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 June 30, 2010


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 o 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. (Check one):

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 June 30, 2010, there were 100 shares of the registrant’s common stock outstanding, with a par value of $0.01 per share. All outstanding shares are owned by a subsidiary of M & F Worldwide Corp.


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

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)


	June 30,			December 31,
	2010			2009
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	206.6		$	63.9
Accounts receivable (net of allowances of $2.9 and $3.0)		127.7			119.7
Investments in marketable securities		—			24.6
Inventories		31.3			32.5
Income taxes receivable		13.0			13.5
Deferred tax assets		18.6			18.6
Prepaid expenses and other current assets		59.4			66.1

Total current assets		456.6			338.9
Property, plant and equipment		353.9			345.6
Less accumulated depreciation		(206.4	)		(184.5	)

Property, plant and equipment, net		147.5			161.1
Goodwill		1,472.1			1,473.2
Other intangible assets, net		1,134.3			1,187.9
Contract acquisition payments, net		29.8			28.6
Other assets		65.1			62.3

Total assets	$	3,305.4		$	3,252.0

LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	35.6		$	33.9
Deferred revenues		115.3			116.1
Current maturities of long-term debt		19.4			19.5
Accrued liabilities:
Salaries, wages and employee benefits		67.8			52.6
Income and other taxes payable		24.4			15.4
Customer incentives		27.1			23.5
Other current liabilities		24.9			30.8

Total current liabilities		314.5			291.8
Long-term debt		2,209.5			2,219.3
Deferred tax liabilities		396.9			415.3
Other liabilities		80.7			79.6
Commitments and contingencies
Stockholder’s equity:
Common stock — 200 shares authorized; par value $0.01; 100 shares issued and outstanding at June 30, 2010 and December 31, 2009		—			—
Additional paid-in capital		157.0			157.0
Retained earnings		158.2			98.0
Accumulated other comprehensive (loss) income, net of taxes:
Currency translation adjustments		(0.8	)		0.3
Funded status of benefit plans		(1.6	)		(1.6	)
Derivative fair-value adjustments		(10.0	)		(8.6	)
Unrealized gains on investments, net		1.0			0.9

Total accumulated other comprehensive loss, net of taxes		(11.4	)		(9.0	)

Total stockholder’s equity		303.8			246.0

Total liabilities and stockholder’s equity	$	3,305.4		$	3,252.0

See Notes to Consolidated Financial Statements

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Product revenues, net	$	346.0		$	351.9		$	701.6		$	715.0
Service revenues, net		77.3			74.5			151.7			150.0

Total net revenues		423.3			426.4			853.3			865.0
Cost of products sold		200.4			210.8			410.2			432.0
Cost of services provided		40.8			38.0			78.5			77.9

Total cost of revenues		241.2			248.8			488.7			509.9

Gross profit		182.1			177.6			364.6			355.1
Selling, general and administrative expenses		98.4			97.1			194.5			201.1
Asset impairment charges		0.6			—			0.6			—
Restructuring costs		7.0			13.6			10.2			24.7

Operating income		76.1			66.9			159.3			129.3
Interest income		0.2			0.3			0.4			0.6
Interest expense		(30.3	)		(35.6	)		(60.2	)		(73.7	)
Gain on early extinguishment of debt		—			8.9			—			61.5
Other income, net		0.1			—			0.1			—

Income before income taxes		46.1			40.5			99.6			117.7
Provision for income taxes		18.1			12.8			39.4			42.8

Net income	$	28.0		$	27.7		$	60.2		$	74.9

See Notes to Consolidated Financial Statements

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


	Six Months Ended
	June 30,
	2010			2009
Operating activities
Net income	$	60.2		$	74.9
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		25.5			29.8
Amortization of intangible assets		54.3			51.3
Amortization of deferred financing fees		3.5			3.6
Gain on early extinguishment of debt		—			(61.5	)
Deferred income taxes		(17.5	)		5.1
Asset impairments		0.6			—
Changes in operating assets and liabilities, net of effect of businesses acquired:
Accounts receivable		(8.2	)		(6.2	)
Inventories		1.3			0.8
Prepaid expenses and other assets		(4.0	)		(10.9	)
Contract acquisition payments, net		(1.2	)		(1.5	)
Accounts payable and accrued liabilities		10.5			(23.9	)
Deferred revenues		2.5			7.4
Income and other taxes		9.2			11.0
Payable to parent		—			(0.7	)
Other, net		1.7			2.6

Net cash provided by operating activities		138.4			81.8

Investing activities
Net repayments of related party notes receivable		3.0			4.8
Proceeds from sale of property, plant and equipment		2.5			0.4
Proceeds from sale of marketable securities		24.7			—
Capital expenditures		(14.6	)		(23.0	)
Capitalized interest		—			(0.2	)
Other, net		(1.3	)		(2.1	)

Net cash provided by (used in) investing activities		14.3			(20.1	)

Financing activities
Redemption of notes		—			(49.7	)
Repayments of credit agreements and other borrowings		(10.0	)		(10.4	)

Net cash used in financing activities		(10.0	)		(60.1	)

Net increase in cash and cash equivalents		142.7			1.6
Cash and cash equivalents at beginning of period		63.9			64.6

Cash and cash equivalents at end of period	$	206.6		$	66.2


Supplemental disclosure of cash paid for:
Interest, net of amounts capitalized	$	56.4		$	76.3
Income taxes, net of refunds		44.0			27.5

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”). Novar was renamed Clarke American Corp. (“Clarke American”) which was the successor by merger to Novar, which indirectly wholly owned the operating subsidiaries of the Clarke American business. On May 1, 2007, the Company completed the acquisition of John H. Harland Company (“Harland”) and changed its name on May 2, 2007 from Clarke American to Harland Clarke Holdings.

During December 2009, Harland Clarke Corp., a wholly owned subsidiary of the Company, acquired in separate transactions SubscriberMail and Protocol Integrated Marketing Services (“Protocol IMS”), a division of Protocol Global Solutions. The acquisition-date aggregate consideration of $13.1 for these transactions includes contingent consideration of $1.8 for SubscriberMail upon the achievement of certain revenue targets in 2010 and 2011, with a maximum contingent consideration of $2.0 if the targets are met (see Note 3). SubscriberMail is a leading email marketing service provider that offers patented tools to develop and deliver professional email communications. Protocol IMS focuses on direct marketing services with solutions that include business to business strategic services, business to consumer strategic services, database marketing and analytics, outbound business to business teleservices, production and fulfillment.

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

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

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

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

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

The Company and each of its existing subsidiaries, other than unrestricted subsidiaries and certain immaterial subsidiaries are guarantors and may also be co-issuers under the 2015 Senior Notes (as hereinafter defined) (see Note 11). Harland Clarke Holdings is a holding company and has no independent assets at June 30, 2010 and no operations. The guarantees and the obligations of the subsidiaries of the Company are full and unconditional and joint and several, and any subsidiaries of the Company other than the subsidiary guarantors and obligors are not significant.

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, 2009.

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

All terms used but not defined elsewhere herein have the meaning ascribed to them in the Company’s 2009 Annual Report on
Form 10-K.

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, 2009.

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 Issued Accounting Guidance

In October 2009, the Financial Accounting Standards Board (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.

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 Protocol IMS and SubscriberMail

During December 2009, Harland Clarke Corp., a wholly owned subsidiary of the Company, acquired in separate transactions 100% of the equity of SubscriberMail and certain assets and liabilities of Protocol IMS. The acquisition-date aggregate consideration of $13.1 for these transactions includes contingent consideration of $1.8 for SubscriberMail upon the achievement of certain revenue targets in 2010 and 2011, with a maximum contingent consideration of $2.0 if the targets are met. SubscriberMail is a leading email marketing service provider that offers patented tools to develop and deliver professional email communications. SubscriberMail results of operations have been included in the Company’s operations since December 31, 2009, the date of its acquisition. Protocol IMS focuses on direct marketing services with solutions that include business to business strategic services, business to consumer strategic services, database marketing and analytics, outbound business to business teleservices, production and fulfillment. Protocol IMS results of operations have been included in the Company’s operations since December 4, 2009, the date of its acquisition. The preliminary allocations of purchase price resulted in identified intangible assets of $4.2 and goodwill of $7.2, which are deductible for tax purposes.

The pro forma effects on the results of operations for these acquisitions were not material.

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

4. Inventories

Inventories consist of the following:


	June 30,		December 31,
	2010		2009
Finished goods	$	9.0	$	9.8
Work-in-process		8.3		9.5
Raw materials		14.0		13.2

	$	31.3	$	32.5

5. Assets Held For Sale

At June 30, 2010, assets held for sale consist of the following Harland Clarke segment facilities:


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

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

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


	June 30,		December 31,
	2010		2009
Land	$	1.6	$	1.4
Buildings and improvements		2.1		3.5

	$	3.7	$	4.9

6. Goodwill and Other Intangible Assets

The change in carrying amount of goodwill by business segment for the six months ended June 30, 2010 is as follows:


			Harland
	Harland		Financial
	Clarke		Solutions			Scantron		Total
Balance as of December 31, 2009	$	779.4	$	425.2		$	268.6	$	1,473.2
Effect of exchange rate changes		—		(1.1	)		—		(1.1	)

Balance as of June 30, 2010	$	779.4	$	424.1		$	268.6	$	1,472.1

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		June 30,		December 31,		June 30,		December 31,
	(in years)		2010		2009		2010		2009
Amortized intangible assets:
Customer relationships		3 — 20	$	1,233.3	$	1,233.4	$	304.9	$	260.5
Trademarks and tradenames		2 — 25		154.5		154.5		7.8		3.4
Software and other		2 — 10		65.5		65.1		32.5		28.2
Patents and patents pending		3 — 20		20.0		20.0		4.8		4.0

				1,473.3		1,473.0		350.0		296.1

Indefinite-lived intangible assets:
Trademarks and tradenames				11.0		11.0		—		—

Total other intangible assets			$	1,484.3	$	1,484.0	$	350.0	$	296.1

Amortization expense was $27.2 and $54.3 for the three and six months ended June 30, 2010, respectively, and $25.7 and $51.3 for the three and six months ended June 30, 2009, respectively.

Estimated aggregate amortization expense for intangible assets through December 31, 2014 is as follows:


Six months ending December 31, 2010	$	54.3
Year ending December 31, 2011		102.6
Year ending December 31, 2012		95.1
Year ending December 31, 2013		83.9
Year ending December 31, 2014		77.3

7. Business Segment Information

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

•

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

•

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

•

Scantron segment — Provides data management solutions and related services to educational, commercial, healthcare and governmental entities worldwide. 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 June 30, 2010 and 2009 is as follows:


			Harland
	Harland		Financial				Corporate
	Clarke⁽¹⁾		Solutions		Scantron		and Other			Total
Product revenues, net:
Three months ended June 30, 2010	$	303.1	$	17.0	$	25.9	$	—		$	346.0
Three months ended June 30, 2009		305.3		18.3		28.3		—			351.9
Service revenues, net:
Three months ended June 30, 2010	$	4.1	$	53.1	$	20.1	$	—		$	77.3
Three months ended June 30, 2009		1.0		51.4		22.1		—			74.5
Intersegment revenues:
Three months ended June 30, 2010	$	0.1	$	—	$	3.1	$	(3.2	)	$	—
Three months ended June 30, 2009		—		—		0.3		(0.3	)		—
Operating income (loss):⁽²⁾
Three months ended June 30, 2010	$	66.3	$	11.4	$	1.8	$	(3.4	)	$	76.1
Three months ended June 30, 2009		52.3		11.2		6.7		(3.3	)		66.9
Depreciation and amortization (excluding amortization of deferred financing fees):
Three months ended June 30, 2010	$	25.9	$	7.1	$	6.5	$	—		$	39.5
Three months ended June 30, 2009		27.4		6.8		6.5		—			40.7
Capital expenditures (excluding capital leases):
Three months ended June 30, 2010	$	5.4	$	1.4	$	1.2	$	—		$	8.0
Three months ended June 30, 2009		8.2		1.1		1.9		—			11.2

Selected summarized financial information for the six months ended June 30, 2010 and 2009 is as follows:


			Harland
	Harland		Financial				Corporate
	Clarke⁽¹⁾		Solutions		Scantron		and Other			Total
Product revenues, net:
Six months ended June 30, 2010	$	611.7	$	33.8	$	56.1	$	—		$	701.6
Six months ended June 30, 2009		619.4		35.3		60.3		—			715.0
Service revenues, net:
Six months ended June 30, 2010	$	5.2	$	105.6	$	40.9	$	—		$	151.7
Six months ended June 30, 2009		2.0		103.6		44.4		—			150.0
Intersegment revenues:
Six months ended June 30, 2010	$	0.1	$	—	$	3.2	$	(3.3	)	$	—
Six months ended June 30, 2009		—		—		0.4		(0.4	)		—
Operating income (loss):⁽²⁾
Six months ended June 30, 2010	$	131.9	$	22.8	$	11.1	$	(6.5	)	$	159.3
Six months ended June 30, 2009		103.2		18.6		13.5		(6.0	)		129.3
Depreciation and amortization (excluding amortization of deferred financing fees):
Six months ended June 30, 2010	$	52.7	$	14.2	$	12.9	$	—		$	79.8
Six months ended June 30, 2009		54.7		13.5		12.9		—			81.1
Capital expenditures (excluding capital leases):
Six months ended June 30, 2010	$	9.8	$	2.3	$	2.5	$	—		$	14.6
Six months ended June 30, 2009		16.4		2.1		4.5		—			23.0


⁽¹⁾		Includes results of the acquired Protocol IMS and SubscriberMail businesses from their respective dates of acquisition.

⁽²⁾		Includes restructuring costs of $7.0 and $13.6 for the three months ended June 30, 2010 and 2009, respectively, and $10.2 and $24.7 for the six months ended June 30, 2010 and 2009, respectively (see Note 16).

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 six months ended June 30, 2010 and 2009 is as follows:


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2010			2009		2010			2009
Net income	$	28.0		$	27.7	$	60.2		$	74.9
Other comprehensive income (loss):
Foreign currency translation adjustments		(0.7	)		1.0		(1.1	)		0.2
Derivative fair-value adjustments, net of taxes of $0.3, $1.6, $0.9 and $4.0		(0.3	)		2.4		(1.4	)		6.1
Unrealized gains on investments, net of taxes of $0.2, $0.2, $0.1 and $0.2		0.3			0.3		0.1			0.3

Comprehensive income	$	27.3		$	31.4	$	57.8		$	81.5

9. Postretirement Defined Benefit Plans

The Company sponsors two unfunded postretirement defined benefit plans that cover certain former salaried and non-salaried employees. One plan provides healthcare benefits and the other provides life insurance benefits. The medical plan is contributory and contributions are adjusted annually based on actual claims experience. For retirees who retired prior to December 31, 2002 with twenty or more years of service at December 31, 2000, the Company contributes approximately 50% of the cost of the medical plan. For all other retirees, the Company’s intent is that the retirees provide the majority of the actual cost of the medical plan. The life insurance plan is noncontributory for those employees that retired by December 31, 2002.

Net periodic postretirement benefit expense for these plans is as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
Interest cost	$	0.2	$	0.2	$	0.5	$	0.5
Net amortization		—		—		—		—

Net postretirement benefit expense	$	0.2	$	0.2	$	0.5	$	0.5

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 2006 through 2009 generally remain open. In addition, open tax years related to foreign jurisdictions remain subject to examination but are not considered material.

There are no events that have occurred since December 31, 2009 that had a material impact on amounts accrued for the Company’s uncertain tax positions.

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

11. Long-Term Debt


	June 30,			December 31,
	2010			2009
$1,900.0 Senior Secured Credit Facilities	$	1,746.0		$	1,755.0
Senior Floating Rate Notes due 2015		206.8			206.8
9.50% Senior Fixed Rate Notes due 2015		271.3			271.3
Capital lease obligations and other indebtedness		4.8			5.7

		2,228.9			2,238.8
Less: current maturities		(19.4	)		(19.5	)

Long-term debt, net of current maturities	$	2,209.5		$	2,219.3

$1,900.0 Senior Secured Credit Facilities

On April 4, 2007, the Company and substantially all of its subsidiaries as co-borrowers entered into a credit agreement (the “Credit Agreement”). The Credit Agreement provides for a $1,800.0 senior secured term loan (the “Term Loan”), which was fully drawn at closing on May 1, 2007 and matures on June 30, 2014. The Company is required to repay the Term Loan in equal quarterly installments in aggregate annual amounts equal to 1% of the original principal amount. In addition, the Credit Agreement requires that a portion of the Company’s excess cash flow be applied to prepay amounts borrowed, as further described below. The Credit Agreement also provides for a $100.0 revolving credit facility (the “Revolver”) that matures on June 28, 2013. The Revolver includes an up to $60.0 subfacility in the form of letters of credit and an up to $30.0 subfacility in the form of short-term swing line loans. The weighted average interest rate on borrowings outstanding under the Term Loan was 2.9% at June 30, 2010. As of June 30, 2010, there were no outstanding borrowings under the Revolver and there was $90.8 available for borrowing (giving effect to the issuance of $9.2 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, with certain reductions set forth in the Credit Agreement, based on

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

achievement and maintenance of leverage ratios) and 100% of the net proceeds of certain issuances, offerings or placements of debt obligations of the Company or any of its subsidiaries (other than permitted debt). Each such prepayment will be applied first to the next eight unpaid quarterly amortization installments on the term loans and second to the remaining amortization installments on the term loans on a pro rata basis. No such excess cash flow payment was required to be paid in 2010 with respect to 2009.

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

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

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 bore 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 Note 12.

Senior Notes due 2015

On May 1, 2007, the Company issued $305.0 aggregate principal amount of Senior Floating Rate Notes due 2015 (the “Floating Rate Notes”) and $310.0 aggregate principal amount of 9.50% Senior Fixed Rate Notes due 2015 (the “Fixed Rate Notes” and, together with the Floating Rate Notes, the “2015 Senior Notes”). The 2015 Senior Notes mature on May 15, 2015. The Fixed Rate Notes bear interest at a rate per annum of 9.50%, payable on May 15 and November 15 of each year. The Floating Rate Notes bear interest at a rate per annum equal to the Applicable LIBOR Rate (as defined in the indenture governing the 2015 Senior Notes (the “Indenture”)), subject to a floor of 1.25%, plus 4.75%, payable on February 15, May 15, August 15 and November 15 of each year. The interest rate on the Floating Rate Notes was 6.0% at June 30, 2010. 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.

During 2009, the Company extinguished $136.9 principal amount of debt by purchasing 2015 Senior Notes in individually negotiated transactions for an aggregate purchase price of $67.6.

Gain on Early Extinguishment of Debt

Of the $136.9 principal amount of debt extinguished in 2009, $114.7 was extinguished during the six months ended June 30, 2009 by purchasing 2015 Senior Notes in individually negotiated transactions for an aggregate purchase price of $49.7, resulting in a gain of $61.5 after the write-off of $3.5 of unamortized deferred financing fees related to the extinguished debt. There were no early extinguishments of debt during the six months ended June 30, 2010.

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

Capital Lease Obligations and Other Indebtedness

The Company has outstanding capital lease obligations and other indebtedness with principal balances totaling $4.8 and $5.7 at June 30, 2010 and December 31, 2009, respectively. These obligations have imputed interest rates ranging from 5.7% to 9.6% and have required payments, including interest, of $0.7 remaining in 2010, $1.6 in 2011, $1.2 in 2012, $1.1 in 2013 and $0.9 in 2014. During the six months ended June 30, 2010 and 2009, a subsidiary of the Company entered into capital leases and other indebtedness totaling $0.1 and $1.2, respectively, and, accordingly, such non-cash transaction amounts have been excluded from the consolidated statements of cash flows.

12. Derivative Financial Instruments

Interest Rate Hedges

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

During 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. The hedges expired on June 30, 2009. The hedges were designed to swap the underlying variable rate for a fixed rate of 4.992%. 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 additional 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, both of 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, which expired on June 30, 2010, swapped 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%.

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

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


		June 30,		December 31,
Derivatives Designated as Cash Flow Hedging Instruments:	Balance Sheet Classification	2010		2009

Interest rate swaps	Other current liabilities	$	—	$	6.3
	Other liabilities		16.5		7.9

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

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 six months ended June 30, 2010 and 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

Loss Recognized in Other

Other Comprehensive Loss into

Comprehensive Income

Interest Expense

Three Months

Six Months

Three Months

Six Months

Ended

June 30,

Derivatives Designated as Cash Flow Hedging Instruments:

2010

2009

2010

2009

2010

2009

2010

2009

Interest rate swaps

6.8

5.0

14.8

7.5

6.2

9.0

12.5

17.5

The Company expects to reclassify approximately $13.5 into net income as additional interest expense during the twelve months ending June 30, 2011.

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


	Six Months Ended
	June 30,
Balances and Net Changes:	2010			2009

Balance at beginning of period	$	8.6		$	16.8
Loss reclassified from accumulated other comprehensive loss into interest expense, net of taxes of $4.9 and $6.8		(7.6	)		(10.7	)
Net change in fair value of interest rate swaps, net of taxes of $5.8 and $2.9		9.0			4.6

Balance at end of period	$	10.0		$	10.7

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

13. Fair Value Measurements

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.

Recurring Fair Value Measurements

As of June 30, 2010, the Company held two types of financial instruments subject to valuation on a recurring basis, marketable securities and interest rate swaps. Marketable securities consist of corporate equity securities and United States treasury securities. The marketable securities are included in investments in marketable securities and 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 June 30, 2010 and December 31, 2009 are as follows:

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


	Balance at
	June 30, 2010		(Level 1)		(Level 2)		(Level 3)
Corporate equity securities	$	2.0	$	2.0	$	—	$	—
Liability for interest rate swaps		16.5		—		16.5		—


	Balance at
	December 31, 2009		(Level 1)		(Level 2)		(Level 3)
United States treasury securities	$	24.6	$	24.6	$	—	$	—
Corporate equity securities		1.9		1.9		—		—
Liability for interest rate swaps		14.2		—		14.2		—

Fair value of interest rate swaps is based on forward-looking interest rate curves as provided by the counterparty, adjusted for the Company’s credit risk. Fair value of corporate equity securities and United States treasury securities are based on quoted market prices.

Fair Value of Financial Instruments

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

The carrying amounts for cash and cash equivalents, trade accounts receivable, accounts payable and accrued liabilities approximate fair value. The estimated fair value of long-term debt is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar issues as of the measurement date. The estimated fair value of long-term debt at June 30, 2010 and December 31, 2009 was approximately $1,910.7 and $1,912.5, respectively. The carrying value of long-term debt at June 30, 2010 and December 31, 2009 was $2,228.9 and $2,238.8, respectively.

14. Marketable Securities

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


			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value

Balance at June 30, 2010:
Corporate equity securities	$	0.3	$	1.8	$	(0.1	)	$	2.0

Balance at December 31, 2009:
United States treasury securities	$	24.6	$	—	$	—		$	24.6
Corporate equity securities		0.3		1.7		(0.1	)		1.9

Total	$	24.9	$	1.7	$	(0.1	)	$	26.5

The United States treasury securities mature in 2012. During the second quarter of 2010, the Company sold its investment in United States treasury securities for $24.7 in cash and recognized a gain of $0.1.

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

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


	Less Than 12 Months				More Than 12 Months
			Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses

At June 30, 2010:
Corporate equity securities	$	—	$	—	$	0.1	$	0.1

At December 31, 2009:
Corporate equity securities	$	—	$	—	$	0.1	$	0.1

The Company has determined that the gross unrealized losses on its corporate equity securities at June 30, 2010 are temporary in nature. Accordingly, the Company does not consider such investments to be other-than-temporarily impaired at June 30, 2010.

15. Commitments and Contingencies

Honeywell Indemnification

Certain of the intermediate holding companies of the predecessor of the Company had issued guarantees on behalf of operating companies formerly owned by these intermediate holding companies, which operating companies are not part of the Company’s businesses. In the stock purchase agreement executed in connection with 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 an Illinois state court an amended complaint that re-asserted previously filed claims against BOE and added claims against Harland Financial Solutions, Inc. (“HFS”). The amended complaint alleged, among other things, that HFS’s LaserPro 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. Following the removal of the action to the United States District Court for the Southern District of Illinois, the District Court entered an order granting with prejudice HFS’s motion to dismiss Mr. Kitson’s claims. In August 2009, Mr. Kitson, individually and as class representative, and BOE agreed to settle and dismiss with prejudice all remaining 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 settlement agreement was approved by the District Court in January 2010.

Other commercial borrowers that have obtained loans from other banks in five states have commenced similar class actions against their banks using similar theories. In some cases, the banks have made warranty claims against HFS related to these class actions. Many of the class actions and related warranty claims are at early stages, and the likely progress of those matters still pending is not yet clear. The Company has not accepted any of the asserted warranty claims and does not believe that any of these claims will result in material liability for the Company, but there can be no assurance.

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.

16. Restructuring

Harland Clarke and Corporate

The Company adopted plans during 2008, 2009 and 2010 to realize cost savings in the Harland Clarke segment by consolidating printing plants, contact centers and selling, general and administrative functions.

The Company expensed $1.1 and $2.4 for severance and severance-related costs and $0.5 and $0.9 for facilities closures and other costs during the three and six months ended June 30, 2010, respectively, and expensed $8.5 and $15.3 for

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

severance and severance-related costs and $2.6 and $3.1 for facilities closures and other costs during the three and six months ended June 30, 2009, respectively. The Company expects to incur in future periods an additional $8.2 for costs related to these plans. Ongoing lease commitments related to these plans continue through 2017.

The following table details the components of the Company’s restructuring accruals under its plans related to the Harland Clarke segment and Corporate for the six months ended June 30, 2010 and 2009:


	Beginning				Paid in			Non-cash			Ending
	Balance		Expensed		Cash			Utilization			Balance

Six Months Ended June 30, 2010:
Severance and severance-related	$	2.5	$	2.4	$	(2.5	)	$	—		$	2.4
Facilities closures and other costs		2.5		0.9		(0.9	)		(0.7	)		1.8

Total	$	5.0	$	3.3	$	(3.4	)	$	(0.7	)	$	4.2


Six Months Ended June 30, 2009:
Severance and severance-related	$	7.4	$	15.3	$	(12.6	)	$	—		$	10.1
Facilities closures and other costs		2.3		3.1		(1.1	)		(1.7	)		2.6

Total	$	9.7	$	18.4	$	(13.7	)	$	(1.7	)	$	12.7

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 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 $0.2 and $0.4 for severance and severance-related costs during the three and six months ended June 30, 2010, respectively, and expensed $0.8 and $2.2 for severance and severance-related costs and $0.0 and $1.0 for facilities and other costs during the three and six months ended June 30, 2009, respectively. The Company currently does not expect to incur significant additional costs related to these plans, which are subject to further refinement as the reorganization progresses.

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

The following table details the Company’s restructuring accruals related to the Harland Financial Solutions segment for the six months ended June 30, 2010 and 2009:


	Beginning				Paid in			Ending
	Balance		Expensed		Cash			Balance
Six months ended June 30, 2010:
Severance and severance-related	$	1.0	$	0.4	$	(0.9	)	$	0.5
Facilities and other costs		0.1		—		(0.1	)		—

Total	$	1.1	$	0.4	$	(1.0	)	$	0.5


Six months ended June 30, 2009:
Severance and severance-related	$	1.4	$	2.2	$	(2.5	)	$	1.1
Facilities and other costs		0.7		1.0		(0.5	)		1.2

Total	$	2.1	$	3.2	$	(3.0	)	$	2.3

Scantron

As a result of an acquisition, the Company adopted plans to restructure the Scantron segment in 2008. 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. The Company completed substantially all of the planned employee terminations and consolidation of printing and manufacturing operations related to the acquisition as of March 31, 2009 and expensed $1.4 and $2.8 for severance and severance-related costs and $0.3 and $0.3 for facilities and other costs related to further consolidation of operations and elimination of certain selling, general and administrative expenses during the three and six months ended June 30, 2009, respectively.

The Company expensed $0.7 and $2.0 for severance and severance-related costs and $4.5 and $4.5 for facilities and other costs related to further consolidation of operations and elimination of certain selling, general and administrative expenses during the three and six months ended June 30, 2010, respectively. Ongoing lease commitments related to these plans continue through 2013.

The following table details the components of the Company’s restructuring accruals related to the Scantron segment for the six months ended June 30, 2010 and 2009:


	Beginning				Paid in			Non-Cash			Ending
	Balance		Expensed		Cash			Utilization			Balance
Six months ended June 30, 2010:
Severance and severance-related	$	0.5	$	2.0	$	(2.2	)	$	—		$	0.3
Facilities and other costs		—		4.5		(0.2	)		0.2			4.5

Total	$	0.5	$	6.5	$	(2.4	)	$	0.2		$	4.8


Six months ended June 30, 2009:
Severance and severance-related	$	1.0	$	2.8	$	(2.4	)	$	—		$	1.4
Facilities and other costs		—		0.3		—			(0.3	)		—

Total	$	1.0	$	3.1	$	(2.4	)	$	(0.3	)	$	1.4

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

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 2017.

17. Transactions with Related Parties

Notes Receivable

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

The outstanding balances on the senior secured credit facility and the note are included in prepaid expenses and other current assets and other assets in the accompanying consolidated balance sheets. During the six months ended June 30, 2010, the Company received $3.0 in payments on the note, bringing the principal balance of the note to $4.0 at June 30, 2010. Interest income of $0.1 and $0.2 was recorded during the three and six months ended June 30, 2010, respectively. Interest income of $0.2 and $0.5 was recorded during the three and six months ended June 30, 2009, respectively.

Other

The Company expensed $0.7 and $1.4 during the three and six months ended June 30, 2010, respectively, and $0.7 and $1.4 during the three and six months ended June 30, 2009, respectively, for services provided to the Company by M & F Worldwide. This amount is reflected in selling, general and administrative expenses.

18. Subsequent Event

On July 21, 2010, Scantron acquired 100% of the equity interests of Spectrum K12 School Solutions, Inc. (“Spectrum K12”) for $30.0 in cash subject to post-closing adjustments. Additional contingent consideration may be payable upon the achievement of certain future revenue targets of Spectrum K12. Spectrum K12 develops, markets and sells student achievement management, response to intervention and special education software solutions. Spectrum K12’s offerings complement Scantron’s offerings in educational assessments, content and data management. The Company financed the Spectrum K12 acquisition and related fees and expenses with cash on hand. Due to the timing of the transaction, preliminary accounting for the business combination is not complete. Financial results for Spectrum K12 will be included in the Company’s results of operations beginning in the third quarter of 2010.

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 six months ended June 30, 2010 and 2009 should be read in conjunction with the more detailed financial information contained in our consolidated financial statements and their notes included elsewhere in this Quarterly Report on Form 10-Q.

Overview of Business

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

The SubscriberMail and Protocol IMS Acquisitions

During December 2009, Harland Clarke Corp., a wholly owned subsidiary of the Company, acquired in separate transactions SubscriberMail and Protocol Integrated Marketing Services (“Protocol IMS”), a division of Protocol Global Solutions. The acquisition-date aggregate consideration of $13.1 million for these transactions includes contingent consideration of $1.8 million for SubscriberMail upon the achievement of certain revenue targets in 2010 and 2011, with a maximum contingent consideration of $2.0 million if the targets are met. SubscriberMail is a leading email marketing service provider that offers patented tools to develop and deliver professional email communications. Protocol IMS focuses on direct marketing services with solutions that include business to business strategic services, business to consumer strategic services, database marketing and analytics, outbound business to business teleservices, production and fulfillment. The Protocol IMS and SubscriberMail acquisitions are collectively referred to as the “2009 Acquisitions.”

Recent Developments

On July 21, 2010, Scantron acquired 100% of the equity interests of Spectrum K12 School Solutions, Inc. (“Spectrum K12”) for $30.0 million in cash subject to post-closing adjustments. Additional contingent consideration may be payable upon the achievement of certain future revenue targets of Spectrum K12. Spectrum K12 develops, markets and sells student achievement management, response to intervention and special education software solutions. Spectrum K12’s offerings complement Scantron’s offerings in educational assessments, content and data management. The Company financed the Spectrum K12 acquisition and related fees and expenses with cash on hand. Due to the timing of the transaction, preliminary accounting for the business combination is not

Harland Clarke Holdings Corp. and Subsidiaries

complete. Financial results for Spectrum K12 will be included in the Company’s results of operations beginning in the third quarter of 2010.

Economic and Other Factors Affecting the Businesses of the Company

Harland Clarke

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

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

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

Harland Financial Solutions

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

Harland Clarke Holdings Corp. and Subsidiaries

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

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

Scantron

While the number of tests given annually in K-12 and higher education continues to grow, the demand for optical mark reader paper-based testing has declined and is expected to continue to decline. Changes in educational funding can affect the rate at which schools adopt new technology thus slowing the decline for paper-based testing but also slowing the demand for Scantron’s on-line testing products. Educational funding changes may also reduce the rate of consumption of Scantron’s forms and purchase of additional hardware to process these forms. Scantron’s education-based customers may turn to lower cost solutions for paper-based forms and hardware in furtherance of addressing their budget needs. A weak economy in the United States may negatively affect education budgets and spending, which would have an adverse 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 affect the demand for data collection to the extent that Scantron’s customers adjust their research or testing expenditures.

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 and to continue to align its cost structure with business needs. 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.

Harland Clarke Holdings Corp. and Subsidiaries

Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009

The operating results for the three months ended June 30, 2010, as reflected in the accompanying consolidated statements of income and described below, include the operating results of the acquired Protocol IMS and SubscriberMail businesses from their respective dates of acquisition.

Net Revenues:


	Three Months Ended June 30,
*$ in millions*	2010			2009
Consolidated Net Revenues:
Harland Clarke segment	$	307.3		$	306.3
Harland Financial Solutions segment		70.1			69.7
Scantron segment		49.1			50.7
Eliminations		(3.2	)		(0.3	)

Total	$	423.3		$	426.4

Net revenues decreased by $3.1 million, or 0.7%, to $423.3 million in the 2010 period from $426.4 million in the 2009 period.

Net revenues for the Harland Clarke segment increased by $1.0 million, or 0.3%, to $307.3 million in the 2010 period from $306.3 million in the 2009 period. The increase was primarily due to revenues from the businesses acquired in the 2009 Acquisitions, the addition of new clients, a one-time payment resulting from the loss of a client and increased revenues per unit. These increases were partially offset by volume declines in check and related products and other one-time nonrecurring items. Net revenues in the 2010 period included charges of $0.2 million for non-cash fair value acquisition accounting adjustments to deferred revenue related to the SubscriberMail acquisition.

Net revenues for the Harland Financial Solutions segment increased by $0.4 million, or 0.6%, to $70.1 million in the 2010 period from $69.7 million in the 2009 period. Increases in maintenance revenues, outsourced host processing revenues, early termination fees and term license revenues were partially offset by decreases in hardware sales and other license revenues.

Net revenues for the Scantron segment decreased by $1.6 million, or 3.2%, to $49.1 million in the 2010 period from $50.7 million in the 2009 period. The decrease was primarily due to declines in service maintenance, hardware and forms revenues. These declines were partially offset by increases in revenues from web-based products and services for the education market and from sales of a newly introduced solution that assists financial institutions with the implementation of recent changes to federal regulations regarding overdraft services provided to financial institution customers.

Elimination of net revenues increased from $0.3 million in the 2009 period to $3.2 million in the 2010 period primarily due to intersegment sales from the Scantron segment to the Harland Clarke segment. These intersegment sales are related to the new solution that assists financial institutions with the implementation of recent changes to federal regulations.

Harland Clarke Holdings Corp. and Subsidiaries

Cost of Revenues:


	Three Months Ended June 30,
*$ in millions*	2010			2009
Consolidated Cost of Revenues:
Harland Clarke segment	$	185.6		$	190.5
Harland Financial Solutions segment		30.3			29.5
Scantron segment		28.5			29.1
Eliminations		(3.2	)		(0.3	)

Total	$	241.2		$	248.8

Cost of revenues decreased by $7.6 million, or 3.1%, to $241.2 million in the 2010 period from $248.8 million in the 2009 period.

Cost of revenues for the Harland Clarke segment decreased by $4.9 million, or 2.6%, to $185.6 million in the 2010 period from $190.5 million in the 2009 period. The decrease in cost of revenues was primarily due to labor cost reductions and decreases in depreciation and occupancy expenses, all of which resulted from restructuring activities. Additionally, lower volumes, which resulted in lower materials and other variable overhead expenses, contributed to the decrease. Decreases in cost of revenues were partially offset by increases resulting from the businesses acquired in the 2009 Acquisitions and by an increase in amortization expense of $1.4 million resulting from the reclassification of the Harland Clarke tradename from an indefinite-lived to a definite-lived intangible asset in the fourth quarter of 2009. Cost of revenues as a percentage of revenues for the Harland Clarke segment was 60.4% in the 2010 period as compared to 62.2% in the 2009 period.

Cost of revenues for the Harland Financial Solutions segment increased by $0.8 million, or 2.7%, to $30.3 million in the 2010 period from $29.5 million in the 2009 period. The increase in cost of revenues was primarily due to an increase in labor costs and an increase in amortization expense of $0.5 million resulting from the reclassification of the Harland Clarke tradename from an indefinite-lived to a definite-lived intangible asset in the fourth quarter of 2009, partially offset by a decrease in depreciation. Cost of revenues as a percentage of revenues for the Harland Financial Solutions segment was 43.2% in the 2010 period as compared to 42.3% in the 2009 period.

Cost of revenues for the Scantron segment decreased by $0.6 million, or 2.1% to $28.5 million in the 2010 period from $29.1 million in the 2009 period. The decrease was primarily due to volume declines and labor cost reductions resulting from restructuring activities, partially offset by an increase in delivery costs related to the Company’s new solution that assists financial institutions with the implementation of recent changes to federal regulations. Cost of revenues as a percentage of revenues for the Scantron segment was 58.0% in the 2010 period as compared to 57.4% in the 2009 period.

Elimination of cost of revenues increased from $0.3 million in the 2009 period to $3.2 million in the 2010 period primarily due to intersegment costs from the Scantron segment to the Harland Clarke segment. These intersegment costs are related to the new solution that assists financial institutions with the implementation of recent changes to federal regulations.

Selling, General and Administrative Expenses:


	Three Months Ended June 30,
*$ in millions*	2010		2009
Consolidated Selling, General and Administrative Expenses:
Harland Clarke segment	$	53.2	$	52.4
Harland Financial Solutions segment		28.2		28.2
Scantron segment		13.6		13.2
Corporate		3.4		3.3

Total	$	98.4	$	97.1

Harland Clarke Holdings Corp. and Subsidiaries

Selling, general and administrative expenses increased by $1.3 million, or 1.3%, to $98.4 million in the 2010 period from $97.1 million in the 2009 period.

Selling, general and administrative expenses for the Harland Clarke segment increased by $0.8 million, or 1.5%, to $53.2 million in the 2010 period from $52.4 million in the 2009 period. The increase was primarily due to the businesses acquired in the 2009 Acquisitions, partially offset by labor cost reductions resulting from restructuring activities and reductions in selling expenses. Selling, general and administrative expenses as a percentage of revenues for the Harland Clarke segment were 17.3% in the 2010 period as compared to 17.1% in the 2009 period.

Selling, general and administrative expenses for the Harland Financial Solutions segment were unchanged. Decreases in general overhead expenses and compensation expense related to an incentive agreement were offset by an increase in foreign currency transaction losses and selling expenses. Selling, general and administrative expenses in the 2010 and 2009 periods included charges of $0.4 million and $1.1 million, respectively, for compensation expense related to an incentive agreement for an acquisition in 2007. Selling, general and administrative expenses as a percentage of revenues for the Harland Financial Solutions segment were 40.2% in the 2010 period as compared to 40.5% in the 2009 period.

Selling, general and administrative expenses for the Scantron segment increased $0.4 million, or 3.0%, to $13.6 million in the 2010 period from $13.2 million in the 2009 period. The increase was primarily due to increases in labor costs, professional fees, and travel expenses in connection with investments in growth initiatives, partially offset by a decrease in integration expenses. Selling, general and administrative expenses as a percentage of revenues for the Scantron segment were 27.7% in the 2010 period as compared to 26.0% in the 2009 period.

Selling, general and administrative expenses for the Corporate segment increased $0.1 million, or 3.0%, to $3.4 million in the 2010 period from $3.3 million in the 2009 period due to increases in general overhead costs.

Asset Impairment Charges

During the 2010 period, the Company recorded non-cash impairment charges of $0.6 million for the Harland Clarke segment to adjust the carrying value of certain held for sale facilities to reflect an updated estimate for the fair values less costs to sell.

Restructuring Costs

The Company adopted plans during 2008, 2009 and 2010 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.

In the 2010 period, the Company recorded restructuring costs of $1.6 million for the Harland Clarke segment, $0.2 million for the Harland Financial Solutions segment and $5.2 million for the Scantron segment related to these plans. In the 2009 period, the Company recorded restructuring costs of $11.1 million for the Harland Clarke segment, $0.8 million for the Harland Financial Solutions segment and $1.7 million for the Scantron segment related to these plans.

Interest Income

Interest income was $0.2 million in the 2010 period as compared to $0.3 million in the 2009 period. The decrease in interest income was primarily due to decreased interest on notes receivable from a related party. See Note 17 to the Company’s consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Interest Expense

Interest expense was $30.3 million in the 2010 period as compared to $35.6 million in the 2009 period. The decrease in interest expense was largely due to lower effective interest rates, as well as a decrease in total debt outstanding.

Harland Clarke Holdings Corp. and Subsidiaries

Gain on Early Extinguishment of Debt

During the 2009 period, the Company extinguished debt with a total principal amount of $24.2 million by purchasing 2015 Senior Notes in individually negotiated transactions for an aggregate purchase price of $14.6 million, resulting in a gain of $8.9 million after the write-off of $0.7 million of unamortized deferred financing fees related to the extinguished debt. There were no early extinguishments of debt during the 2010 period.

Other Income, Net

Other income, net was $0.1 million in the 2010 period as compared to $0.0 million in the 2009 period primarily due to a gain on the sale of marketable securities.

Provision for Income Taxes

The Company’s effective tax rate was 39.3% in the 2010 period and 31.6% in the 2009 period. The increase was primarily due to the effect of the release of a reserve for uncertain tax positions in the 2009 period.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

The operating results for the six months ended June 30, 2010, as reflected in the accompanying consolidated statements of income and described below, include the operating results of the acquired Protocol IMS and SubscriberMail businesses from their respective dates of acquisition.

Net Revenues:


	Six Months Ended June 30,
*$ in millions*	2010			2009
Consolidated Net Revenues:
Harland Clarke segment	$	617.0		$	621.4
Harland Financial Solutions segment		139.4			138.9
Scantron segment		100.2			105.1
Eliminations		(3.3	)		(0.4	)

Total	$	853.3		$	865.0

Net revenues decreased by $11.7 million, or 1.4%, to $853.3 million in the 2010 period from $865.0 million in the 2009 period.

Net revenues for the Harland Clarke segment decreased by $4.4 million, or 0.7%, to $617.0 million in the 2010 period from $621.4 million in the 2009 period. The decrease was primarily due to volume declines in check and related products and one-time nonrecurring items, partially offset by revenues from the businesses acquired in the 2009 Acquisitions, the addition of new clients, increased revenues per unit and a one-time payment resulting from the loss of a client. Net revenues in the 2010 period included charges of $0.5 million for non-cash fair value acquisition accounting adjustments to deferred revenue related to the SubscriberMail acquisition.

Net revenues for the Harland Financial Solutions segment increased by $0.5 million, or 0.4%, to $139.4 million in the 2010 period from $138.9 million in the 2009 period. Increases in maintenance revenues, outsourced host processing revenues, early termination fees and term license revenues were partially offset by decreases in hardware sales and other license revenues.

Net revenues for the Scantron segment decreased by $4.9 million, or 4.7%, to $100.2 million in the 2010 period from $105.1 million in the 2009 period. The decrease was primarily due to declines in service maintenance, forms and hardware revenues. These declines were partially offset by increases in revenues from web-based products and services for the education market and from sales of a newly introduced solution that assists financial institutions with the implementation of recent changes to federal regulations regarding overdraft services provided to financial institution customers.

Elimination of net revenues increased from $0.4 million in the 2009 period to $3.3 million in the 2010 period primarily due to intersegment sales from the Scantron segment to the Harland Clarke segment. These

Harland Clarke Holdings Corp. and Subsidiaries

intersegment sales are related to the new solution that assists financial institutions with the implementation of recent changes to federal regulations.

Cost of Revenues:


	Six Months Ended June 30,
*$ in millions*	2010			2009
Consolidated Cost of Revenues:
Harland Clarke segment	$	375.8		$	391.3
Harland Financial Solutions segment		60.6			59.5
Scantron segment		55.6			59.5
Eliminations		(3.3	)		(0.4	)

Total	$	488.7		$	509.9

Cost of revenues decreased by $21.2 million, or 4.2%, to $488.7 million in the 2010 period from $509.9 million in the 2009 period.

Cost of revenues for the Harland Clarke segment decreased by $15.5 million, or 4.0%, to $375.8 million in the 2010 period from $391.3 million in the 2009 period. The decrease in cost of revenues was primarily due to labor cost reductions and decreases in depreciation and occupancy expenses, all of which resulted from restructuring activities. Additionally, lower volumes, which resulted in lower materials and other variable overhead expenses, contributed to the decrease. Decreases in cost of revenues were partially offset by increases resulting from the businesses acquired in the 2009 Acquisitions and by an increase in amortization expense of $2.8 million resulting from the reclassification of the Harland Clarke tradename from an indefinite-lived to a definite-lived intangible asset in the fourth quarter of 2009. Cost of revenues as a percentage of revenues for the Harland Clarke segment was 60.9% in the 2010 period as compared to 63.0% in the 2009 period.

Cost of revenues for the Harland Financial Solutions segment increased by $1.1 million, or 1.8%, to $60.6 million in the 2010 period from $59.5 million in the 2009 period. The increase in cost of revenues was primarily due to an increase in amortization expense of $1.0 million resulting from the reclassification of the Harland Clarke tradename from an indefinite-lived to a definite-lived intangible asset in the fourth quarter of 2009. Cost of revenues as a percentage of revenues for the Harland Financial Solutions segment was 43.5% in the 2010 period as compared to 42.8% in the 2009 period.

Cost of revenues for the Scantron segment decreased by $3.9 million, or 6.6% to $55.6 million in the 2010 period from $59.5 million in the 2009 period. The decrease was primarily due to volume declines and labor cost reductions resulting from restructuring activities, partially offset by an increase in delivery costs related to the Company’s new solution that assists financial institutions with the implementation of recent changes to federal regulations. Cost of revenues as a percentage of revenues for the Scantron segment was 55.5% in the 2010 period as compared to 56.6% in the 2009 period.

Elimination of cost of revenues increased from $0.4 million in the 2009 period to $3.3 million in the 2010 period primarily due to intersegment costs from the Scantron segment to the Harland Clarke segment. These intersegment costs are related to the new solution that assists financial institutions with the implementation of recent changes to federal regulations.

Selling, General and Administrative Expenses:


	Six Months Ended June 30,
*$ in millions*	2010		2009
Consolidated Selling, General and Administrative Expenses:
Harland Clarke segment	$	105.4	$	108.5
Harland Financial Solutions segment		55.6		57.6
Scantron segment		27.0		29.0
Corporate		6.5		6.0

Total	$	194.5	$	201.1

Harland Clarke Holdings Corp. and Subsidiaries

Selling, general and administrative expenses decreased by $6.6 million, or 3.3%, to $194.5 million in the 2010 period from $201.1 million in the 2009 period.

Selling, general and administrative expenses for the Harland Clarke segment decreased by $3.1 million, or 2.9%, to $105.4 million in the 2010 period from $108.5 million in the 2009 period. The decrease was primarily due to labor cost reductions resulting from restructuring activities and reductions in selling expenses and advertising expenses. Selling, general and administrative expenses from the businesses acquired in the 2009 Acquisitions partially offset the overall decrease. Selling, general and administrative expenses as a percentage of revenues for the Harland Clarke segment were 17.1% in the 2010 period as compared to 17.5% in the 2009 period.

Selling, general and administrative expenses for the Harland Financial Solutions segment decreased by $2.0 million, or 3.5%, to $55.6 million in the 2010 period from $57.6 million in the 2009 period. The decrease was primarily due to labor cost reductions resulting from restructuring activities, a reduction in compensation expense related to an incentive agreement, and decreases in general overhead expenses and depreciation. These decreases were partially offset by an increase in selling expenses and an increase in foreign currency transaction losses. Selling, general and administrative expenses in the 2010 and 2009 periods included charges of $0.8 million and $2.1 million, respectively, for compensation expense related to an incentive agreement for an acquisition in 2007. Selling, general and administrative expenses as a percentage of revenues for the Harland Financial Solutions segment was 39.9% in the 2010 period as compared to 41.5% in the 2009 period.

Selling, general and administrative expenses for the Scantron segment decreased $2.0 million, or 6.9%, to $27.0 million in the 2010 period from $29.0 million in the 2009 period. The decrease was primarily due to lower integration expenses in the 2010 period, a $1.3 million one-time expense in the 2009 period related to a contractual obligation owing to a former employee upon termination of employment, and a decrease in selling expenses. These decreases were partially offset by increases in labor, professional fees and travel expenses in connection with investments in growth initiatives. Selling, general and administrative expenses as a percentage of revenues for the Scantron segment was 26.9% in the 2010 period as compared to 27.6% in the 2009 period.

Selling, general and administrative expenses for the Corporate segment increased $0.5 million, or 8.3% to $6.5 million in the 2010 period from $6.0 million in the 2009 period due to increases in general overhead costs.

Asset Impairment Charges

Restructuring Costs

In the 2010 period, the Company recorded restructuring costs of $3.3 million for the Harland Clarke segment, $0.4 million for the Harland Financial Solutions segment and $6.5 million for the Scantron segment related to these plans. In the 2009 period, the Company recorded restructuring costs of $18.4 million for the Harland Clarke segment, $3.2 million for the Harland Financial Solutions segment and $3.1 million for the Scantron segment related to these plans.

Interest Income

Interest income was $0.4 million in the 2010 period as compared to $0.6 million in the 2009 period. The decrease in interest income was primarily due to decreased interest on notes receivable from a related party. See Note 17 to the Company’s consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Harland Clarke Holdings Corp. and Subsidiaries

Interest Expense

Interest expense was $60.2 million in the 2010 period as compared to $73.7 million in the 2009 period. The decrease in interest expense was largely due to lower effective interest rates, as well as 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 $114.7 million by purchasing 2015 Senior Notes in individually negotiated transactions for an aggregate purchase price of $49.7 million, resulting in a gain of $61.5 million after the write-off of $3.5 million of unamortized deferred financing fees related to the extinguished debt. There were no early extinguishments of debt during the 2010 period.

Other Income, Net

Other income, net was $0.1 million in the 2010 period as compared to $0.0 million in the 2009 period primarily due to a gain on the sale of marketable securities.

Provision for Income Taxes

The Company’s effective tax rate was 39.6% in the 2010 period and 36.4% in the 2009 period. The increase was primarily due to a charge in the 2010 period for the change in federal tax law relating to the deductibility of retiree prescription drug subsidies, in addition to the effect of the release of a reserve 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 six months ended June 30, 2010 was $138.4 million as compared to $81.8 million during the same period in 2009. The increase in net cash provided by operating activities of $56.6 million was due to changes in working capital and an increase in cash flow from operations. Working capital decreased during the six months ended June 30, 2010 compared to the same period in 2009 primarily due to the timing of payments related to other accrued expenses and prepaid expenses.

The Company’s net cash provided by investing activities was $14.3 million during the six months ended June 30, 2010 as compared to net cash used in investing activities of $20.1 million during the same period in 2009. During the six months ended June 30, 2010, the Company sold marketable securities for net proceeds of $24.7 million and had lower capital expenditures compared to the same period in 2009.

The Company’s net cash used in financing activities was $10.0 million during the six months ended June 30, 2010 as compared to $60.1 million during the same period 2009. The decrease in net cash used in financing activities was primarily due to the extinguishment of $114.7 million principal amount of 2015 Senior Notes for an aggregate purchase price of $49.7 million during the same period in 2009.

The Company’s Consolidated Contractual Obligations and Commitments

There were no material changes to the Company’s contractual obligations and commitments as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 during the three months ended June 30, 2010.

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 elsewhere 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

Harland Clarke Holdings Corp. and Subsidiaries

			projects that support future revenue growth. During the six months ended June 30, 2010 and 2009, the Company incurred $14.6 million and $23.0 million of capital expenditures and $0.0 million and $0.2 million of capitalized interest, respectively.

	•		Contract Acquisition Payments. During the six months ended June 30, 2010 and 2009, the Company made $20.0 million and $27.9 million of contract acquisition payments to its clients, respectively.

	•		Restructuring/Cost Reductions. Restructuring accruals have been established for anticipated severance payments, costs related to facilities closures and other expenses related to the restructuring or consolidation of some of the Company’s operations. During the six months ended June 30, 2010 and 2009, the Company made $6.8 million and $19.1 million of payments for restructuring, respectively.

The Company may also, from time to time, seek to use its cash to make acquisitions or investments, and also to retire or purchase its outstanding debt in open market purchases, in privately negotiated transactions, or otherwise. Such retirement or purchase of debt may be funded from the operating cash flows of the business or other sources and will depend upon prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material. The Company used cash on hand to fund the $28.6 million net purchase price after giving effect to working capital adjustments for the acquisition of Spectrum K12 School Solutions, Inc. that was consummated in July 2010.

Cash Flow Risks

The Company’s ability to meet its debt service obligations and reduce its total debt will depend upon its ability to generate cash in the future which, in turn, will be subject to general economic, financial, business, competitive, legislative, regulatory and other conditions, many of which are beyond the Company’s control. The Company may not be able to generate sufficient cash flow from operations or borrow under its credit facility in an amount sufficient to repay its debt or to fund other liquidity needs. As of June 30, 2010, the Company had $90.8 million of availability under its revolving credit facility (after giving effect to the issuance of $9.2 million of letters of credit). The Company may also use its revolving credit facility to fund potential future acquisitions or investments. If future cash flow from operations and other capital resources are insufficient to pay the Company’s obligations as they mature or to fund its liquidity needs, the Company may be forced to reduce or delay business activities and capital expenditures, sell assets, obtain additional debt or equity capital or restructure or refinance all or a portion of its debt on or before maturity. The Company may not be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all. In addition, the terms of the Company’s existing and future indebtedness may limit its ability to pursue any of these alternatives.

Critical Accounting Policies and Estimates

There were no material changes to the Company’s Critical Accounting Policies and Estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 during the three months ended June 30, 2010.

Forward-Looking Statements

This Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, 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, 2009 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates.”

Harland Clarke Holdings Corp. and Subsidiaries

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

	•		our substantial indebtedness;

	•		further adverse changes in or worsening of general economic and industry conditions, including the depth and length of the economic 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;

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

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

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

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

	•		increases in interest rates;

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

	•		consolidation among financial institutions;

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

	•		intense competition in all areas of our businesses;

	•		our ability to successfully 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 any advantage over other providers in our respective industries;

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

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

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

	•		our ability to protect our intellectual property rights;

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

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

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

Harland Clarke Holdings Corp. and Subsidiaries

	•		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; and

	•		unanticipated internal control deficiencies or weaknesses.

The Company encourages investors to read carefully the risk factors described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 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 June 30, 2010, the Company had $1,746.0 million of term loans outstanding under its credit agreement, $9.2 million of letters of credit outstanding under its revolving credit facility, $206.8 million of floating rate senior notes and $271.3 million of 9.50% fixed rate senior notes. All of these outstanding loans bear interest at variable rates, with the exception of the $271.3 million of fixed rate senior notes. Accordingly, the Company is subject to risk due to changes in interest rates. The Company believes that a hypothetical increase of 1 percentage point in the variable component of interest rates applicable to its floating rate debt outstanding at June 30, 2010 would have resulted in an increase in its interest expense for the six months ended June 30, 2010 of approximately $4.5 million, including the effect of the interest rate derivative transactions discussed below.

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

Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 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 June 30, 2010.

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

Harland Clarke Holdings Corp. and Subsidiaries

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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 an Illinois state court an amended complaint that re-asserted previously filed claims against BOE and added claims against Harland Financial Solutions, Inc. (“HFS”). The amended complaint alleged, among other things, that HFS’s LaserPro 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. Following the removal of the action to the United States District Court for the Southern District of Illinois, the District Court entered an order granting with prejudice HFS’s motion to dismiss Mr. Kitson’s claims. In August 2009, Mr. Kitson, individually and as class representative, and BOE agreed to settle and dismiss with prejudice all remaining claims. Separately but concurrently, BOE’s warranty claim against HFS was settled, in exchange for, among other things, payment by HFS of $0.2 million. The class settlement agreement was approved by the District Court in January 2010.

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

Item 1A. Risk Factors

There was no material change to the Company’s risk factors as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 during the three months ended June 30, 2010.

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

None.

Item 3. Defaults Upon Senior Securities

There was no event of default upon senior securities during the three months ended June 30, 2010.

Item 4. Removed and Reserved

Item 5. Other Information

No additional information need be presented.

Item 6. Exhibits


31.1		Certification of Charles T. Dawson, Chief Executive Officer, dated August 5, 2010.

31.2		Certification of Peter A. Fera, Jr., Chief Financial Officer, dated August 5, 2010.


	HARLAND CLARKE HOLDINGS CORP.
Date: August 5, 2010	By:	/s/ Peter A. Fera, Jr.
		Peter A. Fera, Jr.
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)


Date: August 5, 2010	By:	/s/ J. Michael Riley
		J. Michael Riley
		Vice President and Controller (Principal Accounting Officer)

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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	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

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

Item 3.	Defaults Upon Senior Securities	33

Item 4.	Removed and Reserved	33

Item 5.	Other Information	33

Item 6.	Exhibits	33
EX-31.1
EX-31.2