e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2009


o		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		(I.R.S. Employer Identification No.)
incorporation or organization)

2939 Miller Road, Decatur, GA		30035
(Address of principal executive offices)		(Zip code)

(770) 981-9460
(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 þ No o *

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 o No o

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.:

Large accelerated filer o

Accelerated filer o

Non-accelerated filer þ
(Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

As of September 30, 2009, 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 subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. The registrant is a voluntary filer.

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,			December 31,
	2009			2008
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	140.9		$	64.6
Accounts receivable (net of allowances of $3.2 and $2.8)		127.4			128.8
Inventories		34.0			38.4
Income taxes receivable		0.4			8.0
Deferred tax assets		21.0			21.0
Prepaid expenses and other current assets		56.8			42.6

Total current assets		380.5			303.4
Property, plant and equipment		343.5			318.7
Less accumulated depreciation		(178.2	)		(141.1	)

Property, plant and equipment, net		165.3			177.6
Goodwill		1,465.8			1,465.5
Other intangible assets, net		1,254.2			1,328.3
Contract acquisition payments, net		35.0			39.8
Other assets		65.1			77.2

Total assets	$	3,365.9		$	3,391.8

LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	47.2		$	54.4
Deferred revenues		113.5			103.8
Current maturities of long-term debt		19.7			19.8
Accrued liabilities:
Salaries, wages and employee benefits		53.9			68.4
Income and other taxes payable		21.2			13.9
Customer incentives		26.2			25.7
Payable to parent		—			0.7
Other current liabilities		43.1			54.7

Total current liabilities		324.8			341.4
Long-term debt		2,244.5			2,370.8
Deferred tax liabilities		436.4			435.7
Other liabilities		77.5			77.6
Commitments and contingencies
Stockholder’s equity:
Common stock — 200 shares authorized; par value $0.01; 100 shares issued and outstanding at September 30, 2009 and December 31, 2008		—			—
Additional paid-in capital		157.0			157.0
Retained earnings		135.9			27.2
Accumulated other comprehensive loss		(10.2	)		(17.9	)

Total stockholder’s equity		282.7			166.3

Total liabilities and stockholder’s equity	$	3,365.9		$	3,391.8

See Notes to Consolidated Financial Statements

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Product revenues, net	$	354.3		$	376.3		$	1,069.3		$	1,131.4
Service revenues, net		71.4			77.7			221.4			224.5

Total net revenues		425.7			454.0			1,290.7			1,355.9
Cost of products sold		208.2			230.3			640.2			690.2
Cost of services provided		36.4			40.7			114.3			116.9

Total cost of revenues		244.6			271.0			754.5			807.1

Gross profit		181.1			183.0			536.2			548.8
Selling, general and administrative expenses		90.3			110.8			291.4			340.4
Restructuring costs		4.3			1.4			29.0			6.7

Operating income		86.5			70.8			215.8			201.7
Interest income		0.2			0.3			0.8			1.9
Interest expense		(32.6	)		(45.2	)		(106.3	)		(139.7	)
Gain on early extinguishment of debt		0.5			—			62.0			—
Other expense, net		—			—			—			(0.2	)

Income before income taxes		54.6			25.9			172.3			63.7
Provision for income taxes		20.9			10.4			63.7			26.4

Net income	$	33.7		$	15.5		$	108.6		$	37.3

See Notes to Consolidated Financial Statements

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


	Nine Months Ended
	September 30,
	2009			2008
Operating activities
Net income	$	108.6		$	37.3
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		43.7			50.8
Amortization of intangible assets		77.1			73.2
Amortization of deferred financing fees		5.4			5.9
Gain on early extinguishment of debt		(62.0	)		—
Deferred income taxes		(3.7	)		(25.4	)
Asset impairments		0.1			1.0
Changes in operating assets and liabilities, net of effect of businesses acquired:
Accounts receivable		0.5			(19.3	)
Inventories		4.5			0.2
Prepaid expenses and other assets		(13.2	)		3.6
Contract acquisition payments, net		4.8			6.9
Accounts payable and accrued liabilities		(23.8	)		(4.0	)
Deferred revenue		10.8			8.1
Income and other taxes		14.5			19.1
Payable to parent		(0.7	)		(2.1	)
Other, net		4.4			0.7

Net cash provided by operating activities		171.0			156.0
Investing activities
Purchase of Data Management		—			(223.3	)
Investment in related party notes receivable		—			(14.4	)
Net repayments of related party notes receivable		5.2			1.6
Proceeds from sale of property, plant and equipment		0.5			3.5
Capital expenditures		(31.0	)		(38.1	)
Capitalized interest		(0.2	)		(0.5	)
Other, net		(3.2	)		(3.1	)

Net cash used in investing activities		(28.7	)		(274.3	)
Financing activities
Dividend to parent		—			(65.0	)
Purchase of notes		(50.6	)		—
Borrowings on credit agreement		—			62.0
Repayments of credit agreements and other borrowings		(15.4	)		(77.1	)

Net cash used in financing activities		(66.0	)		(80.1	)

Net increase (decrease) in cash and cash equivalents		76.3			(198.4	)
Cash and cash equivalents at beginning of period		64.6			239.7

Cash and cash equivalents at end of period	$	140.9		$	41.3


Supplemental disclosure of cash paid for:
Interest, net of amounts capitalized	$	103.3		$	119.7
Income taxes, net of refunds		55.7			33.8

See Notes to Consolidated Financial Statements

Harland Clarke Holdings Corp. and Subsidiaries

Notes to Consolidated Financial Statements
(dollars in millions)
(unaudited)

1. Description of Business and Basis of Presentation

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

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

The Harland Clarke segment offers checks and related products, forms and treasury supplies, and related delivery and fraud prevention services. It also provides specialized marketing and contact center services to its financial and commercial institution clients. Harland Clarke’s marketing offerings include turnkey marketing solutions, checkbook messaging and e-mail marketing. Through its contact centers, Harland Clarke provides financial institutions with both inbound and outbound support for their clients, including sales and ordering services for checks and related products and services, customer care, banking support and marketing services.

The Harland Financial Solutions segment provides financial technology products and services including lending and mortgage origination and servicing applications, business intelligence solutions, customer relationship management software, Internet banking solutions, mobile banking, branch automation solutions and core processing systems and services, principally targeted to community banks and credit unions.

The Scantron segment provides testing and assessment solutions to schools in North America, offers specialized data management solutions to educational, commercial and governmental entities worldwide and collects and manages survey information for a wide variety of Fortune 1000 and other organizations. Scantron’s products and services include scannable forms, scanning equipment, survey services, testing software and related services, and field maintenance services.

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

The Company and each of its existing subsidiaries, other than unrestricted subsidiaries and certain immaterial subsidiaries, are guarantors and may also be co-issuers under the 2015 Senior Notes (as hereinafter defined) (see Note 11). The Company is a holding company and has no independent assets and no operations at September 30, 2009. The guarantees and the obligations of the subsidiaries of the Company are full and unconditional and joint and several.

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, 2008. All terms used but not defined elsewhere herein have the meaning ascribed to them in the Company’s 2008 Annual Report on Form 10-K.

Subsequent Events

The Company has considered subsequent events through November 6, 2009, the date of issuance, in preparing the consolidated financial statements and notes thereto.

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

2. Summary of Significant Accounting Policies

Reference is made to the significant accounting policies of the Company described in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

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.

Recently Adopted Accounting Pronouncements

The Company adopted new accounting guidance for business combinations on January 1, 2009. Under the new guidance, an acquiring entity is required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. The new guidance changed the accounting treatment for certain specific items, including acquisition costs, noncontrolling interests, acquired contingent liabilities, in-process research and development, restructuring costs associated with a business combination, deferred tax valuation allowances changes, and income tax uncertainties after the acquisition date. The new guidance also includes a substantial number of new disclosure requirements and its effect will vary for each acquisition.

The Company adopted new guidance for disclosures about derivative instruments and hedging activities on January 1, 2009. The new guidance requires enhanced disclosures about the effects of derivative instruments and hedging activities on an entity’s financial condition, financial performance and cash flows. The new guidance increases disclosure requirements but does not have an impact on the Company’s consolidated financial condition, results of operations or cash flows.

In April 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance requiring disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The Company adopted the new guidance effective April 1, 2009 (see Note 15). The new guidance increases disclosure requirements but does not have an impact on the Company’s consolidated financial condition, results of operations or cash flows.

In May 2009, the FASB issued new guidance regarding subsequent events. The new guidance introduces the concept of financial statements being available to be issued and requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. The new guidance does not result in significant changes in the subsequent events that the Company reports—either through recognition or disclosure—in its financial statements. The Company adopted the new guidance effective for the quarter ended June 30, 2009.

Recently Issued Accounting Pronouncements

In August 2009, the FASB issued new guidance for measuring liabilities at fair value. The new guidance provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, an entity is required to measure fair value using certain valuation techniques. It also clarifies that an entity is not required to adjust the fair value of a liability for the existence of a restriction that prevents the transfer of the liability. The new guidance is effective for the first reporting period after its issuance, which is the fourth quarter of 2009 for the Company. The new guidance is not expected to have a significant impact on the Company’s consolidated financial condition, results of operations or cash flows.

In October 2009, the FASB issued new guidance for certain arrangements that include software elements. The new guidance removes non-software components of tangible products and software components of tangible products that have software components essential to the functionality of the tangible product from the scope of software revenue recognition.

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

In October 2009, the FASB issued new guidance for multiple-deliverable revenue arrangements. The new guidance requires entities to allocate revenue in a multiple-deliverable arrangement within the scope of the guidance using estimated selling prices based on a selling price hierarchy. It also eliminates the residual method of revenue allocation and requires revenue to be allocated using the relative selling price method. In addition, the new guidance significantly expands qualitative and quantitative disclosure requirements for multiple-deliverable arrangements.

The new guidance for certain arrangements that include software elements and multiple-deliverable revenue arrangements is effective for fiscal years beginning on or after June 15, 2010. The guidance may be applied retrospectively for all periods presented, or prospectively to all arrangements entered into or materially modified after the adoption date. Early adoption is permitted provided that the guidance is retroactively applied to the beginning of the year of adoption. The Company is currently evaluating the impact of the new guidance on its consolidated financial condition and results of operations.

3. Acquisitions

Acquisition of Transaction Holdings

On December 31, 2008, the Company’s wholly owned subsidiary, Harland Clarke Corp., acquired 100% of the equity of Transaction Holdings Inc. (“Transaction Holdings”) for total cash consideration of $8.2 (the “Transaction Holdings Acquisition”). Transaction Holdings produces personal and business checks, payment coupon books and promotional checks and provides direct marketing services to financial institutions as well as individual consumers and small businesses.

Transaction Holdings’ results of operations have been included in the Company’s operations since December 31, 2008, the date of the Transaction Holdings Acquisition. The allocation of the purchase price is complete and resulted in identified intangible assets of $9.0, goodwill of $2.5 and $2.6 of net deferred tax liabilities.

The pro forma effects on the results of operations for the Transaction Holdings Acquisition were not material and are not included in the pro forma information presented below.

Acquisition of Data Management

On February 22, 2008, the Company’s indirect wholly owned subsidiary, Scantron Corporation, purchased all of the limited liability membership interests of Data Management I LLC (“Data Management”) from NCS Pearson for $218.7 in cash, after giving effect to working capital adjustments of $1.6 (the “Data Management Acquisition”). Data Management’s results of operations have been included in the Company’s operations since February 22, 2008, the date of the Data Management Acquisition. Fees and expenses of $4.6 related to the Data Management Acquisition were capitalized in the purchase price. The capitalized fees and expenses include $2.0 paid to MacAndrews & Forbes Holdings Inc. (which, as of September 30, 2009, beneficially owned approximately 43.4% of the outstanding M & F Worldwide common stock) in February 2008 for its services related to sourcing, analyzing, negotiating and executing the Data Management Acquisition. The acquisition combined complementary products and services of Scantron and Data Management, resulting in an expanded offering of products and services to their respective customers. The Company financed the Data Management Acquisition and related fees and expenses with cash on hand.

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

The following table summarizes the fair values of the assets acquired and liabilities assumed at the Data Management Acquisition date:


Accounts receivable			$	15.9
Inventories				7.5
Property, plant and equipment				25.5
Goodwill				116.2
Other intangible assets:
Customer relationships	$	65.4
Trademarks and tradenames		2.4
Patented technology and software		7.5

Total other intangible assets				75.3
Other assets				0.6

Total assets acquired				241.0
Deferred revenues				7.6
Other liabilities				10.1

Net assets acquired			$	223.3

The above purchase price allocation is complete. Goodwill in the amount of approximately $114.5 and intangible assets in the amount of approximately $75.3 related to Data Management are deductible for tax purposes. The principal factor affecting the purchase price, which resulted in the recognition of goodwill, was the fair value of the going-concern element of Data Management, which included the assembled workforce and synergies that were expected to be achieved.

As a result of the Data Management Acquisition, the Company adopted formal plans to terminate certain employee functions and exit duplicative facilities. The Company recorded $2.5 of severance and severance-related costs for the termination of certain Data Management employees in the above purchase price allocation. See Note 13 for additional disclosures regarding restructuring.

As part of the application of purchase accounting, inventory of Data Management was increased by $0.4 due to a fair value adjustment. The amount of the inventory fair value adjustment was expensed as additional non-cash cost of products sold as the related inventory was sold (of which $0.0 and $0.4 was expensed during the three and nine months ended September 30, 2008, respectively).

Also as part of the application of purchase accounting, deferred revenue of Data Management was decreased by $1.4 due to a fair value adjustment. This non-cash fair value adjustment results in lower revenue being recognized over the related earnings period (of which $0.0 and $0.2 was reflected as reduced revenues during the three and nine months ended September 30, 2009, respectively, and $0.3 and $0.7 was reflected as reduced revenues during the three and nine months ended September 30, 2008, respectively).

Pro Forma Financial Information

The financial information in the table below summarizes the results of operations of the Company, on a pro forma basis, as though the Data Management Acquisition had occurred as of the beginning of the period presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the transaction had taken place at the beginning of the period presented, nor does it purport to represent results of operations for future periods.


	Pro Forma
	Nine Months Ended
	September 30, 2008
Net revenues	$	1,373.2
Operating income		203.3
Net income		38.3
Depreciation and amortization (excluding amortization of deferred financing fees)		125.7

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

In the pro forma information above, the results prior to the Data Management Acquisition were adjusted to include the pro forma impact of the adjustment of amortization of intangible assets and depreciation of fixed assets based on the purchase price allocation and to reflect the impact of income taxes with respect to the pro forma adjustments, utilizing an estimated effective tax rate of 39%.

The pro forma information above includes the impact of the non-recurring fair value adjustments to inventory and deferred revenue resulting from the application of purchase accounting of $1.1 for the nine months ended September 30, 2008.

The pro forma information also gives effect to certain identified cost savings totaling $0.8 in the nine months ended September 30, 2008 as if they had been implemented in their entirety at the beginning of the period presented. These cost savings pertain to the termination of certain Data Management employees for which the related liability was recognized in the purchase price allocation. There can be no assurance that all of such cost savings will be accomplished during any particular period, or at all.

The pro forma information does not include adjustments for additional expected cost savings resulting from the termination of certain of the Company’s historical employees, the closure of certain of the Company’s historical facilities, procurement savings or the elimination of certain duplicate corporate costs to the extent not yet realized in the Company’s operating results. There can be no assurance that all of such cost savings will be accomplished during any particular period, or at all.

4. Inventories

Inventories consist of the following:


	September 30,		December 31,
	2009		2008
Finished goods	$	10.5	$	13.3
Work-in-process		9.9		9.5
Raw materials		13.6		15.6

	$	34.0	$	38.4

5. Assets Held For Sale

At September 30, 2009 and December 31, 2008, assets held for sale consist of the Harland Clarke segment’s printing facility and operations support facility in Atlanta, Georgia. These facilities were closed in 2008 as part of the Company’s plan to exit duplicative facilities related to an acquisition. Subsequent to these facilities classification as assets held for sale, there have been significant changes in the real estate market. The Company continues to make appropriate changes to the marketing plan and believes these facilities will be sold within twelve months. Assets held for sale are included in prepaid expenses and other current assets on the accompanying consolidated balance sheets.

Assets held for sale consist of the following:


	September 30,		December 31,
	2009		2008
Land	$	1.0	$	1.0
Buildings and improvements		1.8		1.7

	$	2.8	$	2.7

6. Goodwill and Other Intangible Assets

The change in carrying amount of goodwill for the nine months ended September 30, 2009 is as follows:


Balance as of December 31, 2008	$	1,465.5
Adjustments to goodwill		(0.1	)
Effect of exchange rate changes		0.4

Balance as of September 30, 2009	$	1,465.8

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

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


			Gross Carrying Amount				Accumulated Amortization
	Useful Life		September 30,		December 31,		September 30,		December 31,
	(in years)		2009		2008		2009		2008
Amortized intangible assets:
Customer relationships		3 - 30	$	1,230.4	$	1,230.6	$	237.9	$	170.2
Trademarks and tradenames		2 - 15		8.4		8.3		1.9		1.1
Software and other		2 - 10		63.4		60.6		25.7		18.2
Patents and patents pending		3 - 20		20.0		19.6		3.5		2.3

				1,322.2		1,319.1		269.0		191.8


Indefinite-lived intangible assets:
Trademarks and tradenames				201.0		201.0		—		—

Total other intangibles			$	1,523.2	$	1,520.1	$	269.0	$	191.8

Amortization expense was $25.8 and $77.1 for the three and nine months ended September 30, 2009, respectively, and $24.7 and $73.2 for the three and nine months ended September 30, 2008, respectively.

Estimated aggregate amortization expense for intangible assets through December 31, 2013 is as follows:


Three months ending December 31, 2009	$	25.7
Year ending December 31, 2010		100.4
Year ending December 31, 2011		93.3
Year ending December 31, 2012		86.4
Year ending December 31, 2013		76.3

During 2008, the Company experienced declines in customer revenues from Alcott Routon operations and assessed the customer relationship intangible asset for impairment. As a result, the Company calculated the estimated fair value and wrote off the customer relationship intangible asset, which was in excess of fair value. The associated impairment charge of $0.5 was included in selling, general and administrative expenses in the accompanying consolidated statements of income for the nine months ended September 30, 2008.

7. Business Segment Information

The Company’s businesses are organized 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. The acquired Transaction Holdings operation is included in the Harland Clarke segment. The acquired Data Management operations are included in the Scantron segment. Management measures and evaluates the reportable segments based on operating income. The current segments and their principal activities consist of the following:

	•		Harland Clarke segment — Provides checks and related products, direct marketing and contact center services to financial and commercial institutions, as well as to individual consumers and small businesses. This segment operates in the United States and Puerto Rico.

	•		Harland Financial Solutions segment — Provides core processing, retail and lending solutions to financial and other institutions. This segment operates primarily in the United States, Israel and Ireland.

	•		Scantron segment — Provides data management solutions, testing and assessment products and services as well as field maintenance services which are sold primarily to educational and commercial customers. This segment operates in the United States and Canada.

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

Selected summarized financial information for the three months ended September 30, 2009 and 2008 was as follows:


			Harland
	Harland		Financial				Corporate
	Clarke(1)		Solutions		Scantron		and Other			Total
Product revenues, net:
Three months ended September 30, 2009	$	303.7	$	17.1	$	33.5	$	—		$	354.3
Three months ended September 30, 2008		321.6		19.1		35.6		—			376.3
Service revenues, net:
Three months ended September 30, 2009	$	1.3	$	50.8	$	19.3	$	—		$	71.4
Three months ended September 30, 2008		1.1		53.7		22.9		—			77.7
Intersegment revenues:
Three months ended September 30, 2009	$	—	$	—	$	0.1	$	(0.1	)	$	—
Three months ended September 30, 2008		—		—		0.1		(0.1	)		—
Operating income (loss):
Three months ended September 30, 2009	$	69.4	$	9.5	$	11.1	$	(3.5	)	$	86.5
Three months ended September 30, 2008		57.0		8.0		9.0		(3.2	)		70.8
Depreciation and amortization (excluding amortization of deferred financing fees):
Three months ended September 30, 2009	$	26.8	$	6.5	$	6.4	$	—		$	39.7
Three months ended September 30, 2008		28.0		7.2		6.1		—			41.3
Capital expenditures (excluding capital leases):
Three months ended September 30, 2009	$	5.3	$	1.3	$	1.4	$	—		$	8.0
Three months ended September 30, 2008		6.1		1.0		4.3		—			11.4

Selected summarized financial information for the nine months ended September 30, 2009 and 2008 was as follows:


			Harland
	Harland		Financial				Corporate
	Clarke(1)		Solutions		Scantron(2)		and Other			Total
Product revenues, net:
Nine months ended September 30, 2009	$	923.1	$	52.4	$	93.8	$	—		$	1,069.3
Nine months ended September 30, 2008		980.1		58.5		92.8		—			1,131.4
Service revenues, net:
Nine months ended September 30, 2009	$	3.3	$	154.4	$	63.7	$	—		$	221.4
Nine months ended September 30, 2008		3.4		159.4		61.7		—			224.5
Intersegment revenues:
Nine months ended September 30, 2009	$	—	$	—	$	0.5	$	(0.5	)	$	—
Nine months ended September 30, 2008		0.3		—		0.4		(0.7	)		—
Operating income (loss):
Nine months ended September 30, 2009	$	172.6	$	28.1	$	24.6	$	(9.5	)	$	215.8
Nine months ended September 30, 2008		173.4		20.8		19.2		(11.7	)		201.7
Depreciation and amortization (excluding amortization of deferred financing fees):
Nine months ended September 30, 2009	$	81.5	$	20.0	$	19.3	$	—		$	120.8
Nine months ended September 30, 2008		85.2		21.7		17.1		—			124.0
Capital expenditures (excluding capital leases):
Nine months ended September 30, 2009	$	21.7	$	3.4	$	5.9	$	—		$	31.0
Nine months ended September 30, 2008		26.9		3.4		7.8		—			38.1


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

(2)		Includes results of the acquired Data Management business from the date of acquisition.

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

8. Comprehensive Income

Total comprehensive income for the three and nine months ended September 30, 2009 and 2008 was as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009		2008
Net income	$	33.7		$	15.5		$	108.6	$	37.3
Other comprehensive income (loss):
Foreign currency translation adjustments		0.5			(1.6	)		0.7		(0.6	)
Changes in fair value of cash flow hedging instruments, net of tax (benefit) provision of $(0.3), $1.9, $3.7 and $3.6		(0.3	)		2.9			5.8		5.6
Unrealized gain (loss) on investments, net of tax provision (benefit) of $0.6, $—, $0.8 and $—		0.9			(0.1	)		1.2		—

Comprehensive income	$	34.8		$	16.7		$	116.3	$	42.3

9. Postretirement Defined Benefit Plans

The Company currently sponsors unfunded defined benefit postretirement plans that cover certain salaried and nonsalaried employees who were formerly employees of Harland. One plan provides health care 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 from Harland prior to December 31, 2002 with twenty or more years of service at December 31, 2000, the Company currently contributes approximately 50% of the cost of providing the medical plan. For all other retirees, the Company’s intent is that the retirees provide the majority of the actual cost of providing the medical plan. The life insurance plan is noncontributory for employees who retired from Harland by December 31, 2002.

Net periodic postretirement costs for these plans were as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
Interest cost	$	0.3	$	0.3	$	0.8	$	0.7
Net amortization		—		—		—		—

Net postretirement benefit cost	$	0.3	$	0.3	$	0.8	$	0.7

10. Income Taxes

The Company is subject to taxation in the United States and various state and foreign jurisdictions. The statute of limitations for the Company’s federal and state tax returns for the tax years 2005 through 2008 generally remain open. In addition, open tax years related to foreign jurisdictions remain subject to examination but are not considered material.

The Internal Revenue Service previously commenced examinations of Novar USA Inc., a predecessor of Harland Clarke Holdings, for the tax year 2005. The Internal Revenue Service recently completed examinations of Harland for the tax years 2005 through May 1, 2007 and for Harland’s amended tax returns filed for claims of research and development credits relating to tax years 2002 through 2005. In connection with completion of the audits, Harland settled its research and development credit claims with the Internal Revenue Service. This resulted in a $5.9 reduction of the accrual for the Company’s uncertain tax positions, of which $3.4 (inclusive of interest) was recorded as a benefit in the tax provision for the nine months ended September 30, 2009.

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

11. Long-Term Debt


	September 30,			December 31,
	2009			2008
$1,900.0 Senior Secured Credit Facilities	$	1,759.5		$	1,773.0
Senior Floating Rate Notes due 2015		227.4			305.0
9.50% Senior Fixed Rate Notes due 2015		271.3			310.0
Capital lease obligations and other indebtedness		6.0			2.6

		2,264.2			2,390.6
Less: current maturities		(19.7	)		(19.8	)

Long-term debt, net of current maturities	$	2,244.5		$	2,370.8

$1,900.0 Senior Secured Credit Facilities

On April 4, 2007, the Company and substantially all of its subsidiaries as co-borrowers entered into a credit agreement (the “Credit Agreement”). The Credit Agreement provides for a $1,800.0 senior secured term loan (the “Term Loan”), which was fully drawn on May 1, 2007 and matures on June 30, 2014. The Company is required to repay the Term Loan in equal quarterly installments in aggregate annual amounts equal to 1% of the original principal amount. In addition, the Credit Agreement requires that a portion of the Company’s excess cash flow be applied to prepay amounts borrowed, as further described below. The Credit Agreement also provides for a $100.0 revolving credit facility (the “Revolver”) that matures on June 28, 2013. The Revolver includes an up to $60.0 subfacility in the form of letters of credit and an up to $30.0 subfacility in the form of short-term swing line loans. The weighted average interest rate on borrowings outstanding under the Term Loan was 2.8% at September 30, 2009. As of September 30, 2009, there were no outstanding borrowings under the Revolver and there was $87.5 available for borrowing (giving effect to the issuance of $12.5 of letters of credit).

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

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

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

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

The Credit Agreement has a commitment fee for the unused portion of the Revolver and for issued letters of credit of 0.50% and 2.63%, respectively. Interest rate margins and commitment fees under the Revolver are subject to reduction in increments based upon the Company achieving certain consolidated leverage ratios.

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

The Credit Agreement contains customary affirmative and negative covenants including, among other things, restrictions on indebtedness, liens, mergers and consolidations, sales of assets, loans, acquisitions, restricted payments, transactions with affiliates, dividends and other payment restrictions affecting subsidiaries and sale-leaseback transactions. The Credit Agreement requires the Company to maintain a maximum consolidated leverage ratio for the benefit of lenders under the Revolver only. The Company has the right to prepay the Term Loan at any time without premium or penalty, subject to certain breakage costs, and the Company may also reduce any unutilized portion of the Revolver at any time, in minimum principal amounts set forth in the Credit Agreement. The Company is required to prepay the Term Loan with 50% of excess cash flow (as defined in the Credit Agreement, commencing in 2009 with respect to the fiscal year 2008, 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

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

obligations of the Company or any of its subsidiaries (other than permitted debt). No such excess cash flow payment is required to be paid in 2009. 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.

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.

Under the terms of the Credit Agreement, the Company was required to ensure that, until no earlier than May 1, 2009, at least 40% of the aggregate principal amount of its long-term indebtedness bear interest at a fixed rate, either by its terms or through entering into hedging agreements within 180 days of the effectiveness of the Credit Agreement. In order to comply with this requirement, the Company entered into interest rate derivative arrangements described in “Interest Rate Hedges” below.

Senior Notes due 2015

On May 1, 2007, the Company issued $305.0 aggregate principal amount of Senior Floating Rate Notes due 2015 (the “Floating Rate Notes”) and $310.0 aggregate principal amount of 9.50% Senior Fixed Rate Notes due 2015 (the “Fixed Rate Notes” and, together with the Floating Rate Notes, the “2015 Senior Notes”). The 2015 Senior Notes mature on May 15, 2015. The Fixed Rate Notes bear interest at a rate per annum of 9.50%, payable on May 15 and November 15 of each year. The Floating Rate Notes bear interest at a rate per annum equal to the Applicable LIBOR Rate (as defined in the indenture governing the 2015 Senior Notes (the “Indenture”)) 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, 2009. The Senior Notes are unsecured and are therefore effectively subordinated to all of the Company’s senior secured indebtedness, including outstanding borrowings under the Credit Agreement. The Company and each of its existing subsidiaries, other than unrestricted subsidiaries and certain immaterial subsidiaries, are guarantors and may also be co-issuers under the 2015 Senior Notes.

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

In August 2007, the Company closed an offer to exchange publicly registered 2015 Senior Notes with substantially equivalent terms for the 2015 Senior Notes originally issued, with $614.5 of the total $615.0 principal amount of the 2015 Senior Notes exchanged.

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

Gain on Early Extinguishment of Debt

During the nine months ended September 30, 2009, the Company extinguished debt with a total principal amount of $116.2 by purchasing 2015 Senior Notes in individually negotiated transactions for an aggregate purchase price of $50.6, resulting in a gain of $62.0 after the write-off of $3.6 of unamortized deferred financing fees related to the extinguished debt.

Capital Lease Obligations and Other Indebtedness

The Company has outstanding capital lease obligations and other indebtedness with principal balances totaling $6.0 and $2.6 at September 30, 2009 and December 31, 2008, respectively. These obligations have imputed interest rates ranging from 6.0% to 8.5% and have required payments, including interest, of $0.4 remaining in 2009, $1.4 in 2010, $1.1 in 2011, $1.1 in 2012 and $1.1 in 2013. During the nine months ended September 30, 2009, the Company entered into a capital lease and other indebtedness totaling $5.1 and, accordingly, such non-cash transaction amounts have been excluded from the consolidated statement of cash flows.

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 the Company’s variable-rate debt.

During February 2006, the Company entered into interest rate hedge transactions in the form of three-year interest rate swaps with a total notional amount of $150.0, which became effective on July 1, 2006 and were accounted for as cash flow hedges. The hedges expired on June 30, 2009. The hedges were designed to swap the underlying variable rate for a fixed rate of 4.992%. The purpose of the hedge transactions was to limit the Company’s risk on a portion of its variable interest rate under a prior credit facility. On May 1, 2007, the Company’s prior credit facilities were repaid in full. The Company redesignated the swaps as a hedge against the variable interest rate on a portion of its Term Loan. The Company amortized the fair value of the derivative liability of $0.4 as of May 1, 2007 in interest expense in the consolidated statements of income over the remaining life of the derivative contract using the straight-line method.

During June 2007, the Company entered into interest rate derivative transactions in the form of a two-year interest rate swap with a notional amount of $255.0 and a three-year interest rate swap with a notional amount of $255.0, which became effective on June 29, 2007. The two-year hedge, which expired on June 30, 2009, swapped the underlying variable rate for a fixed rate of 5.323% and the three-year hedge swaps the underlying variable rate for a fixed rate of 5.362%. During August 2007, the Company entered into an additional interest rate derivative transaction in the form of a two-year interest rate swap with a notional amount of $250.0, which became effective on September 28, 2007. The hedge, which expired on September 28, 2009, swapped the underlying variable rate for a fixed rate of 4.977%.

During June 2009, the Company entered into an interest rate derivative transaction in the form of a three-year interest rate swap with a notional amount of $350.0, which became effective on June 30, 2009. This hedge swaps the underlying variable rate for a fixed rate of 2.353%. During September 2009, the Company entered into an additional interest rate derivative transaction in the form of a three-year interest rate swap with a notional amount of $250.0, which became effective on September 30, 2009. This hedge swaps the underlying variable rate for a fixed rate of 2.140%.

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


		September 30,		December 31,
Derivatives designated as cash flow hedging instruments:	Balance sheet classification	2009		2008

Interest rate swaps	Other current liabilities	$	9.2	$	13.8
	Other liabilities		8.9		13.7

See Note 15 for information regarding the valuation of these derivative instruments.

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

These derivative instruments had no ineffective portions during the three and nine months ended September 30, 2009. Accordingly, no amounts were required to be reclassified from accumulated other comprehensive loss to the consolidated statements of income due to ineffectiveness. The following presents the effect of these derivative instruments (effective portion) on other comprehensive income and amounts reclassified from accumulated other comprehensive loss into interest expense.

Loss reclassified from

accumulated other

Loss recognized in other

comprehensive loss

comprehensive income

into interest expense

Three Months

Nine Months

Three Months

Nine Months

Ended

September 30,

Derivatives designated as cash flow hedging instruments:

2009

Interest rate swaps

8.3

15.8

7.7

25.2

The Company expects to reclassify approximately $22.2 into net income as additional interest expense during the twelve months ending September 30, 2010.

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,
	2009

Balance at the beginning of the period	$	16.8
Amount reclassified to income, net of tax benefit of $9.8		(15.4	)
Net change in fair value of interest rate swaps, net of tax benefit of $6.2		9.6

Balance at end of period	$	11.0

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

12. Commitments and Contingencies

Honeywell Indemnification

Certain of the intermediate holding companies of the predecessor of the Company had issued guarantees on behalf of operating companies formerly owned by these intermediate holding companies, which operating companies are not part of the Company’s businesses. In the stock purchase agreement executed in connection with the acquisition of the Company by M & F Worldwide, Honeywell agreed to use its commercially reasonable efforts to assume, replace or terminate such guarantees and indemnify M & F Worldwide and its affiliates, including the Company and its subsidiaries, with respect to all liabilities arising under such guarantees.

Other

In June 2008, Kenneth Kitson, purportedly on behalf of himself and a class of other alleged similarly situated commercial borrowers from the Bank of Edwardsville, an Illinois-based community bank (“BOE”), filed in a Madison County, Illinois state court an amended complaint that re-asserted previously filed claims against BOE and added claims against Harland Financial Solutions, Inc. (“HFS”). Mr. Kitson’s complaint alleges, among other things, that HFS’s Laser Pro software permitted BOE to generate loan documents that were deceptive and usurious in that they failed to disclose properly the effect of the “365/360” method of calculating interest. HFS removed the action to the United States District Court for the Southern District of Illinois. In February 2009, the District Court entered an order granting with prejudice HFS’s motion to dismiss the claims that Mr. Kitson brought against it. In August 2009, Mr. Kitson, individually and as class representative, and BOE agreed to settle and dismiss with prejudice all claims. Separately but concurrently, BOE’s warranty claim against HFS was settled, in exchange for, among other things, payment by HFS of $0.2. The class

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

settlement agreement has been preliminarily approved by the District Court and the fairness hearing is scheduled for January 25, 2010. HFS’s settlement payment remains in escrow pending this approval.

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

13. Restructuring

Harland Clarke and Corporate

During the second quarter of 2007, as a result of the Harland acquisition, the Company adopted a plan to restructure the Harland Clarke segment and Corporate, focused on improving operating margins through consolidating facilities and reducing duplicative expenses. The Company’s plan primarily included workforce rationalization, facility closures, consolidation of certain redundant outsourcing and the reduction of consulting and other professional services.

In addition to restructuring liabilities recorded in the Harland acquisition purchase accounting, the Company also adopted plans during 2008 and 2009 to realize incremental synergies in the Harland Clarke segment by further consolidating printing plants, contact centers and selling, general and administrative functions. The Company also recorded restructuring liabilities in connection with the Transaction Holdings Acquisition of $1.5 in 2008. The liabilities were reduced by $0.6 in 2009, which is reflected as non-cash utilization in the table below.

The Company expensed $1.7 and $17.0 for severance and severance-related costs and $1.7 and $4.8 for facilities closures and other costs during the three and nine months ended September 30, 2009, respectively, and expensed $0.5 and $0.9 for severance and severance-related costs and $0.1 and $0.5 for facilities closures and other costs during the three and nine months ended September 30, 2008, respectively. The Company expects to incur in future periods an additional $5.4 for costs related to these plans. Ongoing lease commitments related to these plans continue through 2013.

The following table details the components of the Company’s restructuring accruals under its plans established since 2007 related to the Harland Clarke segment and Corporate for the nine months ended September 30, 2009 and 2008:


			Established in
			Acquisition
	Beginning		Purchase					Paid in			Non-Cash			Ending
	Balance		Accounting			Expensed		Cash			Utilization			Balance
Nine months ended September 30, 2009:
Severance and severance-related	$	7.4	$	—		$	17.0	$	(19.1	)	$	—		$	5.3
Facilities closures and other costs		2.3		—			4.8		(1.8	)		(4.0	)		1.3

Total	$	9.7	$	—		$	21.8	$	(20.9	)	$	(4.0	)	$	6.6


Nine months ended September 30, 2008:
Severance and severance-related	$	8.5	$	1.5		$	0.9	$	(7.7	)	$	—		$	3.2
Facilities closures and other costs		2.9		(0.5	)		0.5		(1.5	)		—			1.4

Total	$	11.4	$	1.0		$	1.4	$	(9.2	)	$	—		$	4.6

In addition to the amounts disclosed in the table above, the Company also incurred other expenses related to the facility closures, including inventory write-offs, training, hiring and travel.

Harland Financial Solutions

During the second quarter of 2007, as a result of the Harland acquisition, the Company adopted a plan to restructure the Harland Financial Solutions segment, focused on improving operating margins primarily through consolidating facilities and rationalizing the workforce.

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

During the second quarter of 2008, the Company implemented and completed a plan to restructure certain selling, general and administrative functions within the Harland Financial Solutions segment. The plan focused on improving operating margins through reducing selling, general and administrative expenses by leveraging the Company’s shared services capabilities. During the first quarter of 2009, the Company initiated a multi-year plan to reorganize certain operations and sales and support functions within the Harland Financial Solutions segment. The plan, which is expected to be completed by the end of 2011, focuses on moving from a product-centric organization to a functional organization in order to enhance customer support.

The Company expensed $0.9 and $3.1 for severance and severance-related costs and $0.0 and $1.0 for facilities closures and other costs during the three and nine months ended September 30, 2009, respectively, and expensed $0.1 and $3.0 for severance and severance-related costs during the three and nine months ended September 30, 2008. The Company currently expects to incur additional costs of $0.3 related to these plans, which is subject to refinement as the reorganization progresses.

The following table details the Company’s restructuring accruals related to the Harland Financial Solutions segment for the nine months ended September 30, 2009 and 2008:


			Established in
			Acquisition
	Beginning		Purchase					Paid in			Ending
	Balance		Accounting			Expensed		Cash			Balance
Nine months ended September 30, 2009:
Severance and severance-related	$	1.4	$	—		$	3.1	$	(3.0	)	$	1.5
Facilities and other costs		0.7		—			1.0		(0.8	)		0.9

Total	$	2.1	$	—		$	4.1	$	(3.8	)	$	2.4


Nine months ended September 30, 2008:
Severance and severance-related	$	0.7	$	—		$	3.0	$	(2.3	)	$	1.4
Facilities and other costs		1.7		(0.1	)		—		(0.5	)		1.1

Total	$	2.4	$	(0.1	)	$	3.0	$	(2.8	)	$	2.5

Scantron

During the first quarter of 2008, as a result of the Data Management Acquisition, the Company adopted plans to restructure the Scantron segment. These plans focused on improving operating margins through consolidating manufacturing and printing operations and reducing duplicative selling, general and administrative expenses through workforce rationalization, consolidation of certain redundant outsourcing and the reduction of consulting and other professional services.

As discussed in Note 3, the Company recorded $2.5 of severance and severance-related costs for the termination of certain former Data Management employees in purchase accounting. In addition to these restructuring liabilities recorded in purchase accounting for the Data Management Acquisition, the Company expensed $2.2 for severance and severance-related costs and $0.1 of facilities and other costs for the consolidation of certain printing operations during the nine months ended September 30, 2008, of which $0.7 was expensed during the three months ended September 30, 2008. The Company completed substantially all of the planned employee terminations and consolidation of printing and manufacturing operations related to the Data Management Acquisition as of March 31, 2009.

The Company expensed $0.0 and $2.8 for severance and severance-related costs related to further consolidation of operations and elimination of certain selling, general and administrative expenses, and $0.0 and $0.3 for facilities closures and other costs during the three and nine months ended September 30, 2009, respectively.

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

The following table details the components of the Company’s restructuring accruals related to the Scantron segment for the nine months ended September 30, 2009 and 2008:


			Established in
			Acquisition
	Beginning		Purchase				Paid in			Non-Cash			Ending
	Balance		Accounting		Expensed		Cash			Utilization			Balance
Nine months ended September 30, 2009:
Severance and severance-related	$	1.0	$	—	$	2.8	$	(2.9	)	$	(0.1	)	$	0.8
Facilities and other costs		—		—		0.3		—			(0.3	)		—

Total	$	1.0	$	—	$	3.1	$	(2.9	)	$	(0.4	)	$	0.8


Nine months ended September 30, 2008:
Severance and severance-related	$	—	$	2.5	$	2.2	$	(3.4	)	$	—		$	1.3
Facilities and other costs		—		—		0.1		(0.1	)		—			—

Total	$	—	$	2.5	$	2.3	$	(3.5	)	$	—		$	1.3

In addition to the amounts disclosed in the table above, the Company also incurred other expenses related to the initiatives including inventory write-offs, training, hiring, relocation and travel.

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 2013.

14. Transactions with Related Parties

Notes Receivable

During the third quarter of 2008, the Company acquired the senior secured credit facility and outstanding note of Delphax Technologies, Inc. (“Delphax”), the supplier of Imaggia printing machines and related supplies and service for the Harland Clarke segment. The senior secured credit facility is comprised of a revolving credit facility of up to $14.0 and a term loan of $0.5, subject to borrowing limitations set forth therein, that mature in September 2011. The senior secured credit facility is collateralized by a perfected security interest in substantially all of Delphax’s assets. The revolving facility has a borrowing base calculated based on Delphax’s eligible accounts receivable and inventory. The senior secured credit facility has an interest rate of Wells Fargo N.A. Prime plus 2.5%, payable quarterly. The note, which has a principal amount of $7.0, matures in September 2012, and bears interest at an annual rate of 12.0%, payable quarterly either in cash, or in a combination of cash and up to 25% Delphax stock. As part of this transaction, the Company also received 250,000 shares of Delphax common stock from the previous holder of the Delphax note.

The outstanding balances on the senior secured credit facility and the note are included in other assets in the accompanying consolidated balance sheets. During the nine months ended September 30, 2009, the Company received $15.0 in payments and released $9.8 in draws on the revolver, bringing the principal balance of the debt to $7.0 at September 30, 2009. Interest income of $0.2 and $0.7 was recorded during the three and nine months ended September 30, 2009, respectively. Interest income of $0.3 was recorded during the three months ended September 30, 2008.

Other

The Company expensed $0.7 and $2.0 during the three and nine months ended September 30, 2009, respectively, and $0.7 and $2.0 during the three and nine months ended September 30, 2008, respectively, for services provided to the Company by M & F Worldwide. The amounts are reflected in selling, general and administrative expenses and payable to parent.

During the nine months ended September 30, 2008, the Company paid a cash dividend of $65.0 to M & F Worldwide as permitted by restricted payment baskets within the Company’s debt agreements.

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

As discussed in Note 3, the Company paid $2.0 in February 2008 to MacAndrews & Forbes Holdings Inc. for its services related to sourcing, analyzing, negotiating and executing the Data Management Acquisition.

15. Financial Instruments

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 at September 30, 2009 and December 31, 2008 was approximately $1,918.6 and $1,096.3, respectively, based on bid prices available at these respective dates. The carrying value of long-term debt at September 30, 2009 and December 31, 2008 was $2,264.2 and $2,390.6, respectively.

The Company measures fair value using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of September 30, 2009 and December 31, 2008, the Company held two types of financial instruments subject to valuation on a recurring basis, marketable securities and interest rate swaps. The marketable securities are included in other assets in the accompanying consolidated balance sheets. The interest rate swaps are included in other current liabilities and other liabilities in the accompanying consolidated balance sheets. Fair values as of September 30, 2009 and December 31, 2008 were as follows:


	Balance at
	September 30, 2009		(Level 1)		(Level 2)		(Level 3)
Marketable securities	$	2.2	$	2.2	$	—	$	—
Liability for interest rate swaps		18.1		—		18.1		—


	Balance at
	December 31, 2008		(Level 1)		(Level 2)		(Level 3)
Marketable securities	$	0.2	$	0.2	$	—	$	—
Liability for interest rate swaps		27.5		—		27.5		—

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

The Company’s marketable securities are classified as available-for-sale and are reported at their fair values (quoted market price), which were as follows:


			Gross		Gross
			Unrealized		Unrealized
	Amortized Cost		Gains		Losses			Fair Value
Balance at September 30, 2009:
Equity securities	$	0.3	$	2.0	$	(0.1	)	$	2.2

Balance at December 31, 2008:
Equity securities	$	0.3	$	0.1	$	(0.2	)	$	0.2

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, 2009 and 2008 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.

Overview of Business

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

The Transaction Holdings Acquisition

On December 31, 2008, the Company’s wholly owned subsidiary, Harland Clarke Corp., acquired Transaction Holdings Inc. (“Transaction Holdings”) for total cash consideration of $8.2 million (the “Transaction Holdings Acquisition”). Transaction Holdings produces personal and business checks, payment coupon books, promotional checks and provides direct marketing services to financial institutions, as well as individual consumers and small businesses.

The Data Management Acquisition

With these and previous acquisitions, the Company is focused on improving operating margins by reducing selling, general and administrative expenses, shared services costs and cost of sales.

Harland Clarke Holdings Corp. and Subsidiaries

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

The financial institution outsourcing services industry is highly competitive and fragmented. Quality and breadth of service offerings and strength of customer relationships are among the key competitive factors. Within this category, Harland Clarke competes with large outsourcing service providers that offer a wide variety of services, and some compete with Harland Clarke’s primary offerings — specifically payment services, marketing services and teleservices. Other competitors specialize in providing one or more of these services.

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 have been negatively affected by slow or negative growth of, or downturns in, the United States economy. Business confidence also affects a portion of the Harland Clarke segment. In addition, as Harland Clarke’s financial institution customers fail or merge with other financial institutions, Harland Clarke may lose some or all revenues from such financial institutions and/or experience further pricing pressure, which would negatively affect Harland Clarke’s operating results.

Harland Financial Solutions

Harland Financial Solutions’ operating results are affected by the overall demand for our products, software and related services which is based upon the information technology budgets of our clients and prospects. Economic downturns in one or more of the countries in which we do business and enhanced regulatory burdens, including through increased fees and assessments charged to financial institutions by the FDIC and NCUA in the wake of the financial crisis, could result in reductions in the information technology budgets for some portion of our clients and potentially longer lead-times for acquiring Harland Financial Solutions products and services. In addition, as Harland Financial Solutions’ financial institution customers fail or merge with other financial institutions, Harland Financial Solutions may lose some or all revenues from such financial institutions and/or experience further pricing pressure, which would negatively affect Harland Financial Solutions’ operating results.

The markets for our Harland Financial Solutions products are affected by technological change, evolving industry standards, regulatory changes in client requirements and frequent new product introductions and enhancements. The markets for providing technological solutions to financial institutions and other enterprises require that we continually improve our existing products and create new products, while controlling costs to remain price competitive.

The market for providing technological solutions to financial institutions is highly competitive and fragmented. Harland Financial Solutions competes with several domestic and international companies. Some competitors offer one or more specialized products or services that compete with Harland Financial Solutions. Certain competitors have advantages over Harland Financial Solutions due to their significant worldwide presence, longer operating and product development

Harland Clarke Holdings Corp. and Subsidiaries

history, larger installed client base, and substantially greater financial, technical and marketing resources. In response to competition, Harland Financial Solutions has been required in the past, and may be required in the future, to furnish additional discounts to clients, otherwise modify pricing practices, or offer more favorable payment terms or more favorable contractual implementation terms.

Scantron

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

Asset Impairments

Changes in estimates and assumptions used in the Company’s financial projections resulting from the factors discussed above for any of the Company’s business segments could have a material impact on the fair value of goodwill, indefinite-lived intangible assets or other long-lived assets in future periods, which may result in material asset impairments, as more fully described in Item 1A, “Risk Factors — Weak economic conditions and further acceleration of check unit declines may continue to have an adverse effect on our revenues and profitability and could result in impairment charges.”

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 our 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.

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

The operating results for the three months ended September 30, 2009, as reflected in the accompanying consolidated statements of income and described below, include the operating results of the acquired Transaction Holdings business in the Harland Clarke segment from December 31, 2008, the date of the Transaction Holdings Acquisition.

Harland Clarke Holdings Corp. and Subsidiaries

Net Revenues:


	Three Months Ended September 30,
*$ in millions*	2009			2008
Consolidated Net Revenues:
Harland Clarke segment	$	305.0		$	322.7
Harland Financial Solutions segment		67.9			72.8
Scantron segment		52.9			58.6
Eliminations		(0.1	)		(0.1	)

Total	$	425.7		$	454.0

Net revenues decreased by $28.3 million, or 6.2%, to $425.7 million in the 2009 period from $454.0 million in the 2008 period.

Net revenues for the Harland Clarke segment decreased by $17.7 million, or 5.5%, to $305.0 million in the 2009 period from $322.7 million in the 2008 period. The decrease was primarily due to volume declines from check and related products, which the Company believes was partially affected by the economic downturn. Declines in volumes were partially offset by increased revenues per unit.

Net revenues for the Harland Financial Solutions segment decreased by $4.9 million, or 6.7%, to $67.9 million in the 2009 period from $72.8 million in the 2008 period. Net revenues from the enterprise solutions product lines decreased $3.0 million in the 2009 period compared to the 2008 period. The decrease was primarily due to declines in license, hardware and professional services revenues. Additionally, there was a decrease in early termination fees in the 2009 period as compared to the 2008 period. Net revenues from the risk management product lines decreased $1.4 million in the 2009 period compared to the 2008 period. The decrease was primarily due to declines in lending products. The Company believes the declines were partially affected by the economic downturn, which has negatively affected information technology purchases by financial institutions.

Net revenues for the Scantron segment decreased by $5.7 million, or 9.7%, to $52.9 million in the 2009 period from $58.6 million in the 2008 period. The decrease was primarily due to volume declines in hardware and forms products and a decrease in service and maintenance revenues. The Company believes these product lines and services were partially affected by the economic downturn.

Cost of Revenues:


	Three Months Ended September 30,
*$ in millions*	2009			2008
Consolidated Cost of Revenues:
Harland Clarke segment	$	186.1		$	206.1
Harland Financial Solutions segment		30.3			32.2
Scantron segment		28.3			32.8
Eliminations		(0.1	)		(0.1	)

Total	$	244.6		$	271.0

Cost of revenues decreased by $26.4 million, or 9.7%, to $244.6 million in the 2009 period from $271.0 million in the 2008 period.

Cost of revenues for the Harland Clarke segment decreased by $20.0 million, or 9.7%, to $186.1 million in the 2009 period from $206.1 million in the 2008 period. The decrease was primarily due to lower volumes, which resulted in decreases in delivery, materials, and other variable overhead costs. Labor costs also decreased due to cost reduction and restructuring activities. Decreases in travel expenses and depreciation also contributed to the decrease in cost of revenues. These decreases were partially offset by inflation in delivery and materials expenses, as well as an increase in the amortization of intangible assets of $1.1 million. Cost of revenues as a percentage of revenues for the Harland Clarke segment was 61.0% in the 2009 period as compared to 63.9% in the 2008 period.

Cost of revenues for the Harland Financial Solutions segment decreased by $1.9 million, or 5.9%, to $30.3 million in the 2009 period from $32.2 million in the 2008 period. The decrease was primarily due to lower hardware and other

Harland Clarke Holdings Corp. and Subsidiaries

third-party costs related to volume declines. Labor cost decreases related to cost reduction activities and decreases in depreciation and amortization also contributed to the decrease in cost of revenues. Cost of revenues as a percentage of revenues for the Harland Financial Solutions segment was 44.6% in the 2009 period as compared to 44.2% in the 2008 period.

Cost of revenues for the Scantron segment decreased by $4.5 million, or 13.7%, to $28.3 million in the 2009 period from $32.8 million in the 2008 period. The decrease was primarily due to volume declines and cost reductions related to the Data Management Acquisition, in addition to other restructuring activities. Cost of revenues as a percentage of revenues for the Scantron segment was 53.5% in the 2009 period as compared to 56.0% in the 2008 period.

Selling, General and Administrative Expenses:


	Three Months Ended September 30,
*$ in millions*	2009		2008
Consolidated Selling, General and Administrative Expenses:
Harland Clarke segment	$	46.1	$	59.0
Harland Financial Solutions segment		27.2		32.5
Scantron segment		13.5		16.1
Corporate		3.5		3.2

Total	$	90.3	$	110.8

Selling, general and administrative expenses decreased by $20.5 million, or 18.5%, to $90.3 million in the 2009 period from $110.8 million in the 2008 period.

Selling, general and administrative expenses for the Harland Clarke segment decreased by $12.9 million, or 21.9%, to $46.1 million in the 2009 period from $59.0 million in the 2008 period. The decrease was primarily due to labor cost reductions and lower integration-related and travel expenses. Selling, general and administrative expenses as a percentage of revenues for the Harland Clarke segment was 15.1% in the 2009 period as compared to 18.3% in the 2008 period.

Selling, general and administrative expenses for the Harland Financial Solutions segment decreased by $5.3 million, or 16.3%, to $27.2 million in the 2009 period from $32.5 million in the 2008 period. The decrease was primarily due to labor cost reductions, a reduction in compensation expense related to an incentive agreement for an acquisition and reductions in occupancy and travel expenses. Selling, general and administrative expenses in the 2009 and 2008 periods included charges of $0.8 million and $2.1 million, respectively, for compensation expense related to an incentive agreement for an acquisition. Selling, general and administrative expenses as a percentage of revenues for the Harland Financial Solutions segment was 40.1% in the 2009 period as compared to 44.6% in the 2008 period.

Selling, general and administrative expenses for the Scantron segment decreased $2.6 million, or 16.1%, to $13.5 million in the 2009 period from $16.1 million in the 2008 period. The decrease was primarily due to cost reductions related to the Data Management Acquisition, in addition to other restructuring activities and a decrease in integration-related expenses. Selling, general and administrative expenses as a percentage of revenues for the Scantron segment was 25.5% in the 2009 period as compared to 27.5% in the 2008 period.

Corporate selling, general and administrative expenses increased $0.3 million, or 9.4%, to $3.5 million in the 2009 period from $3.2 million in the 2008 period. The increase was primarily due to higher professional fees.

Restructuring Costs

During 2007 and 2008, as a result of acquisition activity, the Company adopted plans to restructure its businesses. These plans focused on improving operating margins through consolidating facilities and reducing duplicative expenses, such as selling, general and administrative, executive and shared services expenses. As a result of the economic downturn and the sales decline experienced in recent periods, the Company adopted further restructuring plans during 2008 and 2009 to strengthen operating margins and leverage incremental synergies within the printing plants, contact centers and selling, general and administrative areas by leveraging the Company’s shared services capabilities and reorganizing certain operations and sales and support functions.

Harland Clarke Holdings Corp. and Subsidiaries

During the 2009 period, the Company recorded restructuring costs of $3.4 million for the Harland Clarke segment and $0.9 million for the Harland Financial Solutions segment related to these plans. During the 2008 period, the Company recorded restructuring costs of $0.6 million for the Harland Clarke segment, $0.1 million for the Harland Financial Solutions segment and $0.7 million for the Scantron segment related to these plans.

Interest Income

Interest income was $0.2 million in the 2009 period as compared to $0.3 million in the 2008 period. The decrease in interest income was primarily due to lower interest rates on investments in cash equivalents in the 2009 period as compared to the 2008 period, partially offset by higher cash balances available for investment in cash equivalents in the 2009 period as compared to the 2008 period.

Interest Expense

Interest expense was $32.6 million in the 2009 period as compared to $45.2 million in the 2008 period. The decrease in interest expense was due to lower effective interest rates and also a decrease in total debt outstanding.

Gain on Early Extinguishment of Debt

During the 2009 period, the Company extinguished debt with a total principal amount of $1.5 million by purchasing 2015 Senior Notes in individually negotiated transactions for an aggregate purchase price of $0.9 million, resulting in a gain of $0.5 million after the write-off of $0.1 million of unamortized deferred financing fees related to the extinguished debt.

Provision for Income Taxes

The Company’s effective tax rate was 38.3% in the 2009 period and 40.2% in the 2008 period. The change was primarily due to a benefit from the domestic production activities deduction in the 2009 period.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

The operating results for the nine months ended September 30, 2009, as reflected in the accompanying consolidated statements of income and described below, include the operating results of the acquired Transaction Holdings business in the Harland Clarke segment from December 31, 2008, the date of the Transaction Holdings Acquisition. The operating results for the Scantron segment include Data Management operations from February 22, 2008, the date of the Data Management Acquisition.

Net Revenues:


	Nine Months Ended September 30,
*$ in millions*	2009			2008
Consolidated Net Revenues:
Harland Clarke segment	$	926.4		$	983.8
Harland Financial Solutions segment		206.8			217.9
Scantron segment		158.0			154.9
Eliminations		(0.5	)		(0.7	)

Total	$	1,290.7		$	1,355.9

Net revenues decreased by $65.2 million, or 4.8%, to $1,290.7 million in the 2009 period from $1,355.9 million in the 2008 period. The Data Management Acquisition accounted for an increase of $14.6 million in net revenues.

Net revenues for the Harland Clarke segment decreased by $57.4 million, or 5.8%, to $926.4 million in the 2009 period from $983.8 million in the 2008 period. The decrease was primarily due to volume declines from check and related products, which the Company believes was partially affected by the economic downturn, as well as one less production day in the 2009 period. Declines in volumes were partially offset by increased revenues per unit. Additionally, there was $0.7 million of revenue for contract termination fees in the 2009 period compared to $2.3 million in the 2008 period.

Harland Clarke Holdings Corp. and Subsidiaries

Net revenues for the Harland Financial Solutions segment decreased by $11.1 million, or 5.1%, to $206.8 million in the 2009 period from $217.9 million in the 2008 period. Net revenues from the enterprise solutions product lines decreased $9.5 million in the 2009 period compared to the 2008 period. The decrease was primarily due to declines in license, hardware and professional services revenues. Additionally, there was a decrease in early termination fees in the 2009 period as compared to the 2008 period. Net revenues from the risk management product lines decreased $1.0 million in the 2009 period compared to the 2008 period. The decrease was primarily due to declines in mortgage products, partially offset by organic growth in lending products. The Company believes the declines were partially affected by the economic downturn, which has negatively affected information technology purchases by financial institutions.

Net revenues for the Scantron segment increased by $3.1 million, or 2.0%, to $158.0 million in the 2009 period from $154.9 million in the 2008 period. The Data Management Acquisition accounted for an increase of $14.6 million. The remaining $11.5 million decrease was a result of volume declines in hardware and forms products, partially offset by organic growth in software products. The Company believes the hardware and forms product lines were partially affected by the economic downturn.

Cost of Revenues:


	Nine Months Ended September 30
*$ in millions*	2009			2008
Consolidated Cost of Revenues:
Harland Clarke segment	$	577.4		$	625.6
Harland Financial Solutions segment		89.8			93.1
Scantron segment		87.8			89.1
Eliminations		(0.5	)		(0.7	)

Total	$	754.5		$	807.1

Cost of revenues decreased by $52.6 million, or 6.5%, to $754.5 million in the 2009 period from $807.1 million in the 2008 period. The Data Management Acquisition accounted for an increase of $9.4 million in cost of revenues.

Cost of revenues for the Harland Clarke segment decreased by $48.2 million, or 7.7%, to $577.4 million in the 2009 period from $625.6 million in the 2008 period. The decrease was primarily due to lower volumes, which resulted in decreases in delivery, materials, and other variable overhead expenses, and one less production day in the 2009 period. Labor costs also decreased due to cost reduction and restructuring activities. Decreases in travel expenses and depreciation also contributed to the decrease in cost of revenues. These decreases were partially offset by inflation in delivery and materials expenses, as well as an increase in the amortization of intangible assets of $3.1 million. Cost of revenues as a percentage of revenues for the Harland Clarke segment was 62.3% in the 2009 period as compared to 63.6% in the 2008 period.

Cost of revenues for the Harland Financial Solutions segment decreased by $3.3 million, or 3.5%, to $89.8 million in the 2009 period from $93.1 million in the 2008 period. The decrease was primarily due to lower hardware and other third-party costs related to volume declines. Decreases in telecom, travel, depreciation and other overhead costs also contributed to the decrease in cost of revenues. Cost of revenues as a percentage of revenues for the Harland Financial Solutions segment was 43.4% in the 2009 period as compared to 42.7% in the 2008 period.

Cost of revenues for the Scantron segment decreased by $1.3 million, or 1.5%, to $87.8 million in the 2009 period from $89.1 million in the 2008 period. The Data Management Acquisition accounted for an increase of $9.4 million. The remaining $10.7 million decrease was primarily due to volume declines and cost reductions related to the Data Management Acquisition, in addition to other restructuring activities. Cost of revenues as a percentage of revenues for the Scantron segment was 55.6% in the 2009 period as compared to 57.5% in the 2008 period.

Harland Clarke Holdings Corp. and Subsidiaries

Selling, General and Administrative Expenses:


	Nine Months Ended September 30,
*$ in millions*	2009		2008
Consolidated Selling, General and Administrative Expenses:
Harland Clarke segment	$	154.6	$	183.4
Harland Financial Solutions segment		84.8		101.0
Scantron segment		42.5		44.3
Corporate		9.5		11.7

Total	$	291.4	$	340.4

Selling, general and administrative expenses decreased by $49.0 million, or 14.4%, to $291.4 million in the 2009 period from $340.4 million in the 2008 period.

Selling, general and administrative expenses for the Harland Clarke segment decreased by $28.8 million, or 15.7%, to $154.6 million in the 2009 period from $183.4 million in the 2008 period. The decrease was primarily due to labor cost reductions and decreases in integration-related and travel expenses. Selling, general and administrative expenses as a percentage of revenues for the Harland Clarke segment was 16.7% in the 2009 period as compared to 18.6% in the 2008 period.

Selling, general and administrative expenses for the Harland Financial Solutions segment decreased by $16.2 million, or 16.0%, to $84.8 million in the 2009 period from $101.0 million in the 2008 period. The decrease was primarily due to labor cost reductions, a reduction in compensation expense related to an incentive agreement for an acquisition and reductions in occupancy, travel and depreciation expenses. Selling, general and administrative expenses in the 2009 and 2008 periods included charges of $2.9 million and $7.2 million, respectively, for compensation expense related to an incentive agreement for an acquisition. Selling, general and administrative expenses as a percentage of revenues for the Harland Financial Solutions segment was 41.0% in the 2009 period as compared to 46.4% in the 2008 period.

Selling, general and administrative expenses for the Scantron segment decreased $1.8 million, or 4.1%, to $42.5 million in the 2009 period from $44.3 million in the 2008 period. The Data Management Acquisition accounted for an increase of $3.3 million, which was more than offset by a $5.1 million decrease, primarily due to cost reductions related to the Data Management Acquisition, in addition to other restructuring activities, and a decrease in integration-related expenses. In the 2009 period, the Scantron segment incurred approximately $1.3 million in one-time expenses related to a contractual obligation owing to a former employee upon termination of employment. Selling, general and administrative expenses as a percentage of revenues for the Scantron segment was 26.9% in the 2009 period as compared to 28.6% in the 2008 period.

Corporate selling, general and administrative expenses decreased $2.2 million, or 18.8%, to $9.5 million in the 2009 period from $11.7 million in the 2008 period, primarily due to lower professional fees.

Restructuring Costs

During the 2009 period, the Company recorded restructuring costs of $21.8 million for the Harland Clarke segment, $4.1 million for the Harland Financial Solutions segment and $3.1 million for the Scantron segment related to these plans. During the 2008 period, the Company recorded restructuring costs of $1.4 million for the Harland Clarke segment, $3.0 million for the Harland Financial Solutions segment and $2.3 million for the Scantron segment related to these plans.

Harland Clarke Holdings Corp. and Subsidiaries

Interest Income

Interest income was $0.8 million in the 2009 period as compared to $1.9 million in the 2008 period. The decrease in interest income was primarily due to higher average cash equivalents balances in the 2008 period as compared to the 2009 period and lower interest rates on investments in cash equivalents in the 2009 period as compared to the 2008 period, partially offset by higher interest income on notes receivable from a related party in the 2009 period.

Interest Expense

Interest expense was $106.3 million in the 2009 period as compared to $139.7 million in the 2008 period. The decrease in interest expense was due to lower effective interest rates and also a decrease in total debt outstanding.

Gain on Early Extinguishment of Debt

During the 2009 period, the Company extinguished debt with a total principal amount of $116.2 million by purchasing 2015 Senior Notes in individually negotiated transactions for an aggregate purchase price of $50.6 million, resulting in a gain of $62.0 million after the write-off of $3.6 million of unamortized deferred financing fees related to the extinguished debt.

Other Expense, Net

Other expense, net was $0.0 million in the 2009 period as compared to $0.2 million in the 2008 period. The expense in the 2008 period was attributable to a $0.3 million write-down of an equity investment due to an other-than-temporary decline in its market value, partially offset by non-recurring miscellaneous income.

Provision for Income Taxes

The Company’s effective tax rate was 37.0% in the 2009 period and 41.4% in the 2008 period. The change was primarily due to the effects of a net reduction in reserves for uncertain tax positions in the 2009 period.

Liquidity and Capital Resources

Cash Flow Analysis

The Company’s net cash provided by operating activities during the nine months ended September 30, 2009 was $171.0 million as compared to $156.0 million during the nine months ended September 30, 2008. The increase in net cash provided by operating activities of $15.0 million was due to an increase in cash flow from operations partially offset by changes in working capital. Working capital was negatively affected by lower incentive compensation and interest accruals in addition to higher spare parts inventories.

The Company’s net cash used in investing activities was $28.7 million during the nine months ended September 30, 2009 as compared to $274.3 million during the nine months ended September 30, 2008. The decrease in cash used in investing activities was primarily due to the Data Management Acquisition and an investment in related party notes receivable in the 2008 period, decreased capital expenditures in the 2009 period and increased net repayments on related-party notes receivable in the 2009 period.

The Company’s net cash used in financing activities was $66.0 million during the nine months ended September 30, 2009 as compared to $80.1 million during the nine months ended September 30, 2008. The decrease in net cash used in financing activities was primarily due to a $65.0 million dividend paid to M & F Worldwide in the 2008 period. The 2009 period included cash used to extinguish $116.2 million principal amount of 2015 Senior Notes for an aggregate purchase price of $50.6 million.

The Company’s Consolidated Contractual Obligations and Commitments

Estimated future cash payments for interest on the Company’s outstanding long-term debt decreased from $929.2 million as of December 31, 2008 to $493.3 million as of September 30, 2009, primarily due to the impact of a decrease in interest rates on the Company’s floating rate debt as well as the extinguishment of $116.2 million principal amount of 2015 Senior Notes during the nine months ended September 30, 2009. The estimate for future interest payments assumes

Harland Clarke Holdings Corp. and Subsidiaries

that interest rates on the Company’s floating rate debt remain constant with September 30, 2009 market rates. Other contractual obligations and commitments have not changed materially since December 31, 2008. See the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 with respect to the Company’s other contractual obligations and commitments.

Liquidity Assessment

The Company believes that its cash and cash equivalents, borrowings available under its credit agreement (as further discussed in Note 11 to the Company’s consolidated financial statements included in this quarterly report on Form 10-Q) and anticipated cash flow from operating activities will be sufficient to meet the Company’s expected operating needs, investment and capital spending requirements and debt service requirements for the foreseeable future.

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, 2009 and 2008, the Company incurred $31.0 million and $38.1 million of capital expenditures and $0.2 million and $0.5 million of capitalized interest, respectively.

	•		Contract Acquisition Payments. During the nine months ended September 30, 2009 and 2008, the Company made $31.3 million and $30.7 million of contract acquisition payments to its clients, respectively.

	•		Restructuring/Cost Reductions. Restructuring accruals and purchase accounting reserves 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 historical operations, as well as related to the Data Management Acquisition and the Transaction Holdings Acquisition. During the nine months ended September 30, 2009 and 2008, the Company made $27.6 million and $15.5 million of payments for restructuring, respectively.

The Company may also, from time to time, seek to use its cash to make acquisitions or investments, and also to retire or purchase its outstanding debt in open market purchases, in privately negotiated transactions, or otherwise. Such retirement or purchase of debt may be funded from the operating cash flows of the business or other sources and will depend upon prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material. During the nine months ended September 30, 2009, the Company extinguished debt with a total principal amount of $116.2 million by purchasing 2015 Senior Notes in individually negotiated transactions for an aggregate purchase price of $50.6 million.

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 debt or fund other liquidity needs. As of September 30, 2009, the Company had $87.5 million of availability under its revolving credit facility (after giving effect to the issuance of $12.5 million of letters of credit). The Company may also use its revolving credit facility to fund potential future acquisitions or investments. If future cash flow from operations and other capital resources is 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.

Harland Clarke Holdings Corp. and Subsidiaries

Critical Accounting Policies and Estimates

There was no material change 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, 2008 as filed on February 27, 2009 with the United States Securities and Exchange Commission (“SEC”), which is available on the SEC’s website at www.sec.gov.

See Note 2 to the consolidated financial statements included elsewhere in this quarterly report on Form 10-Q regarding the impact of recent accounting pronouncements adopted by the Company on the Company’s financial condition and results of operations.

Forward-Looking Statements

This quarterly report on Form 10-Q for the quarter ended September 30, 2009, 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, 2008 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 market conditions, including the depth and length of the economic recession and higher unemployment, which could result in more rapid declines in product sales of and/or pricing pressure on the Harland Clarke and Scantron segments, and reductions in information technology budgets, which could result in adverse impacts on the Harland Financial Solutions segment;

	•		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;

Harland Clarke Holdings Corp. and Subsidiaries

	•		intense competition in all areas of our businesses;

	•		our ability to successfully manage future acquisitions;

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

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

	•		increased production and delivery costs;

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

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

	•		technological improvements that may reduce our competitive advantage over some of our competitors;

	•		our ability to protect customer data from account data security breaches;

	•		changes in legislation relating to consumer privacy protection which could harm our business;

	•		contracts with our clients relating to consumer privacy protection which 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 that could harm our businesses and reputation;

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

	•		environmental risks;

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

	•		regulations governing the Harland Financial Solutions segment;

	•		our ability to develop new products for our Scantron segment;

	•		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; and

	•		weak economic conditions and declines in the financial performance of our business that may result in material impairment charges.

Harland Clarke Holdings Corp. and Subsidiaries

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, 2008 and in this quarterly report on Form 10-Q 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, 2009, the Company had $1,759.5 million of term loans outstanding under its credit agreement, $12.5 million of letters of credit outstanding under its revolving credit facility, $227.4 million of floating rate senior notes and $271.3 million of 9.50% fixed rate senior notes. All of these outstanding loans bear interest at variable rates, with the exception of the $271.3 million of fixed rate senior notes. Accordingly, the Company is subject to risk due to changes in interest rates. The Company believes that a hypothetical 10% increase or decrease in interest rates applicable to its floating rate debt outstanding at September 30, 2009 would have resulted in an increase or decrease in its interest expense for the nine months ended September 30, 2009 of approximately $1.4 million, excluding the impact of the interest rate derivative transactions discussed below.

In order to manage its exposure to fluctuations in interest rates on a portion of the outstanding variable rate debt, the Company entered into interest rate derivative transactions in 2007 and 2009 in the form of swaps for the Company with notional amounts totaling $855.0 million currently outstanding, as further described in the notes to the consolidated financial statements included elsewhere in this quarterly report. The Company’s derivatives currently swap the underlying variable rate for fixed rates ranging from 2.140% to 5.362%.

Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 presents additional quantitative and qualitative disclosures about exposure to risk in foreign currency exchange rates. There have been no material changes to the disclosures regarding foreign currency exchange rates as of September 30, 2009.


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, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1. Legal Proceedings

Harland Clarke Holdings Corp. and Subsidiaries

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


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, 2008 during the three months ended September 30, 2009, other than the risk factor set forth below.

Weak economic conditions and further acceleration of check unit declines may continue to have an adverse effect on the Company’s revenues and profitability and could result in impairment charges.

The Company has substantial intangible assets, including substantial goodwill arising from previous acquisitions. Goodwill and other intangible assets determined to have an indefinite life are not amortized, but are tested for impairment annually in the fourth quarter, or when events or changes in circumstances indicate that the assets might be impaired. No event or change in circumstances has occurred to date in 2009 that required an interim impairment test. The Company also has a significant amount of property, plant and equipment and amortizable intangible assets, such as customer relationships, which are tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The impairment test processes are more fully described in “Critical Accounting Policies” in the Company’s Annual Report on Form 10-K.

The annual impairment evaluations for goodwill and indefinite-lived intangible assets involve significant estimates and assumptions made by management regarding specific business and operating factors as well as discount rates. Changes in estimates and assumptions, as well as the occurrence of various events or changes in circumstances, could have a material impact on the fair value of goodwill or indefinite-lived intangible assets in future periods, which in turn may result in material asset impairments. Similar considerations apply to any impairment evaluation of our property, plant and equipment and amortizable intangible assets as well as our determinations as to whether interim impairment tests are necessary.

During the fourth quarter of 2009, the Company will be updating its long-range business plans and forecasts, which will include financial projections that will be incorporated in the annual impairment tests. Estimated revenue growth rates for all reporting units may be lower than past projections due to the various factors discussed in this report, including, but not limited to, the following:

	•		the continued adverse economic environment, which may negatively affect future revenue and margins as a result of lower demand and pricing pressure; and

	•		check unit declines that have continued at a higher rate than in the past and are expected to continue to decline at higher rates than in recent years, which may negatively affect future revenue for our Harland Clarke segment.

Depending on the nature of these factors and the expected relative magnitude and permanency of their effects, the Company’s businesses may not be able to achieve previous levels of performance even when overall economic conditions improve. Although the Company’s revenues have declined in 2009, the Company has experienced higher operating margins in 2009 as compared to 2008 due to restructuring and cost-reduction activities. However, benefits from future cost-reduction and containment activities may not be sufficient to fully offset possible future decreases in revenues and margins. As a result, future impairment tests may result in a determination that there have been material asset impairments. Any asset impairment would be reported as a non-cash operating loss, would have a negative effect on the Company’s earnings and could have a negative impact on the market prices of the Company’s outstanding securities.


31.1		Certification of Charles T. Dawson, Chief Executive Officer, dated November 6, 2009.

31.2		Certification of Peter A. Fera, Jr., Chief Financial Officer, dated November 6, 2009.


	HARLAND CLARKE HOLDINGS CORP.
Date: November 6, 2009	By:	/s/ Peter A. Fera, Jr.
		Peter A. Fera, Jr.
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)


Date: November 6, 2009	By:	/s/ J. Michael Riley
		J. Michael Riley
		Vice President and Controller (Principal Accounting Officer)


31.1		Certification of Charles T. Dawson, Chief Executive Officer, dated November 6, 2009.

31.2		Certification of Peter A. Fera, Jr., Chief Financial Officer, dated November 6, 2009.

	a.		designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b.		designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c.		evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d.		disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a.		all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b.		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

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PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets	1

	Consolidated Statements of Income	2

	Consolidated Statements of Cash Flows	3

	Notes to Consolidated Financial Statements	4

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	32

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3.	Defaults Upon Senior Securities	34

Item 4.	Submission of Matters to a Vote of Security Holders	34

Item 5.	Other Information	34

Item 6.	Exhibits	34

EX-31.1
EX-31.2

	1.		I have reviewed this quarterly report on Form 10-Q of Harland Clarke Holdings Corp.;

	2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

	3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

	4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:



Date: November 6, 2009	/s/ Charles T. Dawson
	Name:	Charles T. Dawson
	Title:	Chief Executive Officer (Principal Executive Officer)