment charge is included in asset impairment charges in the accompanying consolidated statements of operations.


11
Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

8. 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 payment solutions, transactional and secure document printing, direct online and print marketing services, inbound and outbound contact center services, as well as customized social stationery, business and home office products to financial and commercial institutions, as well as consumers and other businesses. It services some of the largest accounting software firms and big-box retailers by developing and managing e-commerce sites for the online ordering of customizable printed materials. This segment operates primarily in the United States and Puerto Rico.
•
Scantron segment — Provides data management and decision support solutions and related products and services to educational, commercial and governmental entities worldwide through online and print channels. This segment operates primarily in the United States, Canada and India and also has a network of international distributors.
•
Faneuil segment — Provides call center services, back office operations, staffing services and toll collection services to governmental and regulated commercial clients and patient information collection and tracking, managed technical services and related field maintenance services to educational, commercial, healthcare and governmental entities. This segment operates primarily in the United States and Canada.
As discussed in Note 1, the Company made business segment changes in the second quarter of 2012. Prior period results in the tables below have been reclassified to conform to these business segment changes. The results for the discontinued operations of HFS (see Note 4) are not included in the tables below.
Selected summarized financial information for the three months ended September 30, 2013 and 2012 is as follows:
 
Harland
Clarke(1)
 
Scantron
 
Faneuil(2)
 
Corporate
and Other
 
Total
Continuing operations
 
 
 
 
 
 
 
 
 
Product revenues, net
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2013
$
292.0

 
$
24.6

 
$
2.1

 
$
—

 
$
318.7

Three months ended September 30, 2012
278.4

 
22.5

 
2.2

 
—

 
303.1

Service revenues, net
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2013
$
11.8

 
$
7.1

 
$
40.2

 
$
—

 
$
59.1

Three months ended September 30, 2012
8.3

 
7.1

 
39.4

 
—

 
54.8

Intersegment revenues
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2013
$
—

 
$
0.4

 
$
0.4

 
$
(0.8
)
 
$
—

Three months ended September 30, 2012
—

 
0.6

 
—

 
(0.6
)
 
—

Operating income (loss)(3)
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2013
$
62.5

 
$
4.0

 
$
5.1

 
$
(7.2
)
 
$
64.4

Three months ended September 30, 2012
56.6

 
(5.2
)
 
2.9

 
(4.6
)
 
49.7

Depreciation and amortization (excluding amortization of deferred financing fees):
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2013
$
31.3

 
$
4.8

 
$
2.5

 
$
—

 
$
38.6

Three months ended September 30, 2012
37.2

 
4.3

 
2.9

 
—

 
44.4

Capital expenditures (excluding capital leases):
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2013
$
24.9

 
$
2.0

 
$
2.2

 
$
—

 
$
29.1

Three months ended September 30, 2012
11.8

 
0.8

 
1.2

 
—

 
13.8



12
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, 2013 and 2012 is as follows:
 
Harland
Clarke(1)
 
Scantron
 
Faneuil(2)
 
Corporate
and Other
 
Total
Continuing operations
 
 
 
 
 
 
 
 
 
Product revenues, net
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013
$
840.7

 
$
69.6

 
$
7.5

 
$
—

 
$
917.8

Nine months ended September 30, 2012
841.1

 
67.8

 
5.4

 
—

 
914.3

Service revenues, net
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013
$
33.9

 
$
18.2

 
$
114.7

 
$
—

 
$
166.8

Nine months ended September 30, 2012
25.2

 
19.8

 
109.8

 
—

 
154.8

Intersegment revenues
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013
$
0.1

 
$
1.4

 
$
0.7

 
$
(2.2
)
 
$
—

Nine months ended September 30, 2012
0.1

 
1.4

 
0.2

 
(1.7
)
 
—

Operating income (loss)(3)
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013
$
192.7

 
$
(8.1
)
 
$
12.0

 
$
(17.6
)
 
$
179.0

Nine months ended September 30, 2012
151.8

 
(26.0
)
 
5.6

 
(13.4
)
 
118.0

Depreciation and amortization (excluding amortization of deferred financing fees):
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013
$
92.5

 
$
15.2

 
$
7.6

 
$
—

 
$
115.3

Nine months ended September 30, 2012
110.5

 
13.1

 
8.0

 
—

 
131.6

Capital expenditures (excluding capital leases):
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013
$
40.4

 
$
3.5

 
$
4.0

 
$
—

 
$
47.9

Nine months ended September 30, 2012
32.0

 
5.4

 
3.3

 
—

 
40.7

___________________

(1)
Includes results of the acquired NCP Solutions business from the date of acquisition (see Note 3).
(2)
Includes results of the acquired Faneuil business from the date of common control (see Note 3).
(3)
Includes restructuring costs of $1.6 and $14.9 for the three and nine months ended September 30, 2013 and $11.6 and $16.2 for three and nine months ended September 30, 2012, respectively, (see Note 17) and non-cash impairment charges of $0.2 and $1.1 for the three and nine months ended September 30, 2013, respectively, and $0.7 and $0.7 for the three and nine months ended September 30, 2012, respectively.

Discontinued operations
The amounts shown above do not include depreciation and amortization expense and capital expenditures for the discontinued operations of HFS. Depreciation and amortization (excluding amortization of deferred financing fees) for HFS was $5.5 and $23.7 for the three and nine months ended September 30, 2013, respectively, and $10.0 and $28.6 for the three and nine months ended September 30, 2012, respectively. Capital expenditures (excluding capital leases) for HFS was $1.1 and $5.9 for the three and nine months ended September 30, 2013, respectively, and $3.0 and $6.3 for the three and nine months ended September 30, 2012, respectively.


13
Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

9. Accumulated Other Comprehensive Loss
The following presents changes in accumulated other comprehensive loss, net of tax, by component, during the nine months ended September 30, 2013 and 2012:
 
 
Foreign currency translation adjustments
 
Unrecognized amounts included in postretirement obligations
 
Derivative fair-value adjustments
 
Unrealized gains (losses) on investments, net
 
Total
Nine months ended September 30, 2013:
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
0.4

 
$
(0.7
)
 
$
—

 
$
—

 
$
(0.3
)
Other comprehensive loss before reclassifications
 
(0.6
)
 
—

 
—

 
—

 
(0.6
)
Amounts reclassified from accumulated other comprehensive loss
 
(0.3
)
 
—

 
—

 
—

 
(0.3
)
Net current period other comprehensive loss
 
(0.9
)
 
—

 
—

 
—

 
(0.9
)
Ending balance
 
$
(0.5
)
 
$
(0.7
)
 
$
—

 
$
—

 
$
(1.2
)
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2012:
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
—

 
$
(0.1
)
 
$
(0.1
)
 
$
0.1

 
$
(0.1
)
Other comprehensive income (loss) before reclassifications
 
0.3

 
—

 
—

 
(0.2
)
 
0.1

Amounts reclassified from accumulated other comprehensive loss
 
—

 
—

 
0.1

 
0.1

 
0.2

Net current period other comprehensive income (loss)
 
0.3

 
—

 
0.1

 
(0.1
)
 
0.3

Ending balance
 
$
0.3

 
$
(0.1
)
 
$
—

 
$
—

 
$
0.2

The following presents amounts reclassified out of accumulated other comprehensive loss, by component, during the three and nine months ended September 30, 2013 and 2012:
Details about
accumulated other comprehensive loss components
 
Affected line in the statement of operations
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
Derivative fair-value adjustments
 
Interest expense
 
$
—

 
$
—

 
$
—

 
$
(0.1
)
 
 
Benefit for income taxes on continuing operations
 
—

 
—

 
—

 
—

 
 
Net income (loss)
 
$
—

 
$
—

 
$
—

 
$
(0.1
)
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains on investments, net
 
Other expense, net
 
$
—

 
$
—

 
$
—

 
$
(0.2
)
 
 
Benefit for income taxes on continuing operations
 
—

 
—

 
—

 
(0.1
)
 
 
Net income (loss)
 
$
—

 
$
—

 
$
—

 
$
(0.1
)
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
Income from discontinued operations before income taxes
 
$
0.3

 
$
—

 
$
0.3

 
$
—

 
 
Provision for income taxes on discontinued operations
 
—

 
—

 
—

 
—

 
 
Net income (loss)
 
$
0.3

 
$
—

 
$
0.3

 
$
—




14
Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

10. 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 20 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,
 
2013
 
2012
 
2013
 
2012
Interest cost
$
0.1

 
$
0.1

 
$
0.3

 
$
0.3

Net postretirement benefit cost
$
0.1

 
$
0.1

 
$
0.3

 
$
0.3


11. Income Taxes
The Company is subject to taxation in the United States and various state and foreign jurisdictions. The statute of limitations for the federal and state tax returns of the affiliated group of M & F Worldwide or MacAndrews and subsidiaries, as the case may be, including in each case the Company, for the tax years 2010 through 2012 generally remain open. In addition, open tax years related to foreign jurisdictions remain subject to examination but are not considered material. The Company has recently been notified that the Internal Revenue Service has selected to examine the affiliated group of M & F Worldwide and subsidiaries for the tax year ended December 21, 2011.
There are no events that have occurred since December 31, 2012 that had a material impact on amounts accrued for the Company's uncertain tax positions.
12. Long-Term Debt
 
September 30,
2013
 
December 31,
2012
$1,900.0 Senior Secured Credit Facilities:
 
 
 
Extended Term Loans due 2017
$
625.5

 
$
677.4

Non-Extended Term Loans due 2014
—

 
728.6

Tranche B-3 Term Loans due 2018
745.3

 
—

Total $1,900.0 Senior Secured Credit Facilities
1,370.8

 
1,406.0

9.75% Senior Secured Notes due 2018
285.0

 
235.0

Senior Floating Rate Notes due 2015
204.3

 
204.3

9.50% Senior Fixed Rate Notes due 2015
221.3

 
271.3

Capital lease obligations
3.2

 
3.1

Unamortized original issue discount, original issue premium and acquisition accounting-related fair value discount
(155.3
)
 
(271.9
)
 
1,929.3

 
1,847.8

Less: current maturities
(90.0
)
 
(78.5
)
Long-term debt, net of current maturities
$
1,839.3

 
$
1,769.3

New Facility Joinder Agreement to Credit Agreement
On April 26, 2013, the Company entered into a new facility joinder agreement to the Credit Agreement (as defined hereinafter) under which the Company borrowed $750.0 (the "Tranche B-3 Term Loans"). Proceeds of the Tranche B-3 Term Loans were used to repay, in full, together with all interest and fees accrued in respect of, the Non-Extended Term Loans plus other fees and expenses in connection with such refinancing.
The Tranche B-3 Term Loans will mature on May 22, 2018 subject (if the Revolving Facility (as defined hereinafter) is terminated and repaid in full) to a springing maturity 90 days prior to the maturity of the 2015 Senior Notes if they have not


15
Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

otherwise been repaid, extended or refinanced. The Company is required to repay the Tranche B-3 Term Loans in equal quarterly installments in aggregate annual amounts equal to 2.50% of the original amount. In addition, aggregate amortization in respect of all of the Tranche B-3 Term Loans and all other debt sharing liens with such loans (with certain exceptions) must be at least $75.0 per year (subject to certain reductions). The weighted average interest rate on the Tranche B-3 Term Loans outstanding was 7.0% at September 30, 2013.
The Tranche B-3 Term Loans 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 4.50% per annum, provided that the rate before the applicable margin shall not be less than 2.50% per annum; or
•
A rate per annum equal to a reserve adjusted LIBOR rate, plus an applicable margin of 5.50% per annum, provided that the reserve adjusted LIBOR rate shall not be less that 1.50% per annum.
All other terms are substantially the same as the Credit Agreement (as defined hereinafter).
Revolving Credit Facility due 2018
On February 20, 2013, Harland Clarke Holdings terminated the Revolver (as defined hereinafter) and along with certain of its domestic subsidiaries, as co-borrowers, and its direct parent, CA Acquisition Holdings, Inc. and certain of its other domestic subsidiaries as guarantors, entered into a senior secured asset based revolving credit facility (the "Revolving Facility") with Citibank, N.A., as administrative agent and collateral agent. The Revolving Facility provides for a facility equal to the lesser of $80.0 and a calculated borrowing base consisting of:
•
85% of eligible receivables less unearned revenue; plus
•
the lesser of (i) 85% of the orderly liquidation value of eligible inventory and (ii) 70% of eligible inventory (in each case, at the lower of book value and market); minus
•
eligibility reserves in effect at the time.
The borrowing base at September 30, 2013 was $33.7, a decrease of $18.6 from the borrowing base at June 30, 2013. The decrease was primarily due to recent divestitures (see Notes 4 and 19). The Revolving Facility includes an up to $30.0 subfacility for letters of credit and an up to $10.0 subfacility in the form of short-term swingline loans. As of September 30, 2013, there were no outstanding borrowings under the Revolving Facility and there was $23.3 available for borrowing (giving effect to the issuance of $10.4 of letters of credit).
Borrowings and other obligations under the Revolving Facility are guaranteed by CA Acquisition Holdings, Inc., Harland Clarke Holdings and certain of its domestic subsidiaries and secured by a lien on substantially all of the assets of such loan parties, including inventory, receivables, equipment, intellectual property and real property. The obligations under the Revolving Facility are secured by a first priority lien on inventory, receivables, payment intangibles and other current assets and other assets arising therefrom and proceeds thereof and second priority liens on the remaining collateral, subject to the first priority liens securing the Company's Tranche B-3 Term Loans, Extended Term Loans and 2018 Senior Secured Notes (as defined hereinafter).
The Revolving Facility will terminate on February 20, 2018, with springing maturities 91 days prior to the scheduled maturity date of the Company's Extended Term Loans and 2015 Senior Notes (each as defined hereinafter) all of which mature prior to the termination date of this Revolving Facility.
Borrowings against the Revolving Facility bear, at the Company's option, interest at:
•
A LIBOR rate borrowing, bearing interest at a rate per annum equal to a reserve-adjusted LIBOR rate, plus an applicable margin ranging from 1.75% to 2.25% per annum based on the average excess availability for the prior fiscal quarter; or
•
An Alternate Base Rate ("ABR") borrowing, bearing interest at a rate per annum equal to the greatest of:
•
The prime rate of Citibank;
▪
Federal Funds Effective Rate plus 0.5%; and
▪
LIBOR rate for a one-month interest period plus 1%,
plus an applicable margin ranging from 0.75% to 1.25% per annum based on the average excess availability for the prior fiscal quarter.


16
Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

The Revolving Facility has a commitment fee of 0.5% per annum if the average utilization of the Revolving Facility for the preceding fiscal quarter is less than 50% of the total commitments and 0.375% per annum if the average utilization for the preceding fiscal quarter is greater than or equal to 50% of the total commitments. The Revolving Facility has a weighted average fee of 2.00% for issued letters of credit.
The Revolving Facility contains covenants that, among other things, limit the ability of the Company and its subsidiaries to (i) incur or guarantee additional indebtedness or capitalized lease obligations, or issue disqualified or preferred stock; (ii) grant liens on assets; (iii) transfer or sell assets; (iv) pay dividends or make distributions to stockholders; (v) enter into transactions with affiliates; (vi) make investments or acquisitions; (vii) enter into sale/leaseback transactions; (viii) amend certain of the Company's indebtedness; (ix) engage in substantially different lines of business; (x) change the Company's fiscal year; and (xi) engage in speculative hedging transactions. These covenants are subject to important exceptions and qualifications. The Revolving Facility also contains a fixed charge coverage ratio test that may apply if the Company's excess availability falls below specified levels, as well as affirmative covenants and events of default that are customary for such facilities.
$1,900.0 Senior Secured Credit Facilities
Extended Term Loans
On July 24, 2012, an amendment (the "Amendment") entered into on May 10, 2012 by the Company to its credit agreement dated as of April 4, 2007 (the "Credit Agreement") became effective, thereby extending the maturity of $973.0 of term loans under the Credit Agreement (the "Extended Term Loans") from June 2014 to June 2017 (subject to a springing maturity 90 days prior to the maturity date of the Company's 2015 Senior Notes (as defined hereinafter) if such notes have not been repaid, extended or refinanced). The effectiveness of the Amendment was conditioned on, among other customary conditions, the repayment of $280.2 of the Extended Term Loans, which repayment was made with net proceeds from the issuance of the 2018 Senior Secured Notes (as defined hereinafter) and cash on hand. After giving effect to such repayment and the effectiveness of the Amendment, there were $692.8 of Extended Term Loans outstanding and $729.0 of non-extended term loans (the "Non-Extended Term Loans") outstanding. The Company is required to repay the Extended Term Loans in equal quarterly installments in aggregate annual amounts equal to 10% of the original extended amount after giving effect to the $280.2 prepayment thereof required as a condition precedent to the effectiveness of the Amendment. The Amendment also includes several covenants in addition to those covenants in the Credit Agreement. The weighted average interest rate on the principal amount of Extended Term Loans outstanding was 5.4% at September 30, 2013.
The Extended Term Loans 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 4.25% per annum; or
•
A rate per annum equal to a reserve-adjusted LIBOR rate, plus an applicable margin of 5.25% per annum.
Non-Extended Term Loans
On April 4, 2007, the Company and substantially all of its subsidiaries as co-borrowers entered into 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 was to mature on June 30, 2014 with respect to the Non-Extended Term Loans. The Non-Extended Term Loans were repaid on April 26, 2013 with proceeds from the Tranche B-3 Term Loans. The Company was required to repay the Non-Extended Term Loans in equal quarterly installments in aggregate annual amounts equal to 1% of the original principal amount multiplied by the ratio of Non-Extended Term Loans outstanding on the effective date of the Amendment to the total Non-Extended Term Loans and Extended Term Loans outstanding on the effective date of the Amendment prior to giving effect to the prepayment required as a condition precedent to the effectiveness of the Amendment. 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 provided for a $100.0 revolving credit facility (the "Revolver"). The Revolver included 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 Revolver was terminated on February 20, 2013 upon the execution of the new Revolving Facility.
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, the 2015 Senior Notes (as defined hereinafter), and the 2018 Senior Secured Notes (as defined hereinafter) allow the Company to incur substantial additional debt.


17
Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

The Non-Extended Term Loans bore, 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; or
•
A rate per annum equal to a reserve-adjusted LIBOR rate, plus an applicable margin of 2.50% per annum.
The Company and each of its existing and future domestic subsidiaries, other than unrestricted subsidiaries, certain immaterial subsidiaries, subsidiaries that do not guarantee other debt of the Company and subject to certain other exceptions, 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 Company has the right to prepay the term loans at any time without premium or penalty, subject to certain breakage costs. The Company is required to prepay the term loans 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 quarterly amortization installments on the term loans and second to the remaining amortization installments on the term loans on a pro rata basis. No excess cash flow payment was required in 2013 with respect to 2012. In March 2012, an excess cash flow payment of $12.5 was paid with respect to 2011. Under the terms of the Credit Agreement such excess cash flow payments were applied against other mandatory payments due in the same year of the excess cash flow payment.
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 "2015 Senior Notes 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, 2013. 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 and the 2018 Senior Secured Notes. The Company and each of its existing subsidiaries, other than unrestricted subsidiaries and certain immaterial subsidiaries and certain other exceptions, are guarantors and may also be co-issuers under the 2015 Senior Notes.
The 2015 Senior Notes 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 2015 Senior Notes 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


18
Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

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.
9.75% Senior Secured Notes due 2018
On July 24, 2012, the Company and Harland Clarke Corp., Harland Financial Solutions, Inc., Scantron Corporation and Checks in the Mail, Inc. (together, the "Co-Issuers") issued $235.0 aggregate principal amount of 9.75% Senior Secured Notes due 2018 (the "2018 Senior Secured Notes"). Harland Financial Solutions, Inc. was released from its obligations as a Co-Issuer and Guarantor (as defined below) in connection with the divestiture of HFS (see Notes 1 and 4). The Company used the net proceeds from the offering, together with cash on hand, to repay $280.2 aggregate principal amount of outstanding Extended Term Loans under its Credit Agreement.
The 2018 Senior Secured Notes were issued pursuant to an indenture, dated as of July 24, 2012 (the "2018 Senior Secured Notes Indenture"), among the Company, the Co-Issuers, certain of the Company's domestic subsidiaries that guarantee the 2018 Senior Secured Notes (the "Guarantors") and Wells Fargo Bank, National Association, as trustee and collateral agent (the "Trustee"). The Guarantors have guaranteed (the "Guarantees") the Company's and Co-Issuers' obligations under the 2018 Senior Secured Notes and the 2018 Senior Secured Notes Indenture on a senior secured basis. The 2018 Senior Secured Notes and the Guarantees are secured pursuant to a Security Agreement, dated as of July 24, 2012, by and among the Company, the Co-Issuers, the Guarantors and Wells Fargo Bank, National Association, as collateral trustee (the "Collateral Trustee") and a Collateral Trust Agreement, dated as of July 24, 2012, by and among the Company, certain subsidiaries of Harland Clarke Holdings named therein, Credit Suisse AG, Cayman Islands branch, as credit agreement collateral agent, and Wells Fargo Bank, National Association, as trustee and as collateral trustee.
The 2018 Senior Secured Notes mature on August 1, 2018. The 2018 Senior Secured Notes bear interest at a rate of 9.75% per annum, payable on each February 1 and August 1 to holders of record at the close of business on the immediately preceding January 15 and July 15 of each year.
On May 20, 2013, the Company completed an additional offering of $50.0 aggregate principal amount of the 2018 Senior Secured Notes (the "Additional Notes") pursuant to the 2018 Senior Secured Notes Indenture and supplemented on February 20, 2013 (as so supplemented, the "Indenture") under which the Company previously issued $235.0 aggregate principal amount of the 2018 Senior Secured Notes (the "Original Notes", and together with the Additional Notes, the "Notes"). The Additional Notes were sold at a price of 109.00% plus accrued interest from February 1, 2013. The Additional Notes trade as a single series with the Original Notes and are treated substantially the same as the Original Notes under the Indenture. On June 19, 2013, Harland Clarke Holdings used proceeds from the Additional Notes to repay and retire $50.0 of the Fixed Rate Notes.
The 2018 Senior Secured Notes are senior secured obligations of the Company and the Co-Issuers and the Guarantees are senior secured obligations of the Guarantors. The 2018 Senior Secured Notes and the Guarantees rank as follows: (i) secured on a first-priority basis, equally and ratably with all obligations of the Company, the Co-Issuers and the Guarantors that are secured by pari passu liens on the collateral, including their existing senior secured credit facilities; (ii) effectively junior to all of the Company's, Co-Issuers' and the Guarantors' obligations under any future asset-based revolving credit facility to the extent of the value of the current asset collateral held by the Company, the Co-Issuers and the Guarantors; (iii) structurally subordinated to any existing and future indebtedness and other liabilities of any existing and future subsidiaries of the Company that are not Guarantors; (iv) pari passu in right of payment with all of the existing and future senior indebtedness of the Company, the Co-Issuers and the Guarantors and effectively senior to the extent of the value of the collateral to any future unsecured indebtedness of the Company, the Co-Issuers and the Guarantors that is secured by liens on the collateral that are junior to the liens securing the Senior Secured Notes and the Guarantees or that is unsecured; and (v) senior in right of payment to any existing and future subordinated indebtedness of the Company, the Co-Issuers and the Guarantors.
The 2018 Senior Secured Notes and the Guarantees are secured on a first-priority basis, equally and ratably with the indebtedness under the Credit Agreement, by substantially all of the Company's, the Co-Issuers' and the Guarantors' assets, subject to certain exceptions and permitted liens.
Beginning with the fiscal year ending December 31, 2013, if the Company's secured leverage ratio exceeds certain levels, the Company will be required to offer to purchase an amount of the 2018 Senior Secured Notes equal to the greater of (1) $15.0 and (2) 50% of its excess cash flow for the applicable period, less any voluntary prepayments of 2018 Senior Secured Notes or credit facility indebtedness and certain mandatory prepayments made during the applicable period and subject to certain other exceptions, at a purchase price equal to 100% of the principal amount of the 2018 Senior Secured Notes, plus accrued and unpaid interest and additional interest. Upon the occurrence of a change of control or if the Company sells certain assets, the Company may be required to make an offer to purchase the 2018 Senior Secured Notes at certain specified prices.


19
Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

The 2018 Senior Secured Notes Indenture contains covenants that, among other things, limit the Company's, the Co-Issuers' and the Guarantors' ability to (i) incur or guarantee additional indebtedness or issue preferred stock; (ii) grant liens on assets; (iii) pay dividends or make distributions to stockholders; (iv) repurchase or redeem capital stock or subordinated indebtedness; (v) make investments or acquisitions; (vi) enter into sale/leaseback transactions; (vii) incur restrictions on the ability of the Company's subsidiaries to pay dividends or to make other payments to the Company; (viii) enter into transactions with the Company's affiliates; (ix) merge or consolidate with other companies or transfer all or substantially all assets; and (x) transfer or sell assets. These covenants are subject to important exceptions and qualifications. The 2018 Senior Secured Notes Indenture contains affirmative covenants and events of default that are customary for indentures governing high-yield debt securities.
Faneuil Revolving Credit Facilities
Faneuil had a $35.5 revolving credit facility (the "Revolving Credit Agreement"), which was to mature on June 1, 2012 and was paid in full on January 25, 2012. The Revolving Credit Agreement allowed Faneuil to choose from two different interest rate options. The first option was LIBOR plus 2.5% per annum and the second option was Prime Rate minus 1.25%. The Revolving Credit Agreement contained certain covenants and restrictions including covenants and restrictions related to change of control, mergers, dissolution, accounting methodology, indebtedness, dividends and distributions. The Revolving Credit Agreement was collateralized by substantially all of the assets of Faneuil, and was secured by a pledge of the shares of Faneuil's parent.
On January 25, 2012, Faneuil entered into a new $25.0, two-year, revolving credit agreement with MacAndrews & Forbes Group LLC, which is an indirect wholly owned subsidiary of MacAndrews. This revolver was drawn in full on January 25, 2012 and the proceeds, along with cash on hand, were used to pay in full the outstanding balance of $25.6 plus all accrued interest under the Revolving Credit Agreement. Faneuil terminated the Revolving Credit Agreement and it is no longer available for borrowing.
On March 19, 2012, in connection with the Faneuil Acquisition, Faneuil's $25.0 revolving credit facility with MacAndrews & Forbes Group LLC was extinguished and Faneuil no longer has any loans outstanding.
Loss on Early Extinguishment of Debt
In connection with the repayment of $726.6 of the Non-Extended Term Loans and $50.0 of Fixed Rate Notes in the second quarter of 2013, the Company recorded a non-cash loss on early extinguishment of debt of $61.0 resulting from the write-off of unamortized acquisition accounting-related fair value discount, which was attributable to the MacAndrews Acquisition.
In connection with the repayment of $280.2 of the Extended Term Loans in the third quarter of 2012, the Company recorded a loss on early extinguishment of debt of $34.2 resulting from the write-off of unamortized acquisition accounting-related fair value discount, which was attributable to the MacAndrews Acquisition.
Capital Lease Obligations
The Company had outstanding capital lease obligations with principal balances totaling $3.2 and $3.1 at September 30, 2013 and December 31, 2012, respectively. These obligations have imputed interest rates ranging from 0.0% to 9.6% and have required payments of $0.5 remaining in 2013, $1.7 in 2014, $0.5 in 2015, $0.4 in 2016 and $0.1 in 2017.
13. 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 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 and expired on June 30, 2012. This hedge swapped 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 September 30, 2009 and expired on September 30, 2012. This hedge swapped 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 and expired on June 30, 2013. This hedge swapped the underlying variable rate for a fixed rate of 1.264%.


20
Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

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,
2013
 
December 31,
2012
Interest rate swaps
 
Other current liabilities
 
$
—

 
$
1.3

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 were ineffective during the six months ended June 30, 2013 and the three and nine months ended September 30, 2012. The following presents the effect of these derivative instruments (effective and ineffective portion) on other comprehensive loss and amounts reclassified from accumulated other comprehensive loss into interest expense.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Interest Rate Swaps:
 
 
 
 
 
 
 
Loss reclassified from other comprehensive income into interest expense (effective portion)
$
—

 
$
—

 
$
—

 
$
0.1

Loss recognized in interest expense (ineffective portion)
—

 
0.3

 
—

 
1.8

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:
 
2012
Balance at beginning of period
 
$
0.1

Loss reclassified from accumulated other comprehensive loss into interest expense, net of taxes of $0.0
 
(0.1
)
Balance at end of period
 
$
—

There were no balances related to these derivative instruments in accumulated other comprehensive loss in the nine months period ended September 30, 2013.
14. Fair Value Measurements
Nonrecurring Fair Value Measurements
During the nine months ended September 30, 2013, the Company recorded non-cash impairment charges of $0.2 for the Harland Clarke segment and $0.9 for the Scantron segment related to assets that were determined to have no future use.
During the nine months ended September 30, 2012, the Company recorded non-cash impairment charges of $0.5 for the Faneuil segment related to abandoned leasehold improvements resulting from the loss of a client and $0.2 for the Harland Clarke segment related to assets that were determined to have limited future use.


21
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, 2013 and December 31, 2012 are as follows:
 
Balance at
 
 
 
 
 
 
 
September 30, 2013
 
(Level 1)
 
(Level 2)
 
(Level 3)
Corporate equity securities
$
0.1

 
$
0.1

 
$
—

 
$
—

 
Balance at
 
 
 
 
 
 
 
December 31, 2012
 
(Level 1)
 
(Level 2)
 
(Level 3)
Corporate equity securities
$
0.1

 
$
0.1

 
$
—

 
$
—

Liability for interest rate swaps
1.3

 
—

 
1.3

 
—

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 is based on quoted market prices.
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, 2013 and December 31, 2012 was approximately $2,080.7 and $1,984.4, respectively. The carrying value of long-term debt at September 30, 2013 and December 31, 2012 was $1,929.3 and $1,847.8 respectively. As described in Note 1, the carrying value of the Company's long-term debt was adjusted to fair value as of the date of the MacAndrews Acquisition.
15. Investments
Equity Method Investment
During 2012, the Company purchased certain equity securities of Transactis, Inc. ("Transactis"), a privately held company, representing a 15.6% ownership interest for $7.0 in cash. The Company accounts for this investment using the equity method due to its ability to influence operating and financial matters of Transactis through its representation on the Transactis board of directors and certain rights under the terms of the stock purchase agreement. The assets, liabilities and results of operations are not significant to the Company's financial position or results of operations. The carrying value of this investment at September 30, 2013 and December 31, 2012 was $6.4 and $6.9, respectively, and is included in other assets in the accompanying consolidated balance sheets.
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, 2013:
 
 
 
 
 
 
 
Corporate equity securities
$
0.1

 
$
—

 
$
—

 
$
0.1

Balance at December 31, 2012:
 
 
 
 
 
 
 
Corporate equity securities
$
0.1

 
$
—

 
$
—

 
$
0.1

During the nine months ended September 30, 2012, the Company sold its United States treasury securities, which were to mature in 2014, for $56.3 in cash and recognized a loss of $0.2, which is included in other expense, net in the accompanying consolidated statements of operations.


22
Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

16. Commitments and Contingencies
Various legal proceedings, claims and investigations are pending against the Company, including those relating to commercial transactions, intellectual property matters, environmental 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 consolidated financial position or results of operations.
17. Restructuring
Harland Clarke and Corporate
The Company adopted plans during 2011, 2012 and 2013 to realize cost savings in the Harland Clarke segment and Corporate by 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, 2013 and 2012:
 
Beginning
Balance
 
Expensed
 
Paid in
Cash
 
Non-Cash
Utilization
 
Ending
Balance
Nine months ended September 30, 2013:
 
 
 
 
 
 
 
 
 
Severance and severance-related
$
6.4

 
$
1.2

 
$
(4.1
)
 
$
—

 
$
3.5

Facilities closures and other costs
2.4

 
6.7

 
(1.9
)
 
(4.3
)
 
2.9

Total
$
8.8

 
$
7.9

 
$
(6.0
)
 
$
(4.3
)
 
$
6.4

 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2012:
 
 
 
 
 
 
 
 
 
Severance and severance-related
$
4.5

 
$
7.5

 
$
(5.1
)
 
$
—

 
$
6.9

Facilities closures and other costs
3.0

 
1.6

 
(1.4
)
 
(0.8
)
 
2.4

Total
$
7.5

 
$
9.1

 
$
(6.5
)
 
$
(0.8
)
 
$
9.3

The non-cash utilization of $4.3 and $0.8 in 2013 and 2012, 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 $1.6 for costs related to these plans. The Company expects to make payments for severance and severance-related costs through 2014. Ongoing lease commitments related to these plans continue through 2017.
Scantron
During 2013, the Company adopted a plan in the Scantron segment to exit certain product lines in the education market. The plan resulted in the closure of four leased facilities and the elimination of operations and selling, general and administrative expenses associated with those product lines, largely occurring in the second quarter of 2013.
The Company previously adopted plans during 2011 and 2012 to realize 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, 2013 and 2012:
 
Beginning
Balance
 
Expensed
 
Paid in
Cash
 
Non-Cash
Utilization
 
Ending
Balance
Nine months ended September 30, 2013:
 
 
 
 
 
 
 
 
 
Severance and severance-related
$
3.2

 
$
4.0

 
$
(5.2
)
 
$
—

 
$
2.0

Facilities and other costs
0.9

 
2.6

 
(2.0
)
 
(0.8
)
 
0.7

Total
$
4.1

 
$
6.6

 
$
(7.2
)
 
$
(0.8
)
 
$
2.7

 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2012:
 
 
 
 
 
 
 
 
 
Severance and severance-related
$
2.0

 
$
4.1

 
$
(3.0
)
 
$
—

 
$
3.1

Facilities and other costs
1.4

 
1.2

 
(1.2
)
 
—

 
1.4

Total
$
3.4

 
$
5.3

 
$
(4.2
)
 
$
—

 
$
4.5



23
Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

The non-cash utilization in the table above includes adjustments to the carrying value of other property, plant and equipment. Ongoing lease commitments related to these plans continue to 2018. The Company expects to make payments for severance and severance-related costs through 2014.
Faneuil
The Company adopted a plan in 2012 to realize cost savings in the Faneuil 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 Faneuil segment for the nine months ended September 30, 2013 and 2012:
 
Beginning
Balance
 
Expensed
 
Paid in
Cash
 
Ending
Balance
Nine months ended September 30, 2013:
 
 
 
 
 
 
 
Severance and severance-related
$
0.6

 
$
0.4

 
$
(0.7
)
 
$
0.3

Facilities and other costs
0.2

 
—

 
(0.1
)
 
0.1

Total
$
0.8

 
$
0.4

 
$
(0.8
)
 
$
0.4

 
 
 
 
 
 
 
 
Nine months ended September 30, 2012:
 
 
 
 
 
 
 
Severance and severance-related
$
—

 
$
0.9

 
$
—

 
$
0.9

Facilities and other costs
—

 
0.9

 
(0.3
)
 
0.6

Total
$
—

 
$
1.8

 
$
(0.3
)
 
$
1.5

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 2018.
18. Transactions with Related Parties
Insurance
The Company participates in MacAndrews' directors and officers insurance program, which covers the Company as well as MacAndrews and MacAndrews' other affiliates. The limits of coverage are available on aggregate losses to any or all of the participating companies and their respective directors and officers. The Company reimburses MacAndrews for its allocable portion of the premiums for such coverage, which the Company believes is more favorable than premiums the Company could secure were it to secure its own coverage. At September 30, 2013, the Company recorded prepaid expenses and other assets of $0.7 and $1.1, respectively, relating to the directors and officers insurance program. At December 31, 2012, the Company recorded prepaid expenses and other assets of $0.7 and $1.0, respectively, related to the directors and officers insurance program. The Company paid $1.0 and $1.9 to MacAndrews during the nine months ended September 30, 2013 and 2012, respectively, under the directors and officers insurance program. The Company also participates in certain other insurance programs with MacAndrews under which it pays premiums directly to the insurance broker.
Tax Sharing Agreement
The Company, MacAndrews and certain other subsidiaries of MacAndrews entered into a tax sharing agreement on December 21, 2011, whereby MacAndrews files consolidated federal income tax returns on the Company's behalf. Under the tax sharing agreement, the Company makes periodic payments to MacAndrews. These payments are based on the applicable federal income tax liability that the Company would have had for each taxable period if the Company had not been included in the MacAndrews consolidated group. Similar provisions apply with respect to any foreign, state or local income or franchise tax returns filed by any MacAndrews consolidated, combined or unitary group for each period that the Company is included in any such group for foreign, state or local tax purposes. The Company made net payments to MacAndrews of $228.3 and $270.3 for the three and nine months ended September 30, 2013, respectively, and $22.4 and $70.6 for the three and nine months ended September 30, 2012, respectively.
Notes Receivable
On December 27, 2011, the Company entered into a revolving credit agreement with its indirect parent, MacAndrews, whereby MacAndrews could borrow an amount not exceeding $30.0. The facility is unsecured, bears interest at LIBOR plus 2% and matures in December 2013. The facility was drawn in full by MacAndrews on December 27, 2011 and remained outstanding at September 30, 2013. Interest income of $0.2 and $0.5 was recorded and related payments were received during


24
Harland Clarke Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions)
(unaudited)

the three and nine months ended September 30, 2013, respectively. Interest income of $0.2 and $0.6 was recorded and related payments were received during the three and nine months ended September 30, 2012, respectively.
Other
The Company expensed $0.6 and $2.0 during the three and nine months ended September 30, 2013, respectively, and $0.6 and $2.0 during the three and nine months ended September 30, 2012, respectively, for services provided to the Company by M & F Worldwide. This amount is reflected in selling, general and administrative expenses.
During the nine months ended September 30, 2013 and 2012, the Company paid cash dividends of $29.2 and $25.8, respectively, to M & F Worldwide as permitted by restricted payment baskets within the Company's debt agreements.
On March 19, 2012, the Company completed the Faneuil Acquisition from affiliates of MacAndrews, its indirect parent (see Note 3). In connection with the Faneuil Acquisition, Faneuil's revolving credit facility with an affiliate of MacAndrews, which was entered into on January 25, 2012, was extinguished (see Note 12).
19. Subsequent Event
On October 18, 2013, the Company completed the sale of Faneuil, Inc. ("Faneuil"), its wholly-owned business process outsourcing subsidiary, to ALJ Regional Holdings, Inc. ("ALJ") for consideration consisting of $25.0 in cash, a $25.0 two year note to the Company and 3.0 million shares of ALJ's common stock. The sale did not include Faneuil's Harland Technology Services business, which was transferred to and became part of the operations and results of Scantron from and after October 18, 2013 and the Company is currently evaluating the impact of the divestiture on its consolidated financial position and results of operations.


25
Harland Clarke Holdings Corp. and Subsidiaries

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, 2013 and 2012 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 operating subsidiaries and was incorporated in Delaware on October 19, 2005. The Company is an indirect, wholly owned subsidiary of M & F Worldwide Corp. ("M & F Worldwide"), which is, as of December 21, 2011, an indirect, wholly owned subsidiary of MacAndrews & Forbes Holdings Inc. ("MacAndrews"). MacAndrews is wholly owned by Ronald O. Perelman. On September 12, 2011, M & F Worldwide agreed to merge with an indirect, wholly owned subsidiary of MacAndrews, and, following a vote of stockholders of M & F Worldwide and the satisfaction or waiver of closing conditions, that merger was effected on December 21, 2011 (the "MacAndrews Acquisition").
As a result of the MacAndrews Acquisition, which resulted in a change in ownership of M & F Worldwide, the Company was required to use the acquisition method of accounting to revalue its assets and liabilities as of the date of the MacAndrews Acquisition. Such accounting results in a number of changes, including, but not limited to, decreased revenues as a result of fair value adjustments to deferred revenues, increased depreciation and amortization as a result of the revaluation of assets and increased non-cash interest expense that results from adjusting the Company's long-term debt to fair value as of the date of the MacAndrews Acquisition.
On August 16, 2013, the Company completed the sale of each of Harland Financial Solutions, Inc., Harland Financial Solutions Worldwide Limited and Harland Israel Ltd. (collectively, "HFS") to affiliates of Davis + Henderson Corporation. The consideration received by the Company for the sale was approximately $1.2 billion in cash. The Company entered into an ancillary agreement providing for certain transitional services for a limited time to the buyer on terms customary for a transaction of this type. Results of operations for HFS through August 16, 2013, including the related gain, are reported as discontinued operations in the accompanying consolidated statements of operations included elsewhere in this Quarterly Report on Form 10‑Q (see Note 4 to the accompanying consolidated financial statements included elsewhere in this Quarterly Report on Form 10‑Q). Results of operations for HFS are not included in segment or consolidated results of operations other than as discontinued operations and prior periods have been reclassified to remove results of operations for HFS from results reported for continuing operations.
On March 19, 2012, the Company purchased Faneuil, Inc. ("Faneuil") from affiliates of MacAndrews (see Note 3 to the accompanying consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q). Under accounting guidance for transactions among entities under common control, the Company has accounted for the purchase at historical cost and has retrospectively recasted prior periods under common control to include Faneuil operations. The Company and Faneuil came under common control on December 21, 2011, the date of the MacAndrews Acquisition. Faneuil is a separate business segment for financial reporting purposes. On October 18, 2013, the Company completed the sale of Faneuil (see Note 19 to the accompanying consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q).
During the second quarter of 2012, the Company transferred certain product and service lines from the Scantron segment to other segments. Specifically, Scantron transferred the Harland Technology Services ("HTS") and Medical Device Tracking ("MDT") businesses to the Faneuil segment and the Survey Services business to the Harland Clarke segment. Prior period segment information has been reclassified to reflect this change. With the October 18, 2013 sale of Faneuil, the Harland Technology Services business was transferred to and became part of the operations and results of Scantron from and after that date.
Harland Clarke Holdings delivers to multiple industries a robust portfolio of products and services designed to optimize customer relationships and generate revenue. Its business units have long been recognized as leading providers of best-in-class payment solutions, marketing services, data capture and analytics − delivered through multiple channels, including online, digital print technology, mobile and phone. Harland Clarke Holdings' portfolio offers retail products, high-value transactional print and electronic documentation, security solutions and business intelligence. Its skills in capturing, managing, analyzing and delivering data measurement and assessment information, through both print and digital channels, supports decision-making and improved outcomes for organizations worldwide. Harland Clarke Holdings serves the financial, insurance and investment services industries, as well as education, big-box retailing, accounting software, commercial, government and franchising. Its clients, including more than 8,500 financial institutions, range in size from major corporate brands and trade associations, to state and local governments, micro-businesses and individual consumers.
The Harland Clarke segment offers to its more than 12,500 financial institution and commercial clients a range of solutions to support their success. These include payment solutions, security solutions, forms and treasury supplies and related


26
Harland Clarke Holdings Corp. and Subsidiaries

delivery and fraud prevention products, as well as transactional print and electronic documentation, including statements, compliance documents and communications. It provides marketing services including inbound and outbound contact center solutions and direct marketing campaigns delivered through the multiple channels of online, digital print technology, mobile and phone. Harland Clarke offers a spectrum of solutions based upon business intelligence and analytic services that range from surveys, database mining, strategic planning, creative development and production through fulfillment. Harland Clarke offers online customized social and business stationery, cards, office products and promotional products directly to consumers, small and medium businesses and direct selling associations. It also services some of the largest accounting software firms and big-box retailers by developing and managing e-commerce sites for the online ordering of customizable printed materials.
The Scantron segment provides data management and decision support solutions and related services to educational, commercial and governmental entities worldwide. Scantron products and services provide solutions for testing and assessment, instruction and performance management and business operational data collection. Scantron's solutions combine a variety of data collection, analysis and management tools including online solutions, software, scanning equipment, and pre-printed and customized forms.
The Faneuil segment provides business process outsourcing services including call center operations, back office operations, staffing services and toll collection services to governmental and regulated commercial clients. The Faneuil segment also provides patient information collection and tracking services, managed technical services and related field maintenance services to educational, commercial, healthcare and governmental entities.
Refinancing Transactions
On May 20, 2013, the Company completed the issuance of additional 2018 Senior Secured Notes. Proceeds from the issuance were used to repay and retire $50.0 million principal amount of fixed rate 2015 Senior Notes. On April 26, 2013, the Company completed a transaction to refinance its non-extended term loans that were to mature in June 2014. On February 20, 2013, the Company completed certain refinancing transactions with respect to its revolving credit facility dated as of April 4, 2007. On July 24, 2012, the Company completed certain refinancing transactions with respect to its credit agreement dated as of April 4, 2007, as amended on May 10, 2012. See Note 12 to the accompanying consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
NCP Solutions Acquisition
On May 31, 2013, the Company acquired 100% of the equity of NCP Solutions, LLC ("NCP Solutions") for $35.2 million, net of cash acquired of $0.3 million, and after giving effect to working capital adjustments of $0.5 million (the "NCP Solutions Acquisition"). NCP Solutions is a leading end-to-end communications solutions provider to consumer finance companies, banks, mortgage lenders, mortgage subservicers, credit unions, auto and equipment finance companies, auto service contract providers, direct marketing companies, healthcare and health insurance companies, check producers and various other customers. The NCP Solutions business is included in the Harland Clarke segment for financial reporting purposes.
Faneuil
On March 19, 2012, the Company entered into a Stock Purchase Agreement pursuant to which the Company purchased 100% of the issued and outstanding shares of capital stock of New Faneuil, Inc. ("New Faneuil") for $70.0 million in cash (the "Faneuil Acquisition") from affiliates of MacAndrews. The Company financed the Faneuil Acquisition with Harland Clarke Holdings' cash on hand. New Faneuil, through its wholly owned subsidiary, Faneuil, provides business process outsourcing services including call center operations, back office operations, staffing services and toll collection services to governmental and regulated commercial clients across the United States. On October 18, 2013, the Company completed the sale of Faneuil (see Note 19 to the accompanying consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q).
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 continues to decline, although at a slower rate of decline in the past two years compared to the decline experienced during the height of the financial crisis. Harland Clarke maintains that 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 and other recently filed reports on Form 10-K and Form 10‑Q. Harland Clarke believes these higher rates of decline are attributable at least in part to changing business strategies of certain of our financial institution clients and an increase in the use of alternative non-cash payments in addition to other factors. Harland Clarke is unable to determine the extent to which other factors such as economic and financial market difficulties, the depth and


27
Harland Clarke Holdings Corp. and Subsidiaries

length of the economic downturn, higher unemployment, decreased openings of checking accounts and decreased consumer spending have also contributed to the higher rates of decline. As mentioned, beginning in 2011, this trend of higher check unit declines improved slightly from that experienced in recent years and continues to the present. However, Harland Clarke is unable to determine at this time if this improvement to the trend will continue. Harland Clarke still expects that check unit volume will continue to decline, 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 as and when overall economic conditions improve.
Harland Clarke continues managing its costs, overhead and facilities to reflect the decline in check unit volumes. However, the business anticipates that in the future, it will not be able to mitigate the revenue declines from declining check unit volumes through cost management, which could negatively affect Harland Clarke's margins. Therefore, Harland Clarke remains focused on growing its non-check related products and services, optimizing its existing catalog of offerings and developing or acquiring new or expanded offerings, in each case to better serve its clients. Harland Clarke does not believe that organic growth and revenues from non-check related products and services will fully offset revenue declines from declining check unit volumes.
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, price and the value its solutions deliver to clients.
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.
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 online 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. Scantron's recent exit from certain product lines in the education market may also have an adverse effect on its ongoing business and business prospects. Scantron is subject to federal and state educational budget allotments. In the current economic and political landscapes, these budget allotments may come under pressure and could be reduced, thus affecting customer willingness to invest in Scantron products.
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 must successfully develop new products and solutions to respond to the significant changes in the educational testing and data collection industry due to customer requirements, technological and regulatory changes. Scantron must continue to keep pace with changes in testing and data collection technology and the needs of its clients. The development of new education-related technologies depends on the timing and costs of the development effort, product performance, functionality, customer acceptance, adoption rates and competition, all of which could have a negative effect on our business. If Scantron is not able to adopt new electronic data collection and other education technology-related solutions at a rate that keeps pace with other technological advances, or in a manner that results in meaningful customer adoption, the business, business prospects, results of operations and financial condition of Scantron could be materially and adversely affected. In addition, Scantron has taken actions to and may from time to time, depending on the foregoing and other factors, determine to limit investment in, restrict marketing efforts for or discontinue certain of its products which are not part of Scantron's evolving


28
Harland Clarke Holdings Corp. and Subsidiaries

strategic plans. Actions to further limit Scantron's product lines could have other negative consequences on Scantron's business and its relationships with customers and suppliers.
Scantron enters into contracts with customers that provide for multiple products and services or "elements," such as software, implementation, 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 sales of products and services associated with acquisitions completed in 2010 and 2011 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.
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, 2012 for additional information regarding revenue recognition policies.
Faneuil
The Faneuil segment provides outsourcing solutions and information technology solutions to customers throughout the United States.
Faneuil is an outsourcer for government services and highly regulated industries with a focus on industries that remain robust under normal economic conditions, e.g., transportation, utilities, state agencies, municipal governments and healthcare. During economic downturns, the ability of both private and governmental entities to make expenditures may decline. Faneuil cannot be certain that economic or political conditions will be generally favorable or that there will not be significant fluctuations which adversely affect Faneuil's industry as a whole or key markets targeted by Faneuil. As Faneuil's operations are, in part, dependent upon government funding, significant decreases in the level of government funding could have an unfavorable effect on Faneuil's operating results.
Faneuil's business is subject to a variety of program related risks, including changes in political and other circumstances, particularly since contracts for major programs are performed over extended periods of time. These risks include the failure of applicable governing authorities to take necessary actions, opposition by third parties to specific programs and the failure by customers to obtain adequate financing for particular programs. Due to these factors, losses on a select contract or contracts could occur, and Faneuil could experience significant changes in operating results.
Faneuil's primary competition comes from other large providers of toll services such as Affiliated Computer Services, Inc. ("ACS") and TransCore, Inc., and providers of customer contact center services such as ACS and Convergys Corporation. If Faneuil cannot compete effectively, it will negatively affect its operating results. To remain competitive, Faneuil must continuously implement new technologies, expand its portfolio of outsourced services and may have to make occasional strategic adjustments to its pricing for its services.
Faneuil's operations are positively affected by the growing trend in government agencies to outsource their internal operations to address shrinking budgets and eliminate the historically higher costs associated with staffing government programs. Tolling operations are expected to increase across the country in an effort to provide new funding for government agencies realizing budgetary cutbacks as a result of the prevailing economic climate. Similarly, governments and other highly regulated businesses are seeking economic efficiencies by outsourcing their customer contact centers. While Faneuil will look to take advantage of these opportunities, some of these opportunities require performance bonds, and there can be no assurance that bonds will be available on reasonable terms.
Faneuil's HTS business is a nationwide information technology solutions and services provider offering installation, implementation, maintenance and repair, managed services and managed print services for computers, networks, printers, Scantron's data collection devices and a variety of other technology equipment. HTS provides these services to customers of all sizes nationwide in a variety of industries, e.g., banking, education, government, commercial businesses and healthcare. HTS competes with other hardware manufacturers that have a significant market-share in a highly fragmented environment. Falling technology prices and better hardware reliability pose a threat to the business, and HTS has expanded its focus to increase its sales of managed services solutions in response to these market trends.
See Note 19 to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding the divestiture of certain Faneuil businesses on October 18, 2013. Faneuil's HTS business was


29
Harland Clarke Holdings Corp. and Subsidiaries

excluded from the divestiture and was transferred to and became part of the operations and results of Scantron from and after October 18, 2013.
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.
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. During the second quarter of 2012, the Company transferred certain product and service lines from the Scantron segment to other segments. Specifically, Scantron transferred the HTS and MDT businesses to the Faneuil segment and the Survey Services business to the Harland Clarke segment. Prior period results in the tables below have been reclassified to reflect these business segment changes. The results for the Harland Financial Solutions segment are reported as discontinued operations (see Note 1 and Note 4 to the accompanying consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q) for all periods presented.
In the tables below, dollars are in millions.
Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012
The operating results for the three months ended September 30, 2013 and 2012, as reflected in the accompanying consolidated statements of operations and described below, include the operating results of the acquired NCP Solutions business from May 31, 2013, the date of the acquisition, and the Faneuil businesses that were sold on October 18, 2013. They also include reclassifications related to the business segment changes discussed in the Consolidated Operating Results section above. They do not include operating results for the Harland Financial Solutions segment which are reported as discontinued operations.
Net Revenues:
 
Three Months Ended
 
September 30,
 
2013
 
2012
Consolidated Net Revenues:
 
 
 
Harland Clarke segment
$
303.8

 
$
286.7

Scantron segment
32.1

 
30.2

Faneuil segment
42.7

 
41.6

Eliminations
(0.8
)
 
(0.6
)
Total
$
377.8

 
$
357.9

Net revenues increased by $19.9 million, or 5.6%, to $377.8 million in the 2013 period from $357.9 million in the 2012 period.
Net revenues for the Harland Clarke segment increased by $17.1 million, or 6.0%, to $303.8 million in the 2013 period from $286.7 million in the 2012 period primarily due to the NCP Solutions Acquisition that increased net revenues by $24.0 million, a $1.3 million increase in net benefits for non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition, a $0.7 million increase in non-check revenues and an additional one-half production day in the 2013 period. These increases were partially offset by a decrease in revenues per unit that decreased net revenues by $10.0 million and a slight volume decline, net of conversions and client losses, that decreased net revenues by $0.7 million. Non-cash fair value acquisition accounting adjustments to deferred revenues and client incentives were a net benefit of $7.9 million in the 2013 period compared to a net benefit of $6.6 million in the 2012 period.


30
Harland Clarke Holdings Corp. and Subsidiaries

Net revenues for the Scantron segment increased by $1.9 million, or 6.3%, to $32.1 million in the 2013 period from $30.2 million in the 2012 period primarily due to a $4.5 million increase in revenues for online products primarily resulting from the recognition of deferred revenues related to contracts that were terminated in the 2013 period due to the discontinuation of certain online products, partially offset by a $2.6 million increase in charges for non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition and by volume declines in scanners and forms that reduced net revenues by $0.3 million. Charges for non-cash fair value acquisition accounting adjustments to deferred revenues were $2.6 million in the 2013 period.
Net revenues for the Faneuil segment increased by $1.1 million, or 2.6%, to $42.7 million in the 2013 period from $41.6 million in the 2012 period primarily due to a $1.7 million increase from new business contracts and a $0.4 million decrease in charges for non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition, partially offset by a $1.0 million decrease resulting from a contract price decrease. Charges for non-cash fair value acquisition accounting adjustments to deferred revenues were $0.1 million in the 2013 period compared to $0.5 million in the 2012 period.
Elimination of net revenues increased to $0.8 million in the 2013 period from $0.6 million in the 2012 period primarily due to intersegment sales of information technology services from the Scantron segment to the Harland Clarke segment.

Cost of Revenues:
 
Three Months Ended
 
September 30,
 
2013
 
2012
Consolidated Cost of Revenues:
 
 
 
Harland Clarke segment
$
190.9

 
$
180.4

Scantron segment
16.0

 
16.7

Faneuil segment
32.7

 
31.2

Eliminations
(0.8
)
 
(0.6
)
Total
$
238.8

 
$
227.7

Cost of revenues increased by $11.1 million, or 4.9%, to $238.8 million in the 2013 period from $227.7 million in the 2012 period.
Cost of revenues for the Harland Clarke segment increased by $10.5 million, or 5.8%, to $190.9 million in the 2013 period from $180.4 million in the 2012 period primarily due to the NCP Solutions Acquisition that increased cost of revenues by $19.9 million, a $1.8 million increase in professional fees and a $0.8 million increase in depreciation and amortization related to investments in technology. These increases were partially offset by $7.7 million of cost reductions resulting from technology enabled efficiencies and other cost reduction and restructuring initiatives and a $4.5 million decrease in non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition. Non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition were $8.4 million in the 2013 period, including $8.5 million in depreciation and amortization and a benefit of $0.1 million in other non-cash acquisition accounting adjustments, compared to $12.9 million in the 2012 period, including $13.1 million in depreciation and amortization and a benefit of $0.2 million in other non-cash acquisition accounting adjustments. Cost of revenues as a percentage of revenues for the Harland Clarke segment decreased to 62.8% in the 2013 period from 62.9% in the 2012 period.
Cost of revenues for the Scantron segment decreased by $0.7 million, or 4.2%, to $16.0 million in the 2013 period from $16.7 million in the 2012 period primarily due to a decrease of $1.7 million resulting from volume declines and cost reduction and restructuring initiatives and a $1.6 million increase in net benefits for non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition, partially offset by a $2.3 million increase resulting from lower cost deferrals in the 2013 period related to implementation services for revenues that have not yet been recognized and from recognition of deferred costs related to contracts that were terminated in the 2013 period due to the discontinuation of certain online products. Net benefits for non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition were $6.8 million in the 2013 period, including a $5.5 million benefit in depreciation and amortization and a $1.3 million benefit in other non-cash acquisition accounting adjustments, compared to a net benefit of $5.2 million in the 2012 period, all in depreciation and amortization. Cost of revenues as a percentage of revenues for the Scantron segment decreased to 49.8% in the 2013 period from 55.3% in the 2012 period primarily due to cost reduction and restructuring initiatives and an increase in net benefits for non-cash fair value acquisition accounting adjustments.


31
Harland Clarke Holdings Corp. and Subsidiaries

Cost of revenues for the Faneuil segment increased by $1.5 million, or 4.8%, to $32.7 million in the 2013 period from $31.2 million in the 2012 period primarily due to an increase in implementation costs related to new contracts and operational costs associated with new business. Net benefits for non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition were $0.3 million in the 2013 and 2012 periods, all of which was in depreciation and amortization. Cost of revenues as a percentage of revenues for the Faneuil segment increased to 76.6% in the 2013 period from 75.0% in the 2012 period due to the change in business mix.
Elimination of cost of revenues increased to $0.8 million in the 2013 period from $0.6 million in the 2012 period primarily due to intersegment sales of information technology services from the Scantron segment to the Harland Clarke segment.
Selling, General and Administrative Expenses:
 
Three Months Ended
 
September 30,
 
2013
 
2012
Consolidated Selling, General and Administrative Expenses:
 
 
 
Harland Clarke segment
$
48.5

 
$
43.1

Scantron segment
12.2

 
15.0

Faneuil segment
4.9

 
5.5

Corporate
7.2

 
4.6

Total
$
72.8

 
$
68.2

Selling, general and administrative expenses increased by $4.6 million, or 6.7%, to $72.8 million in the 2013 period from $68.2 million in the 2012 period.
Selling, general and administrative expenses for the Harland Clarke segment increased by $5.4 million, or 12.5%, to $48.5 million in the 2013 period from $43.1 million in the 2012 period primarily due to a $2.8 million accrual for legal matters, the NCP Solutions Acquisition that increased selling, general and administrative expenses by $2.7 million, a $1.2 million increase in general overhead expenses and a $0.4 million increase in advertising expenses, partially offset by a $1.5 million decrease in depreciation and amortization not related to acquisition accounting and a $0.2 million increase in net benefits for non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition. Non-cash fair value acquisition accounting adjustments related to the MacAndrews acquisition were a net benefit of $0.2 million for the 2013 period, all of which was in depreciation and amortization, compared to $0.0 million in the 2012 period, including a $0.6 million charge for depreciation and amortization and a $0.6 million benefit in other non-cash acquisition accounting adjustments. Selling, general and administrative expenses as a percentage of revenues for the Harland Clarke segment increased to 16.0% in the 2013 period from 15.0% in the 2012 period primarily due to increased expenses.
Selling, general and administrative expenses for the Scantron segment decreased $2.8 million, or 18.7%, to $12.2 million in the 2013 period from $15.0 million in the 2012 period primarily due to a decrease of $4.7 million resulting from cost reduction and restructuring initiatives, a $0.3 million decrease in costs related to projects to increase efficiencies and a $0.3 million decrease in charges for non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition, partially offset by an increase of $2.2 million due to higher depreciation unrelated to acquisition accounting, a decrease in capitalization of software development costs and a decrease in cost deferrals related to implementation services for revenues that have not yet been recognized. Charges for non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition were $0.1 million for the 2013 period, including $0.2 million in depreciation and amortization and a $0.1 million benefit in other non-cash acquisition accounting adjustments, compared to $0.4 million in the 2012 period, all in depreciation and amortization. Selling, general and administrative expenses as a percentage of revenues for the Scantron segment decreased to 38.0% in the 2013 period from 49.7% in the 2012 period primarily due to cost reduction and restructuring initiatives.
Selling, general and administrative expenses for the Faneuil segment decreased by $0.6 million, or 10.9%, to $4.9 million in the 2013 period from $5.5 million in the 2012 period primarily due to cost reductions of $0.9 million, partially offset by a $0.3 million increase in operational costs associated with new business. Selling, general and administrative expenses as a percentage of revenues for the Faneuil segment decreased to 11.5% in the 2013 period from 13.2% in the 2012 period primarily due to cost reductions and a change in business mix.
Corporate selling, general and administrative expenses increased by $2.6 million, or 56.5%, to $7.2 million in the 2013 period from $4.6 million in the 2012 period primarily due to an increase in corporate development activities.


32
Harland Clarke Holdings Corp. and Subsidiaries

Asset Impairment Charges
During the 2013 period, the Company recorded non-cash impairment charges of $0.2 million for the Scantron segment related to assets that were determined to have no future use. During the 2012 period, the Company recorded non-cash impairment charges of $0.5 million for the Faneuil segment related to abandoned leasehold improvements resulting from the loss of a client and $0.2 million for the Harland Clarke segment related to assets that were determined to have limited future use.
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. During the first quarter of 2013, the Company adopted a plan in the Scantron segment to exit certain product lines in the education market, which resulted in the closure of leased facilities and the elimination of operations and selling, general and administrative expenses associated with those product lines.
In the 2013 period, the Company recorded restructuring costs of $1.9 million for the Harland Clarke segment and a benefit of $0.3 million for the Scantron segment related to these plans. In the 2012 period, the Company recorded restructuring costs of $6.4 million for the Harland Clarke segment, $3.7 million for the Scantron segment and $1.5 million for the Faneuil segment related to these plans.
Interest Expense
Interest expense was $53.5 million in the 2013 period compared to $56.3 million in the 2012 period. The decrease in interest expense was primarily due to fair value acquisition accounting adjustments to the principal amount of debt outstanding at the time of the MacAndrews Acquisition that resulted in an $13.3 million decrease in non-cash interest expense, partially offset by the refinancing of a portion of outstanding debt at higher interest rates and an increase in amortization of deferred financing fees and issuance discounts. In addition, other fair value acquisition accounting adjustments to deferred financing costs and interest rate swaps resulted in a $4.2 million increase in non-cash interest expense.
Loss on Early Extinguishment of Debt
The non-cash loss on early extinguishment of debt of $34.2 million in the 2012 period, which was attributable to refinancing transactions, resulted from the write-off of unamortized acquisition accounting-related fair value discount related to the MacAndrews Acquisition (see Note 1 to the accompanying consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q).
Provision (Benefit) for Income Taxes on Continuing Operations
The Company's effective tax rate on continuing operations was a provision of 30.9% in the 2013 period and a benefit 39.2% in the 2012 period. The provision for the 2013 period is lower than the statutory rate primarily due to the domestic production activities deduction.
Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012
The operating results for the nine months ended September 30, 2013 and 2012, as reflected in the accompanying consolidated statements of operations and described below, include the operating results of the acquired Faneuil business for the full period since Faneuil and the Company were under common control during each of the periods. They include the operating results of the acquired NCP Solutions business from May 31, 2013, the date of the acquisition, and the Faneuil businesses that were sold on October 18, 2013. They also include reclassifications related to the business segment changes discussed in the Consolidated Operating Results section above. They do not include operating results for the Harland Financial Solutions segment which are reported as discontinued operations.


33
Harland Clarke Holdings Corp. and Subsidiaries

Net Revenues:
 
Nine Months Ended
 
September 30,
 
2013
 
2012
Consolidated Net Revenues:
 
 
 
Harland Clarke segment
$
874.7

 
$
866.4

Scantron segment
89.2

 
89.0

Faneuil segment
122.9

 
115.4

Eliminations
(2.2
)
 
(1.7
)
Total
$
1,084.6

 
$
1,069.1

Net revenues increased by $15.5 million, or 1.4%, to $1,084.6 million in the 2013 period from $1,069.1 million in the 2012 period.
Net revenues for the Harland Clarke segment increased by $8.3 million, or 1.0%, to $874.7 million in the 2013 period from $866.4 million in the 2012 period primarily due to the NCP Solutions Acquisition that increased net revenues by $32.0 million, a $1.6 million increase in non-check revenues and a $1.0 million increase in net benefits for non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition, partially offset by volume declines, net of conversions and client additions and losses, that reduced net revenues by $16.4 million and a decrease in revenues per unit that decreased net revenues by $8.2 million. Non-cash fair value acquisition accounting adjustments to deferred revenues and client incentives were a net benefit of $24.4 million in the 2013 period compared to a net benefit of $23.4 million in the 2012 period.
Net revenues for the Scantron segment increased by $0.2 million, or 0.2%, to $89.2 million in the 2013 period from $89.0 million in the 2012 period primarily due to a $5.5 million increase in revenues for online products primarily resulting from the recognition of deferred revenues related to contracts that were terminated in the 2013 period due to the discontinuation of certain online products, partially offset by volume declines in scanners and forms that reduced net revenues by $4.8 million and a $0.5 million increase in charges for non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition. Charges for non-cash fair value acquisition accounting adjustments to deferred revenues were $6.0 million in the 2013 period compared to $5.5 million in the 2012 period.
Net revenues for the Faneuil segment increased by $7.5 million, or 6.5%, to $122.9 million in the 2013 period from $115.4 million in the 2012 period primarily due to a $6.1 million increase from new business contracts and a $4.5 million decrease in charges for non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition, partially offset by a $3.1 million decrease resulting from a contract price decrease. Charges for non-cash fair value acquisition accounting adjustments to deferred revenues were $0.2 million in the 2013 period compared to $4.7 million in the 2012 period.
Elimination of net revenues increased to $2.2 million in the 2013 period from $1.7 million in the 2012 period primarily due to intersegment sales of information technology services from the Scantron segment to the Harland Clarke segment.
Cost of Revenues:
 
Nine Months Ended
 
September 30,
 
2013
 
2012
Consolidated Cost of Revenues:
 
 
 
Harland Clarke segment
$
537.5

 
$
568.8

Scantron segment
49.2

 
55.1

Faneuil segment
95.1

 
90.5

Eliminations
(2.2
)
 
(1.7
)
Total
$
679.6

 
$
712.7

Cost of revenues decreased by $33.1 million, or 4.6%, to $679.6 million in the 2013 period from $712.7 million in the 2012 period.


34
Harland Clarke Holdings Corp. and Subsidiaries

Cost of revenues for the Harland Clarke segment decreased by $31.3 million, or 5.5%, to $537.5 million in the 2013 period from $568.8 million in the 2012 period primarily due to a $27.0 million decrease in non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition, including decreases in depreciation and amortization of $14.4 million and decreases in other non-cash acquisition accounting adjustments of $12.6 million. The decrease was also due to $26.2 million of cost reductions resulting from technology enabled efficiencies and other cost reduction and restructuring initiatives, a $7.2 million decrease in variable expenses related to volume declines and a $0.5 million decrease in depreciation and amortization not related to acquisition accounting. These decreases were partially offset by the NCP Solutions Acquisition that increased cost of revenues by $26.8 million and a $4.2 million increase in professional fees. Non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition were $26.9 million in the 2013 period, including $27.2 million in depreciation and amortization and a $0.3 million benefit in other non-cash acquisition accounting adjustments, compared to $53.9 million in the 2012 period, including $41.6 million in depreciation and amortization and $12.3 million in other non-cash acquisition accounting adjustments. Cost of revenues as a percentage of revenues for the Harland Clarke segment decreased to 61.4% in the 2013 period from 65.7% in the 2012 period primarily due to technology enabled efficiencies and other cost reduction and restructuring initiatives and a decrease in non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition.
Cost of revenues for the Scantron segment decreased by $5.9 million, or 10.7%, to $49.2 million in the 2013 period from $55.1 million in the 2012 period primarily due to a decrease of $7.4 million resulting from volume declines and cost reduction and restructuring initiatives and a $2.2 million increase in net benefits for non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition, partially offset by a $3.7 million increase resulting from lower cost deferrals in the 2013 period related to implementation services for revenues that have not yet been recognized and from recognition of deferred costs related to contracts that were terminated in the 2013 period due to the discontinuation of certain online products. Net benefits for non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition were $18.6 million in the 2013 period, including a $16.4 million benefit in depreciation and amortization and a benefit of $2.2 million in other non-cash acquisition accounting adjustments, compared to a $16.4 million benefit in the 2012 period, including a $16.5 million decrease in depreciation and amortization and a $0.1 million charge for other non-cash acquisition accounting adjustments. Cost of revenues as a percentage of revenues for the Scantron segment decreased to 55.2% in the 2013 period from 61.9% in the 2012 period primarily due to cost reduction and restructuring initiatives and an increase in net benefits for non-cash fair value acquisition accounting adjustments.
Cost of revenues for the Faneuil segment increased by $4.6 million, or 5.1%, to $95.1 million in the 2013 period from $90.5 million in the 2012 period primarily due to a $3.8 million increase in implementation costs related to new contracts and operational costs associated with the new business and a $0.8 million decrease in net benefits for non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition. Net benefits for non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition were $0.8 million in the 2013 period, all of which was in depreciation and amortization, compared to $1.6 million in the 2012 period, including a $2.3 million benefit in depreciation and amortization and a $0.7 million charge in other non-cash acquisition accounting adjustments. Cost of revenues as a percentage of revenues for the Faneuil segment decreased to 77.4% in the 2013 period from 78.4% in the 2012 period due to the change in business mix.
Elimination of cost of revenues increased to $2.2 million in the 2013 period from $1.7 million in the 2012 period primarily due to intersegment sales of information technology services from the Scantron segment to the Harland Clarke segment.
Selling, General and Administrative Expenses:
 
Nine Months Ended
 
September 30,
 
2013
 
2012
Consolidated Selling, General and Administrative Expenses:
 
 
 
Harland Clarke segment
$
136.4

 
$
136.5

Scantron segment
40.6

 
54.6

Faneuil segment
15.4

 
17.0

Corporate
17.6

 
13.4

Total
$
210.0

 
$
221.5

Selling, general and administrative expenses decreased by $11.5 million, or 5.2%, to $210.0 million in the 2013 period from $221.5 million in the 2012 period.


35
Harland Clarke Holdings Corp. and Subsidiaries

Selling, general and administrative expenses for the Harland Clarke segment decreased by $0.1 million, or 0.1%, to $136.4 million in the 2013 period from $136.5 million in the 2012 period primarily due to a $4.4 million decrease resulting from cost reduction and restructuring initiatives largely of labor and general overhead expense reductions, a $2.3 million decrease in advertising expenses and a $1.5 million decrease in depreciation and amortization not related to acquisition accounting, partially offset by the NCP Solutions Acquisition that increased selling, general and administrative expenses by $3.5 million, a $2.8 million accrual for legal matters and a $1.9 million decrease in net benefits for non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition. Non-cash fair value acquisition accounting adjustments related to the MacAndrews acquisition were a net benefit of $0.8 million for the 2013 period, including a $0.6 million benefit in depreciation and amortization and a $0.2 million benefit in other non-cash acquisition accounting adjustments, compared to a net benefit of $2.7 million in the 2012 period, including a $4.0 million benefit in other non-cash acquisition accounting adjustments and a $1.3 million increase in depreciation and amortization. Selling, general and administrative expenses as a percentage of revenues for the Harland Clarke segment decreased to 15.6% in the 2013 period from 15.8% in the 2012 period primarily due to cost reduction and restructuring initiatives.
Selling, general and administrative expenses for the Scantron segment decreased $14.0 million, or 25.6%, to $40.6 million in the 2013 period from $54.6 million in the 2012 period primarily due to a decrease of $16.7 million resulting from cost reduction and restructuring initiatives, a $2.4 million decrease in costs related to projects to increase efficiencies, partially offset by an increase of $5.3 million primarily due to higher depreciation unrelated to acquisition accounting, a decrease in capitalization of software development costs and a decrease in cost deferrals related to implementation services for revenues that have not yet been recognized and a $0.3 million decrease in charges for non-cash fair value acquisition accounting adjustment related to the MacAndrews Acquisition. Charges for non-cash fair value acquisition accounting adjustments related to the MacAndrews Acquisition were $0.7 million in the 2013 period, including $0.6 million in depreciation and amortization and $0.1 million in other non-cash acquisition accounting adjustments, compared to $1.0 million in the 2012 period, including $0.8 million in depreciation and amortization and $0.2 million in other non-cash acquisition accounting adjustments. Selling, general and administrative expenses as a percentage of revenues for the Scantron segment decreased to 45.5% in the 2013 period from 61.3% in the 2012 period primarily due to cost reduction and restructuring initiatives.
Selling, general and administrative expenses for the Faneuil segment decreased by $1.6 million, or 9.4%, to $15.4 million in the 2013 period from $17.0 million in the 2012 period primarily due to cost reductions of $2.3 million, partially offset by a $0.7 million increase in operational costs associated with new business. Selling, general and administrative expenses as a percentage of revenues for the Faneuil segment decreased to 12.5% in the 2013 period from 14.7% in the 2012 period primarily due to cost reductions and a change in business mix.
Corporate selling, general and administrative expenses increased by $4.2 million, or 31.3%, to $17.6 million in the 2013 period from $13.4 million in the 2012 period primarily due to an increase in corporate development activities, partially offset by a reduction in expenses related to the MacAndrews Acquisition that occurred in the first quarter of 2012.
Asset Impairment Charges
During the 2013 period, the Company recorded non-cash impairment charges of $0.2 million for the Harland Clarke segment and $0.9 million for the Scantron segment related to assets that were determined to have no future use. During the 2012 period, the Company recorded non-cash impairment charges of $0.5 million for the Faneuil segment related to abandoned leasehold improvements resulting from the loss of a client and $0.2 million for the Harland Clarke segment related to assets that were determined to have limited future use.
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. During the first quarter of 2013, the Company adopted a plan in the Scantron segment to exit certain product lines in the education market, which resulted in the closure of leased facilities and the elimination of operations and selling, general and administrative expenses associated with those product lines.
In the 2013 period, the Company recorded restructuring costs of $7.9 million for the Harland Clarke segment, $6.6 million for the Scantron segment and $0.4 million for the Faneuil segment related to these plans. In the 2012 period, the Company recorded restructuring costs of $9.1 million for the Harland Clarke segment, $5.3 million for the Scantron segment and $1.8 million for the Faneuil segment related to these plans.
Interest Income
Interest income was $0.6 million in the 2013 period compared to $0.7 million in the 2012 period. The decrease in interest income was primarily due to interest received on United States treasury securities in the 2012 period. The United States treasury securities were sold in the first quarter of 2012.


36
Harland Clarke Holdings Corp. and Subsidiaries

Interest Expense
Interest expense was $165.4 million in the 2013 period compared to $166.0 million in the 2012 period. The decrease in interest expense was primarily due to fair value acquisition accounting adjustments to the principal amount of debt outstanding at the time of the MacAndrews Acquisition that resulted in a $33.6 million decrease in non-cash interest expense, partially offset by the refinancing of a portion of outstanding debt at higher interest rates and an increase in amortization of deferred financing fees and issuance discounts. In addition, other fair value acquisition accounting adjustments to deferred financing costs and interest rate swaps resulted in a $4.1 million increase in non-cash interest expense.
Loss on Early Extinguishment of Debt
The non-cash losses on early extinguishment of debt of $61.0 million in the 2013 period and $34.2 million in the 2012 period, which were attributable to refinancing transactions, resulted from the write-off of unamortized acquisition accounting-related fair value discount related to the MacAndrews Acquisition (see Note 1 to the accompanying consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q).
Other Expense, net
Other expense, net was $0.2 million in the 2012 period due to a loss on the sale of marketable securities.
Provision (Benefit) for Income Taxes on Continuing Operations
The Company's effective tax rate on continuing operations was a benefit of 40.6% in the 2013 period and a benefit of 38.4% in the 2012 period. The benefit for the 2013 period is higher than the statutory rate primarily due to the domestic production activities deduction. The benefit for the 2012 period is different from the statutory rate primarily due to state net operating losses for which no benefit was recorded.
Liquidity and Capital Resources
Cash Flow Analysis
The following table summarizes the Company's historical cash flows which are presented on a consolidated basis and include cash flows from discontinued operations.
 
Nine Months Ended
 
September 30,
(In millions)
2013
 
2012
Cash (Used In) Provided By:
 
 
 
Operating activities
$
(62.8
)
 
$
164.5

Investing activities
1,085.2

 
(37.8
)
Financing activities
(86.6
)
 
(154.0
)
The Company's net cash used in operating activities during the nine months ended September 30, 2013 was $62.8 million compared to net cash provided by operating activities of $164.5 million during the nine months ended September 30, 2012. The increase in net cash used in operating activities of $227.3 million was due to a $227.1 million decrease in cash flows from operations and a $0.2 million decrease in cash flows from changes in operating assets and liabilities. The $227.1 million decrease in cash flow from operations was primarily due to payments of $224.7 million related to taxes on the sale of HFS, the proceeds of which are included in the investing activities section of the cash flow statement. The decrease in cash flows from changes in operating assets and liabilities was primarily due to changes in deferred revenues, inventories, contract acquisition payments and prepaid expenses and other assets totaling $67.2 million largely the result of fair value acquisition accounting adjustment related to the MacAndrews Acquisition and changes in accounts payable and accrued liabilities and other, net totaling $11.4 million, substantially offset by a $79.6 million increase from accruals for income taxes primarily related to the sale of HFS.
The Company's net cash provided by investing activities was $1,085.2 million during the nine months ended September 30, 2013 compared to net cash used in investing activities of $37.8 million during the nine months ended September 30, 2012. The increase in cash provided by investing activities was primarily due to proceeds of $1,181.9 million from the sale of HFS, net of cash divested and costs to sell, that occurred during the nine months ended September 30, 2013 and a $2.5 million decrease in expenditures for capitalized computer software development costs during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012, partially offset by proceeds of $56.3 million from the sale of marketable securities that occurred during the nine months ended September 30, 2012 and a $6.8 million increase in capital expenditures during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012.


37
Harland Clarke Holdings Corp. and Subsidiaries

The Company's net cash used in financing activities was $86.6 million during the nine months ended September 30, 2013 compared to $154.0 million during the nine months ended September 30, 2012. The decrease in net cash used in financing activities was primarily due to a $33.9 million decrease in net repayments of notes and credit agreements, a $33.8 million decrease in payments to parent for the Faneuil Acquisition and a $7.4 million decrease in payments related to derivative instruments, partially offset by a $4.3 million increase in debt issuance costs related to refinancing activities.
Accounting guidance for acquisitions among entities under common control requires the $33.8 million of cash paid in excess of the carrying amount of the assets and liabilities assumed for the Faneuil Acquisition to be treated as an equity transaction with the parent in financing activities. The $36.2 million remaining balance of the $70.0 million purchase price is treated as consideration paid to purchase the affiliate in investing activities.
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, 2012 during the three months ended September 30, 2013 except for certain refinancing transactions completed and disclosed in the Company's Quarterly Report on Form 10-Q for the quarterly periods ended March 31, 2013 and June 30, 2013.
Liquidity Assessment
The Company believes that its cash and cash equivalents, borrowings available under its credit agreement (as further discussed in Note 12 to the accompanying 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.
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, 2013 and 2012, the Company incurred $53.8 million and $47.0 million of capital expenditures and $0.5 million and $0.4 million of capitalized interest, respectively. These amounts include capital expenditures for discontinued operations of $5.9 million and $6.3 million for the nine months ended September 30, 2013 and 2012, respectively, and capitalized interest for discontinued operations of $0.1 million for the nine months ended September 30, 2013. The Company's capital expenditures are estimated to be in the range of $60.0 million to $65.0 million for the fiscal year ending December 31, 2013, which includes $5.9 million for discontinued operations.
•
Contract Acquisition Payments. During the nine months ended September 30, 2013 and 2012, the Company made $18.7 million and $36.6 million of contract acquisition payments to its clients, respectively.
•
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, 2013 and 2012, the Company made $14.0 million and $11.0 million of payments, respectively, for restructuring for continuing operations.
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 acquisition of NCP Solutions that was consummated on May 31, 2013. The Company used proceeds from the issuance of senior secured term loans and senior secured notes to fund the repayment of $726.6 million of non-extended term loans in April 2013 and $50.0 million of fixed rate senior notes in June 2013.
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, 2013, the Company had $23.3 million of availability under its senior secured asset based revolving credit facility (after giving effect to the issuance of $10.4 million of letters of credit), a decrease of $18.6 million from June 30, 2013. The decrease was primarily due to recent divestitures (see Notes 4 and 19 to the accompanying consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q). The Company may also use its senior secured asset


38
Harland Clarke Holdings Corp. and Subsidiaries

based 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, 2012 as filed on February 25, 2013 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, 2013, 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, 2012 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 and/or pricing pressure which could result in adverse effects on our businesses;
•
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;
•
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 locate, execute, integrate and manage recent acquisitions as well as future acquisitions;
•
ongoing obligations with respect to divestiture transactions which could result in unanticipated liabilities;
•
our ability to implement any or all components of our business strategy;


39
Harland Clarke Holdings Corp. and Subsidiaries

•
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;
•
our ability to develop new products for our Scantron segment and to grow Scantron's online education business;
•
determinations made to limit investments in, restrict marketing efforts for or discontinue certain products which are not part of the Company's strategic plans;
•
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;
•
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;
•
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, 2012 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, 2013, the Company had $1,370.8 million of term loans outstanding under its credit agreement, $10.4 million of letters of credit outstanding under its senior secured asset based revolving credit facility, $204.3 million of floating rate senior notes, $221.3 million of 9.50% fixed rate senior notes and $285.0 million of 9.75% senior secured notes. All of these outstanding loans bear interest at variable rates, with the exception of $221.3 million of fixed rate senior notes and $285.0 million of senior secured 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, 2013 would have resulted in an increase in its interest expense for the nine months ended September 30, 2013 of approximately $4.7 million.
As of September 30, 2013, the Company's net foreign currency market exposures were $8.9 million. This is the value of the equity of the investments in the foreign subsidiaries in Canada and India. Since the exposures are not material, the Company does not generally hedge against foreign currency fluctuations.


40
Harland Clarke Holdings Corp. and Subsidiaries

A 10% appreciation in foreign currency exchange rates from the prevailing market rates would result in a $0.8 million increase in the related assets or liabilities. Conversely, a 10% depreciation in these currencies from the prevailing market rates would result in a $0.9 million decrease in the related assets and liabilities.
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, 2013 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


41
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, intellectual property matters, environmental 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 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, 2012 during the three months ended September 30, 2013.
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, 2013.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
No additional information need be presented.
Item 6. Exhibits
Exhibit
Number
 
Description
4.16
 
Indenture, dated as of July 24, 2012, by and among Harland Clarke Holdings Corp., as Issuer, the Co-Issuers named therein, the Guarantors named therein, and Wells Fargo Bank, National Association, as trustee and collateral agent. (1)
 
 
 
31.1
 
Certification of Charles T. Dawson, Chief Executive Officer, dated November 8, 2013.
 
 
 
31.2
 
Certification of Peter A. Fera, Jr., Chief Financial Officer, dated November 8, 2013.
 
 
 
101.INS
 
XBRL Instance Document.
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema.
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase.
 
 
 
101.DEF
 
XBRL Taxonomy Definition Linkbase.
 
 
 
101.LAB
 
XBRL Taxonomy Extension Labels Linkbase.
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase.
 
 
 
 
 
 
 
 
 
 
(1) 
This indenture replaces the document filed as Exhibit 4.16 to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012 filed with the Securities and Exchange Commission on August 9, 2012. The document originally filed did not reflect the final version that was executed, which reflected corrections of a few typographical errors.


42

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 8, 2013
By:  
/s/ Peter A. Fera, Jr.
 
 
 
Peter A. Fera, Jr. 
 
 
 
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer) 
 
 
 
 
 
Date:
November 8, 2013
By:  
/s/ J. Michael Riley  
 
 
 
J. Michael Riley 
 
 
 
Vice President and Controller
(Principal Accounting Officer) 


43

EXHIBIT INDEX
Exhibit
Number
 
Description
4.16
 
Indenture, dated as of July 24, 2012, by and among Harland Clarke Holdings Corp., as Issuer, the Co-Issuers named therein, the Guarantors named therein, and Wells Fargo Bank, National Association, as trustee and collateral agent. (1)
 
 
 
31.1
 
Certification of Charles T. Dawson, Chief Executive Officer, dated November 8, 2013.
 
 
 
31.2
 
Certification of Peter A. Fera, Jr., Chief Financial Officer, dated November 8, 2013.
 
 
 
101.INS
 
XBRL Instance Document.
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema.
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase.
 
 
 
101.DEF
 
XBRL Taxonomy Definition Linkbase.
 
 
 
101.LAB
 
XBRL Taxonomy Extension Labels Linkbase. 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase.
 
 
 
 
 
 
 
 
 
 
(1) 
This indenture replaces the document filed as Exhibit 4.16 to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012 filed with the Securities and Exchange Commission on August 9, 2012. The document originally filed did not reflect the final version that was executed, which reflected corrections of a few typographical errors.


44