UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

HARLAND CLARKE HOLDINGS CORP.
(Exact name of registrant as specified in its charter)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act.

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

As of September 30, 2007, 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.

Harland Clarke Holdings Corp. and Subsidiaries
Consolidated Balance Sheets
(in millions, except share and per share data)


	September 30, 2007				December 31, 2006
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	187.3			$	30.5
Accounts receivable (net of allowances of $0.4 and $0.0)			112.8				19.8
Inventories			29.8				13.6
Income taxes receivable			40.0				0.4
Deferred tax assets			29.3				3.1
Prepaid expenses and other current assets			35.9				12.7
Total current assets			435.1				80.1
Property, plant and equipment			260.4				119.0
Less accumulated depreciation			(65.3	)			(26.6	)
Property, plant and equipment, net			195.1				92.4
Goodwill			1,349.4				346.8
Other intangible assets, net			1,353.4				550.9
Upfront contract payments, net			57.5				31.1
Other assets			63.4				17.0
Total assets		$	3,453.9			$	1,118.3
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable		$	61.3			$	21.1
Deferred revenues			85.7				1.1
Current maturities of long-term debt			20.1				46.6
Accrued liabilities:
Salaries, wages and employee benefits			59.1				22.8
Income and other taxes payable			23.9				3.8
Customer incentives			24.4				8.8
Acquisition-related payments			19.5				—
Other current liabilities			42.0				8.9
Payable to parent			1.5				—
Total current liabilities			337.5				113.1
Long-term debt			2,394.7				557.2
Deferred tax liabilities			490.6				221.9
Other liabilities			45.6				6.8
Commitments and contingencies
Stockholder’s equity:
Common stock, par value $0.01; 200 shares authorized; 100 shares issued at September 30, 2007 and December 31, 2006			—				—
Additional paid-in capital			202.5				202.5
Accumulated (deficit) retained earnings			(10.0	)			16.7
Accumulated other comprehensive (loss) income			(7.0	)			0.1
Total stockholder’s equity			185.5				219.3
Total liabilities and stockholder’s equity		$	3,453.9			$	1,118.3

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


	Three Months Ended September 30,								Nine Months Ended September 30,
	2007				2006				2007				2006
Product revenues, net		$	367.2			$	154.8			$	831.2			$	473.0
Service revenues, net			65.6				0.5				105.8				1.4
Total net revenues			432.8				155.3				937.0				474.4
Cost of products sold			226.6				95.6				513.9				292.3
Cost of services provided			33.2				0.4				58.5				1.1
Total cost of revenues			259.8				96.0				572.4				293.4
Gross profit			173.0				59.3				364.6				181.0
Selling, general and administrative expenses			106.3				35.8				232.8				110.5
Restructuring costs			2.0				1.0				4.9				1.9
Operating income			64.7				22.5				126.9				68.6
Interest income			2.0				—				3.3				—
Interest expense			(52.6	)			(15.4	)			(113.1	)			(44.6	)
Loss on early extinguishment of debt			—				—				(54.6	)			—
Other income (expense), net			0.1				—				0.2				—
Income (loss) before income taxes			14.2				7.1				(37.3	)			24.0
Provision (benefit) for income taxes			6.7				(0.2	)			(12.4	)			6.4
Net income (loss)		$	7.5			$	7.3			$	(24.9	)		$	17.6

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


	Nine Months Ended September 30,
	2007				2006
Operating activities
Net (loss) income		$	(24.9	)		$	17.6
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation			40.8				19.3
Amortization of intangible assets			46.0				21.4
Amortization of deferred financing fees and original issue discount			5.0				1.6
Loss on early extinguishment of debt			54.6				—
Deferred income taxes			(3.5	)			(15.5	)
Asset impairment			3.1				—
Changes in operating assets and liabilities, net of effect of businesses acquired:
Accounts receivable			(9.0	)			(2.1	)
Inventories			6.4				0.5
Payable to parent			1.5				—
Prepaid expenses and other assets			(5.9	)			3.9
Accounts payable and accrued expenses			1.3				13.1
Deferred revenue			9.8				0.1
Upfront contract payments, net			14.8				6.3
Income and other taxes			(10.6	)			1.0
Other, net			0.6				0.1
Net cash provided by operating activities			130.0				67.3
Investing activities
Purchase of Harland, net of cash acquired of $23.8			(1,423.0	)			—
Purchase of Peldec assets			(14.2	)			—
Proceeds from sale of property, plant and equipment			1.2				—
Capital expenditures			(17.2	)			(10.5	)
Capitalized interest			(0.3	)			(0.7	)
Other, net			(0.5	)
Net cash used in investing activities			(1,454.0	)			(11.2	)
Financing activities
Dividend to parent			(1.8	)			—
Cash overdrafts			(0.1	)			(13.2	)
Issuance of notes			615.0				—
Redemption of notes			(175.0	)			—
Borrowings on credit agreements			1,800.0				3.3
Repayments of credit agreements and other borrowings			(659.5	)			(23.9	)
Premiums, penalties and consent payments related to extinguishment of debt			(41.2	)			—
Debt issuance cost			(56.6	)			—
Net cash provided by (used in) financing activities			1,480.8				(33.8	)
Net increase in cash and cash equivalents			156.8				22.3
Cash and cash equivalents at beginning of period			30.5				6.2
Cash and cash equivalents at end of period		$	187.3			$	28.5
Supplemental disclosure of cash paid for:
Interest		$	134.0			$	29.8
Taxes paid, net of refunds			2.1				13.8

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

Harland Clarke Holdings Corp. (‘‘Harland Clarke Holdings’’ and, together with its subsidiaries, the ‘‘Company’’) is a holding company that conducts its operations through its direct and indirect wholly owned operating subsidiaries and was incorporated in Delaware on October 19, 2005. On December 15, 2005, CA Investment Corp., an indirect wholly owned subsidiary of M & F Worldwide Corp. (‘‘M & F Worldwide’’) purchased 100% of the capital stock of Novar USA Inc. (‘‘Novar’’) and was renamed ‘‘Clarke American Corp.’’ Clarke American Corp. is 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 a subsidiary of the Company was merged with and into Harland, with Harland continuing after the merger as the surviving corporation and as a wholly owned subsidiary of the Company (the ‘‘Harland Acquisition’’) (see Note 3). After the closing of the Harland Acquisition, the Company changed its name on May 2, 2007 from Clarke American Corp. to Harland Clarke Holdings Corp.

Subsequent to the acquisition of Harland, the Company reorganized its business and corporate structure along the following three business segments: Harland Clarke (which consists of the combined check business and related products and services of Clarke American Corp. and Harland), Harland Financial Solutions and Scantron.

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

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

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

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, 2006. All terms used but not defined elsewhere herein have the meaning ascribed to them in the Company’s 2006 Annual Report on Form 10-K.

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

The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries after elimination of all material intercompany accounts and transactions. The Company has consolidated the results of operations and accounts of Harland from the date of acquisition of May 1, 2007.

The Company and each of its existing subsidiaries other than unrestricted subsidiaries and certain immaterial subsidiaries which were acquired from Harland, are guarantors and may also be co-issuers under the 2015 Senior Notes (as hereinafter defined) (see Note 10). The Company is a holding company, and has no independent assets other than approximately $19.9 of cash and cash equivalents at September 30, 2007, 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 minor.

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.

The Company recognizes product and service revenue when persuasive evidence of a non-cancelable arrangement exists, delivery has occurred and/or services have been rendered, the price is fixed or determinable, collectibility is reasonably assured, legal title and economic risk is transferred to the customer and an economic exchange has taken place. Revenues are recorded net of any applicable discounts, upfront contract payments amortization, accrued incentives and allowances for sales returns. Deferred revenues represent amounts billed to the customer in excess of amounts earned.

Revenues for direct response marketing services are recognized from the Company’s fixed price direct mail and marketing contracts based on the proportional performance method for time and materials at relative fair value for specific projects.

For multiple-element software arrangements, total revenue is allocated to each element based on the fair value method or the residual method when applicable. Under the fair value method, the total revenue is allocated among the elements based upon the relative fair value of each element as determined through vendor-specific objective evidence. Under the residual method, the fair value of the undelivered maintenance, training and other service elements, as determined based on vendor-specific objective evidence (the price of a bundled element when sold separately), is deferred and the remaining (residual) arrangement is recognized as revenue at the time of delivery. Maintenance fees are deferred and recognized ratably over the maintenance period, which is usually twelve months. Training revenue is recognized as the services are performed. For multiple-element arrangements that do not include software, total revenue is allocated to contract elements based on the provisions of the Financial Accounting Standards Board’s (‘‘FASB’’) Emerging Issues Task Force (‘‘EITF’’) 00-21, ‘‘Revenue Arrangements with Multiple Elements.’’

Revenue from licensing of software under usage-based contracts is recognized ratably over the term of the agreement or on an actual usage basis. Revenue from licensing of software under limited term license agreements is recognized ratably over the term of the agreement.

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

For software that is installed and integrated by the Company or customer, license revenue is recognized upon shipment assuming functionality has already been proven and there are no significant customization services. For software that is installed, integrated and customized by the Company, revenue is recognized on a percentage-of-completion basis as the services are performed using an input method based on labor hours. Estimates of efforts to complete a project are used in the percentage-of-completion calculation. Due to the uncertainties inherent in these estimates, actual results could differ from those estimates. Revenue from arrangements that are subject to substantive customer acceptance provisions are deferred until the acceptance conditions have been met.

Revenue from outsourced data processing services and other transaction processing services is recognized in the month the transactions are processed or the services are rendered.

The contractual terms of software sales do not provide for product returns or allowances. However, on occasion the Company may allow for returns or allowances primarily in the case of a new product release. Provisions for estimated returns and sales allowances are established by the Company concurrently with the recognition of revenue and are based on a variety of factors including actual return and sales allowance history and projected economic conditions.

Service revenues are comprised of revenues derived from software maintenance agreements, card services, field maintenance services, core processing service bureau deliverables, analytical services, consulting services, training services, survey services and certain contact center services.

The Company’s Harland Clarke segment has contractual agreements with many of its customers that provide incentives for rebates or discounts on certain products. Such rebates and discounts are recorded as reductions to revenue and as accrued liabilities. Some agreements may provide for the purchase of certain products not covered by the agreement at a discount by the customer and the cost of such products is recorded as a cost of products sold over the term of the agreement and as an accrued liability.

Revenue received from shipping and handling fees is reflected in product revenues, net in the accompanying consolidated statements of operations. Costs related to shipping and handling are included in cost of products sold.

The Company considers all cash on hand, money market funds and other highly liquid debt instruments with a maturity, when purchased, of three months or less to be cash and cash equivalents.

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable losses in its existing accounts receivable. Account balances are charged against the allowance when the Company believes it is probable the receivable will not be recovered. The Company does not have any off-balance sheet credit exposure related to its customers.

The Company states inventories at the lower of cost or market value. The Company determines cost by average costing or the first-in, first-out method.

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

Certain contracts with customers of the Company’s Harland Clarke segment involve upfront payments to the customer. These payments are capitalized and amortized on a straight-line basis as a reduction of revenue over the life of the related contract and are generally refundable from the customer on a prorated basis if the contract is canceled prior to the contract termination date. When such a termination occurs, the amounts repaid are offset against any unamortized upfront contract payment balance related to the terminating customer, with any resulting excess reported as an increase in revenue. The Company recorded revenue related to contract terminations of $0.6 and $1.5 for the three and nine months ended September 30, 2007, respectively. The Company recorded revenue related to contract terminations of $0.3 and $0.8 for the three and nine months ended September 30, 2006, respectively.

Advertising costs, which are recorded in selling, general and administrative expenses, consist primarily of marketing new and existing products, re-branding existing products and launching new initiatives throughout the Company.

Direct-response advertising is capitalized and amortized over its expected period of future benefit, while all other advertising costs are expensed as incurred. Direct-response advertising consists primarily of inserts that include order coupons for products offered by Checks in The Mail, a division of the Company’s Harland Clarke segment, which are amortized for a period up to 18 months. These costs are amortized following their distribution, and are charged to match the advertising expense with the related revenue streams. Unamortized balances are included in other current and non-current assets in the accompanying consolidated balance sheets.

The Company’s advertising expense was $4.9 and $13.9 for the three and nine months ended September 30, 2007, respectively, and $3.6 and $11.3 for the three and nine months ended September 30, 2006, respectively.

The Company states property, plant and equipment at cost. Maintenance and repairs are charged to expense as incurred. Additions, improvements and replacements that extend the asset life are capitalized. Depreciation is provided on a straight-line basis over the estimated useful lives of such assets. The Company amortizes leasehold improvements over the shorter of the useful life of the related asset or the lease term. Certain leases also contain tenant improvement allowances, which are recorded as a leasehold improvement and deferred rent and amortized over the lease term. The Company eliminates cost and accumulated depreciation applicable to assets retired or otherwise disposed of from the accounts and reflects any gain or loss on such disposition in operating results. As further discussed below, the Company capitalizes the qualifying costs incurred during the development stage on internally developed software or software obtained for internal use and amortizes the costs over the estimated useful life of the software. The Company capitalizes interest on qualified long-term projects and depreciates it over the life of the related asset.

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

The Company expenses research and development expenditures as incurred, including expenditures related to the development of software products that do not qualify for capitalization. The amounts expensed totaled $4.9 and $8.4 during the three and nine months ended September 30, 2007, respectively, and were primarily costs incurred related to the development of software. Research and development costs were not significant for the three and nine months ended September 30, 2006.

Software development costs incurred prior to the establishment of technological feasibility are expensed as incurred. Software development costs incurred after the technological feasibility of the subject software product has been established and prior to its availability for sale are capitalized in accordance with Statement of Financial Accounting Standards (‘‘SFAS’’) No. 86, ‘‘Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.’’ Capitalized software development costs are amortized on a product-by-product basis using the estimated economic life of the product on a straight-line basis over three years. Unamortized software development costs in excess of estimated net realizable value from a particular product are written down to their estimated net realizable value.

The Company accounts for costs to develop or obtain computer software for internal use in accordance with Accounting Standards Executive Committee Statement of Position 98-1, ‘‘Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,’’ which requires certain costs to be capitalized.

Goodwill represents the excess of cost (purchase price) over the fair value of net assets acquired. Acquired intangibles are recorded at fair value as of the date acquired using the purchase method. Goodwill and other intangibles determined to have an indefinite life are not amortized, but are tested for impairment at least annually or when events or changes in circumstances indicate that the assets might be impaired.

The goodwill impairment test is a two-step process, which requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of the Company’s reporting units based on discounted cash flow models using revenue and profit forecasts and comparing the estimated fair values with the carrying values of the Company’s reporting units, which include the goodwill. If the estimated fair values are less than the carrying values, a second step is performed to compute the amount of the impairment by determining an ‘‘implied fair value’’ of goodwill. The determination of the Company’s ‘‘implied fair value’’ requires the Company to allocate the estimated fair value to the assets and liabilities of the reporting unit. Any unallocated fair value represents the ‘‘implied fair value’’ of goodwill, which is compared to the corresponding carrying value.

The Company measures impairment of its indefinite lived intangible assets, which consist of certain tradenames and trademarks based on projected discounted cash flows. The Company also re-evaluates the useful life of these assets annually to determine whether events and circumstances continue to support an indefinite useful life.

The Company evaluates goodwill and indefinite lived intangible assets for impairment on an annual basis in the fourth quarter, or more frequently, if indicators of impairment exist.

The Company amortizes its customer relationships, software and amortizable trademarks and tradenames using the cash flow method over their estimated useful lives. All other amortizable intangible assets are being amortized ratably over their estimated useful lives.

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

When events or changes in circumstances indicate that the carrying amount of a long-lived asset other than goodwill and indefinite lived intangible assets may not be recoverable, the Company assesses the recoverability of such asset based on estimates of future undiscounted cash flows compared to net book value. If the future undiscounted cash flow estimates are less than net book value, net book value would then be reduced to estimated fair value, which generally approximates discounted cash flows. The Company also evaluates the amortization periods of assets to determine whether events or circumstances warrant revised estimates of useful lives. Assets held for disposal are carried at the lower of carrying amount or fair value, less estimated costs to sell such assets.

The Company computes income taxes under the liability method. Under the liability method, the Company generally determines deferred income taxes based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company records net deferred tax assets when it is more likely than not that it will realize the tax benefits. See Note 9.

The Company has defined benefit postretirement plans and defined contribution 401(k) plans, which cover certain current and former employees of the Company who meet eligibility requirements.

Effective December 31, 2006, the Company adopted the provisions of SFAS No. 158, ‘‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R).’’ SFAS No. 158 requires an entity to recognize in its statement of financial position the funded status of its defined benefit pension and postretirement benefit plans, measured as the difference between the fair value of the plan assets and the benefit obligation. SFAS No. 158 also requires an entity to recognize changes in the funded status of a defined benefit pension and postretirement benefit plan within accumulated comprehensive income (loss), net of tax, to the extent such changes are not recognized in earnings as components of periodic net benefit cost. The adoption of SFAS No. 158 did not change the amount of actuarially determined expense that is recorded in the consolidated statements of operations.

The functional currency for the Company’s foreign subsidiaries is their local currency. The Company translates all assets and liabilities denominated in foreign functional currencies into U.S. dollars at rates of exchange in effect at the balance sheet date and statement of operations items at the average rates of exchange prevailing during the period. The Company records translation gains and losses as a component of accumulated other comprehensive income (loss) in the stockholder’s equity section of the Company’s balance sheets. Gains and losses resulting from transactions in other than functional currencies are reflected in operating results, except for transactions of a long-term nature. The Company considers undistributed earnings of foreign subsidiaries to be permanently invested. As a result, no income taxes have been provided on these undistributed earnings or on the foreign currency translation adjustments recorded as a part of other comprehensive income (loss).

The Company is self-insured for certain workers’ compensation and group medical costs. Provisions for losses expected under these programs are recorded based on the Company’s estimates of the aggregate liabilities for the claims incurred. Payments for estimated claims beyond one year

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

have been discounted. As of September 30, 2007 and December 31, 2006, the combined liabilities for self-insured workers compensation and group medical liability were $13.7 and $3.9, respectively.

The Company began using derivative financial instruments in 2006 to manage interest rate risk related to a portion of its long-term debt. The Company recognizes all derivatives at fair value as either assets or liabilities in the consolidated balance sheets and changes in the fair values of such instruments are recognized in earnings unless specific hedge accounting criteria are met. If specific cash flow hedge accounting criteria are met, the Company recognizes the changes in fair value of these instruments in other comprehensive income (loss) until the underlying debt instrument being hedged is settled or the Company determines that the specific hedge accounting criteria are no longer met.

On the date the interest rate derivative contract is entered into, the Company designates the derivative as either a fair value hedge or a cash flow hedge. The Company formally documents the relationship between hedging instruments and the hedged items, as well as its risk-management objectives and strategy for undertaking various hedge transactions. The Company links all hedges that are designated as fair value hedges to specific assets or liabilities on the balance sheet or to specific firm commitments. The Company links all hedges that are designated as cash flow hedges to forecasted transactions or to liabilities on the balance sheet. The Company also assesses, both at the inception of the hedge and on an on-going basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. If an existing derivative were to become not highly effective as a hedge, the Company would discontinue hedge accounting prospectively. The Company measures ineffectiveness in accordance with SFAS No. 133, ‘‘Accounting for Derivative Instruments and Hedging Activities.’’

Deferred financing fees are being amortized to interest expense using the effective interest method over the term of the respective financing agreements. Unamortized balances are reflected in other assets in the accompanying consolidated balance sheets and were $53.4 and $13.2 as of September 30, 2007 and December 31, 2006, respectively.

The Company has restructuring costs related primarily to facility consolidations and workforce rationalization. A portion of these costs relate to the operations acquired from Harland and have been included in purchase accounting in accordance with EITF 95-3, ‘‘Recognition of Liabilities in Connection with a Purchase Business Combination.’’ The remaining costs relate to the Company’s previously existing operations and have been accounted for in accordance with SFAS No. 146, ‘‘Accounting for Costs Associated with Exit or Disposal Activities.’’ Additional restructuring charges related to the Company’s previously existing operations will be incurred as the Company completes its restructuring plan.

Certain amounts in previously issued financial statements have been reclassified to conform to the 2007 presentation. These reclassifications primarily relate to the Harland Acquisition, which resulted in the inclusion of additional line items in the financial statements.

In September 2006, the FASB issued SFAS No. 157, ‘‘Fair Value Measurement.’’ SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair

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

value measurements. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, but does not expand the use of fair value to any new circumstance. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the anticipated impact of SFAS No. 157 on its consolidated results of operations and financial position.

In February 2007, the FASB issued SFAS No. 159, ‘‘The Fair Value Option for Financial Assets and Financial Liabilities.’’ SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value and requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS No. 159 on its consolidated results of operations and financial position.

On May 1, 2007, the Company purchased 100% of the outstanding shares of Harland, for $1,423.0 in cash. The acquisition combined complementary products and services of Harland and Clarke American Corp. to create a more effective and efficient strategic partner to financial institutions. Harland’s results of operations have been included in the Company’s operations since May 1, 2007, the date of the Harland Acquisition. Fees and expenses of $42.9 related to the Harland Acquisition were capitalized in the purchase price. The capitalized fees and expenses include $10.0 paid by M & F Worldwide to MacAndrews & Forbes Holdings Inc. (which, as of September 30, 2007, beneficially owned approximately 37.5% of the outstanding M & F Worldwide common stock) (‘‘Holdings’’) for services in sourcing, analyzing, negotiating and executing the Harland Acquisition (see Note 13). The Company reimbursed M & F Worldwide for that payment during the third quarter of 2007. The capitalized fees and expenses also include $3.0 paid by the Company to M & F Worldwide to reimburse it for professional fees paid relating to the Harland Acquisition. Acquisition-related liabilities of $19.5 on the accompanying consolidated balance sheet as of September 30, 2007 represent amounts to be paid to certain former Harland executives under employment contracts.

The Company and certain of its subsidiaries borrowed the following amounts on May 1, 2007 in order to fund the purchase price for Harland, to repay debt under its previously outstanding senior secured credit facilities, to repay its previously outstanding 11.75% Senior Notes, to repay Harland’s existing indebtedness and to pay fees and expenses (see Note 10):

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

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


Cash			$	23.8
Accounts receivable				84.4
Property, plant and equipment				129.0
Goodwill				995.4
Other intangible assets:
Customer relationships	$	667.3
Trademarks and tradenames		114.7
Patented technology		12.2
Software		50.2
Total other intangible assets				844.4
Other assets				160.3
Total assets acquired				2,237.3
Deferred revenues				79.0
Long-term debt				229.1
Deferred tax liabilities				281.4
Other liabilities				181.9
Net assets acquired			$	1,465.9

The above purchase price allocation is preliminary and the amount allocated to goodwill is subject to refinement as the Company finalizes the valuation of certain assets and liabilities. Goodwill in the amount of approximately $95.0 and intangible assets in the amount of approximately $107.0 related to Harland are deductible for tax purposes. The Company has not yet completed the allocation of goodwill to its segments.

As a result of the Harland Acquisition, the Company adopted a formal plan to terminate certain employees and exit duplicative facilities, which is subject to further refinement. The Company recorded $12.5 of severance and severance-related costs for the termination of certain Harland employees and $5.4 of costs for the closure of certain Harland facilities in the above purchase price allocation in accordance with the EITF 95-3. See Note 12 for additional disclosures regarding restructuring.

As part of the application of purchase accounting, inventory was increased by $4.6 due to a fair value adjustment. The amount of the inventory fair value adjustment is being expensed as additional non-cash cost of products sold as the fair-valued inventory is sold (of which $0.1 and $4.4 were expensed during the three and nine months ended September 30, 2007, respectively).

Also as part of the application of purchase accounting, deferred revenue was decreased by $13.9 due to a fair value adjustment. This non-cash fair value adjustment results in lower revenue being recognized over the related earnings period (of which $3.9 and $8.2 were reflected as reduced revenues during the three and nine months ended September 30, 2007, respectively). The Company expects that the substantial majority of the reduction in net revenues resulting from the deferred revenue fair value adjustment will be recognized during the twelve month period following the Harland Acquisition.

The unaudited financial information in the table below summarizes the results of operations of the Company, on a pro forma basis, as though the Harland Acquisition and related financing transactions had occurred as of the beginning of each of the periods presented. The unaudited pro

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

forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the Harland Acquisition and related financing transactions had taken place at the beginning of each of the periods presented, nor does it purport to represent results of operations for future periods.

In the pro forma information above, the results prior to the acquisition were adjusted to include the pro forma impact of: the adjustment of amortization of intangible assets and depreciation of fixed assets based on the preliminary purchase price allocation; the adjustment of interest expense reflecting the extinguishment of the Company’s and Harland’s former debt and the issuance of $2,415.0 of new debt; and to reflect the impact of income taxes with respect to the pro forma adjustments, utilizing an estimated effective tax rate of 39%. In the pro forma information above, the results prior to the acquisition were not adjusted for non-recurring employee retention bonuses, stock based compensation and other non-recurring merger related expenses incurred by Harland prior to the acquisition totaling $0.0 and $115.9 in the three and nine months ended September 30, 2007 results above, respectively.

The pro forma information above for the three months ended September 30, 2007 includes the impact of non-recurring fair value adjustments to inventory and deferred revenue resulting from the application of purchase accounting of $0.1 and $3.9, respectively.

The pro forma information above for the nine months ended September 30, 2007 includes the impact of the loss on early extinguishment of debt of $54.6; a commitment fee related to the financing transactions; the non-recurring fair value adjustments to inventory and deferred revenue resulting from the application of purchase accounting of $4.4 and $8.2, respectively; and non-recurring employee retention bonuses of $2.4.

The pro forma information above for the nine months ended September 30, 2006 includes the impact of non-recurring fair value adjustments to inventory of $1.3 resulting from the application of purchase accounting as a result of the purchase of Clarke American Corp. by M & F Worldwide on December 15, 2005.

The pro forma information also gives effect to certain identified cost savings as if they had been implemented in their entirety at the beginning of each period presented ($13.2 reflected in the three months ended September 30, 2007 and 2006; and $39.7 reflected in the nine months ended September 30, 2007 and 2006). These cost savings pertain to the termination of certain Harland employees and the closure of certain Harland facilities and were estimated pursuant to EITF 95-3. There can be no assurance that all of such cost savings will be accomplished during any particular period, or at all.

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

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

On August 15, 2007, the Company’s indirect wholly owned Irish subsidiary, Harland Financial Global Solutions, Inc. (‘‘HFGS Inc.’’), purchased certain intellectual property (the ‘‘Products’’) and operations related to software products developed by Peldec Decision Systems Ltd. (‘‘Peldec’’), an Israeli corporation, including related contracts, documents, permits and agreements, and the assumption of certain related liabilities and contractual obligations, for aggregate consideration of $30.0. Harland Financial Solutions, Inc. (‘‘HFS Inc.’’), a wholly owned subsidiary of the Company, had distributed the Products since August 2005 pursuant to a reseller agreement with Peldec.

Of the total consideration of $30.0, $14.0 was paid at closing, $6.0 is due on the first anniversary of the closing date, and $5.0 is due on each of the second and third anniversaries of the closing date. The time-based payments are treated as an incentive agreement and are being recorded as compensation expense ratably over the service period. Each time-based payment is subject to forfeiture if certain key employees terminate employment prior to such payment date for certain reasons. The time-based payments are also subject to acceleration in certain instances, including a change in control, as defined in the IP and Assets Purchase Agreement and related documents. A preliminary allocation of the purchase price above resulted in identified intangible assets of $7.2.

The pro forma effects on the results of operations for the Peldec assets purchase were not material and are not included in the pro forma information presented above.

The change in carrying amount of goodwill for the nine months ended September 30, 2007 is as follows:

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

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


			Gross Carrying Amount						Accumulated Amortization
	Useful Life (in years)		September 30, 2007			December 31, 2006			September 30, 2007			December 31, 2006
Amortized intangible assets:
Customer relationships		6 – 30		$	1,148.7		$	483.3		$	67.7		$	27.9
Trademarks and tradenames		5 – 15			11.8			11.0			1.3			0.6
Covenants not to compete		3			0.4			0.4			0.4			0.4
Software		2 – 10			59.3			2.0			6.0			1.0
Patented technology		4 – 10			12.2			—			0.5			—
					1,232.4			496.7			75.9			29.9
Indefinite lived intangible assets:
Trademarks and tradenames					196.9			84.1			—			—
Total other intangible assets				$	1,429.3		$	580.8		$	75.9		$	29.9

Amortization expense was $20.3 and $46.0 for the three and nine months ended September 30, 2007, respectively, and $7.1 and $21.4 for the three and nine months ended September 30, 2006, respectively.

The weighted average amortization period for all amortizable intangible assets recorded in connection with the Harland acquisition was 17.5 years as of May 1, 2007. The weighted average amortization period for each major class of these amortizable intangible assets as of May 1, 2007 was as follows: customer relationships – 18.5 years, trademarks and tradenames – 4.7 years, software – 7.6 years and patented technology – 9.9 years. Intangible assets acquired in the Peldec assets purchase have a weighted average amortization period of 8.5 years.

Estimated annual aggregate amortization expense for intangible assets through December 31, 2011 is as follows:

During the three months ended September 30, 2007, the Company continued to experience greater revenue attrition than expected for Alcott Routon operations of the Harland Clarke segment. As a result of this as well as management’s decision to change the business model the Company assessed whether a portion of the related acquired tradename and customer relationship intangible assets were impaired. An analysis of the sum of the forecasted undiscounted future cash flows based on current expectations indicated an impairment and the intangible assets were written down to their current estimated fair value. As a result, an impairment charge of $3.1 was recorded and included in selling, general and administrative expenses in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2007.

Subsequent to the completion of the Harland Acquisition on May 1, 2007, the Company reorganized its business along three reportable segments together with a corporate group for certain

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

support services. The reorganization aligned the Company’s operations on the basis of products, services and industry. The Company’s previously existing Financial Institution and Direct to Consumer segments were combined with Harland’s similar operations; this business segment now operates under the name of Harland Clarke and is referred to as the Harland Clarke segment. The Company also added two new reportable segments for business lines acquired in the Harland Acquisition: the Harland Financial Solutions segment and the Scantron segment. Management measures and evaluates the reportable segments based on operating income. The current segments and their principal activities consist of the following:

Prior period results in the tables below have been restated to conform to the business segment changes as described above. The Company has not yet completed the allocation of assets acquired from Harland to its segments. See Note 3 for additional disclosures regarding the Harland Acquisition.

Selected summarized financial information for the three months ended September 30, 2007 and 2006 was as follows:


	Harland Clarke			Harland Financial Solutions			Scantron			Corporate and Other				Total
Product revenues, net:
Three months ended September 30, 2007		$	331.5		$	16.4		$	19.3		$	—			$	367.2
Three months ended September 30, 2006			154.8			—			—			—				154.8
Service revenues, net:
Three months ended September 30, 2007		$	0.7		$	62.3		$	2.6		$	—			$	65.6
Three months ended September 30, 2006			0.5			—			—			—				0.5
Intersegment revenues:
Three months ended September 30, 2007		$	0.2		$	0.3		$	—		$	(0.5	)		$	—
Three months ended September 30, 2006			—			—			—			—				—
Operating income (loss):
Three months ended September 30, 2007		$	55.4		$	9.6		$	4.7		$	(5.0	)		$	64.7
Three months ended September 30, 2006			22.5			—			—			—				22.5
Depreciation and amortization:
Three months ended September 30, 2007		$	30.4		$	5.5		$	3.5		$	0.1			$	39.5
Three months ended September 30, 2006			13.5			—			—			—				13.5
Capital expenditures (excluding capital leases):
Three months ended September 30, 2007		$	4.0		$	2.6		$	0.5		$	—			$	7.1
Three months ended September 30, 2006			3.5			—			—			—				3.5

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

Selected summarized financial information for the nine months ended September 30, 2007 and 2006 was as follows:


	Harland Clarke			Harland Financial Solutions			Scantron			Corporate and Other				Total
Product revenues, net:
Nine months ended September 30, 2007		$	771.7		$	30.3		$	29.2		$	—			$	831.2
Nine months ended September 30, 2006			473.0			—			—			—				473.0
Service revenues, net:
Nine months ended September 30, 2007		$	1.3		$	100.4		$	4.1		$	—			$	105.8
Nine months ended September 30, 2006			1.4			—			—			—				1.4
Intersegment revenues:
Nine months ended September 30, 2007		$	0.3		$	0.4		$	—		$	(0.7	)		$	—
Nine months ended September 30, 2006			—			—			—			—				—
Operating income (loss):
Nine months ended September 30, 2007		$	122.8		$	13.5		$	1.6		$	(11.0	)		$	126.9
Nine months ended September 30, 2006			68.6			—			—			—				68.6
Depreciation and amortization:
Nine months ended September 30, 2007		$	68.8		$	11.8		$	6.1		$	0.1			$	86.8
Nine months ended September 30, 2006			40.7			—			—			—				40.7
Capital expenditures (excluding capital leases):
Nine months ended September 30, 2007		$	12.7		$	3.6		$	0.9		$	—			$	17.2
Nine months ended September 30, 2006			10.5			—			—			—				10.5

Total comprehensive income (loss) for the three and nine months ended September 30, 2007 and 2006 was as follows:


	Three Months Ended September 30,								Nine Months Ended September 30,
	2007				2006				2007				2006
Net income (loss)		$	7.5			$	7.3			$	(24.9	)		$	17.6
Other comprehensive income (loss):
Foreign currency translation adjustments			—				—				0.4				—
Changes in fair value of cash flow hedging instruments, net of taxes of $4.9, $0.8, $4.7 and $0.0			(7.6	)			(1.3	)			(7.2	)			—
Unrealized loss on investments, net of a negligible tax benefit			(0.1	)			—				(0.2	)			—
Comprehensive income (loss)		$	(0.2	)		$	6.0			$	(31.9	)		$	17.6

As a result of the Harland Acquisition, the Company currently sponsors unfunded postretirement defined benefit plans that cover certain salaried and nonsalaried employees who were formerly employees of Harland. One plan provides health care benefits and the other provides life insurance benefits. The medical plan is contributory and contributions are adjusted annually based on actual claims experience. For retirees who retired from Harland prior to December 31, 2002 with twenty or more years of service at December 31, 2000, the Company currently contributes approximately 50% of

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

the cost of providing the medical plan. For all other retirees, the Company’s intent is that the retirees provide the majority of the actual cost of providing the medical plan. The life insurance plan is noncontributory for those employees that retired from Harland by December 31, 2002.

The accrued postretirement benefit obligation as of May 1, 2007, the date of the Harland Acquisition, was $17.3. The Company expects to contribute $0.8 to the postretirement benefit plans during the period May 1, 2007 through December 31, 2007. The Company’s contributions to these postretirement plans during the period May 1, 2007 through September 30, 2007 were $0.4.

The Company records any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction between a seller and a customer, which may include, but is not limited to, sales, use, value added, and some excise taxes on a net basis in the accompanying consolidated statements of operations.

On January 1, 2007 the Company adopted the provisions of FASB Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109’’ (‘‘FIN 48’’), which prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The adoption of FIN 48 did not have a significant impact on the Company’s consolidated financial statements.

Unrecognized tax benefits at January 1, 2007 and September 30, 2007, which, if recognized in the future, would favorably impact the Company’s effective tax rate were not material. The Company records both accrued interest and penalties related to income tax matters in the provision for income taxes in the accompanying consolidated statements of operations. At January 1, 2007 and September 30, 2007, the Company had accrued immaterial amounts for the potential payment of penalties and interest.

The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company’s federal tax returns for the 2003 through 2006 tax years remain subject to examination. Recently, the Joint Committee has concluded its review of the 2001 and 2002 tax years which had no impact on the consolidated financial statements, and the Internal Revenue Service commenced its examination for the year 2005. The Company files in numerous state jurisdictions with varying statutes of limitations. In addition, open tax years related to foreign jurisdictions remain subject to examination but are not considered material.

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


	September 30, 2007				December 31, 2006
$480.0 Prior Credit Facilities, net of $1.8 unamortized original issue discount at December 31, 2006		$	—			$	423.2
11.75% Senior Notes due 2013			—				175.0
$1,900.0 Senior Secured Credit Facilities			1,795.5				—
Senior Floating Rate Notes due 2015			305.0				—
9.50% Senior Fixed Rate Notes due 2015			310.0				—
Capital lease obligations and other indebtedness			4.3				5.6
			2,414.8				603.8
Less: current maturities			(20.1	)			(46.6	)
Long-term debt, net of current maturities		$	2,394.7			$	557.2

In connection with the Harland Acquisition, 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 7.6% at September 30, 2007. As of September 30, 2007, there were no borrowings under the Revolver and there was $84.2 available for borrowing (giving effect to the issuance of $15.8 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.

The Credit Agreement has a commitment fee for the unused portion of the Revolver and for issued letters of credit of 0.50% and 2.88%, 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

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

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 secured leverage ratio for the benefit of lenders under the Revolver only. The Company has the right to prepay the Term Loan at any time without premium or penalty, subject to certain breakage costs, and the Company may also reduce any unutilized portion of the Revolver at any time, in minimum principal amounts set forth in the Credit Agreement. The Company is required to prepay the Term Loan with 50% of excess cash flow (as defined in the Credit Agreement, commencing with the fiscal year 2008, with certain reductions set forth in the Credit Agreement, based on achievement and maintenance of leverage ratios) and 100% of the net proceeds of certain issuances, offerings or placements of debt 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.

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 is required to ensure that, until no earlier than May 1, 2009, at least 40% of the aggregate principal amount of its long-term indebtedness bears 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 has entered into interest rate derivative arrangements described in ‘‘Interest Rate Hedges’’ below.

Additionally, in connection with the Harland Acquisition, 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

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

9.50%, payable on May 15 and November 15 of each year. The Floating Rate Notes bear interest at a rate per annum equal to the Applicable LIBOR Rate (as defined in the indenture governing the 2015 Senior Notes (the ‘‘Indenture’’)) plus 4.75%, payable on February 15, May 15, August 15 and November 15 of each year. The interest rate on the floating rate notes was 10.3% at September 30, 2007. 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 Indenture contains customary restrictive covenants, including, among other things, restrictions on the Company’s ability to incur additional debt, pay dividends and make distributions, make certain investments, repurchase stock, incur liens, enter into transactions with affiliates, enter into sale and lease back transactions, merge or consolidate and transfer or sell assets. The Company must offer to repurchase all of the 2015 Senior Notes upon the occurrence of a ‘‘change of control,’’ as defined in the Indenture, at a purchase price equal to 101% of their aggregate principal amount, plus accrued and unpaid interest. The Company must also offer to repurchase the 2015 Senior Notes with the proceeds from certain sales of assets, if it does not apply those proceeds within a specified time period after the sale, at a purchase price equal to 100% of their aggregate principal amount, plus accrued and unpaid interest.

In accordance with the deadlines and other provisions of a registration rights agreement that the Company executed in connection with the issuance of the 2015 Senior Notes, the Company filed a registration statement on June 13, 2007 registering an offer to exchange for publicly registered 2015 Senior Notes with substantially equivalent terms as those of the 2015 Senior Notes originally issued, which was declared effective by the Securities and Exchange Commission on June 20, 2007. The Company commenced an exchange offer on June 21, 2007 and closed the offer on August 3, 2007, with $614.5 of the total $615.0 principal amount of the 2015 Senior Notes having been exchanged.

Concurrent with the completion of M & F Worldwide’s acquisition of Clarke American Corp. (since renamed Harland Clarke Holdings) in December 2005, the Company, as Borrower, entered into senior secured credit facilities (the ‘‘Prior Credit Facilities’’), which provided for a revolving credit facility (the ‘‘Prior Revolver’’) in the amount of $40.0 maturing on December 15, 2010 and a $440.0 term loan maturing on December 15, 2011 (the ‘‘Prior Term Loan’’). The outstanding principal balance under the Prior Credit Facilities of $393.7 was repaid on May 1, 2007 in connection with the Harland Acquisition and related financing transactions, along with accrued interest through the date of repayment of $2.9 and prepayment penalties of $3.9. Portions of the Prior Revolver were available for the issuance of letters of credit and swing line loans. The Prior Credit Facilities had a commitment fee for the unused portion of the revolving credit facility and for issued letters of credit of 0.50% and 3.25%, respectively.

The Prior Term Loan had an aggregate principal amount at maturity of $440.0. The Company assumed $437.8 of net obligations from its issuance, net of original issue discount of 0.5%. The original issue discount was being amortized as non-cash interest expense over the life of the term loan facility using the effective interest method, and the unamortized amount of $1.5 was written off in the second quarter of 2007 upon repayment of the debt. The Prior Term Loan was required to be repaid in quarterly installments in annual amounts of $19.0 in 2007, $28.0 in 2008, $33.0 in 2009, $38.0 in 2010 and $280.5 in 2011. The Prior Term Loan also required that a portion of the Company’s excess cash flow be applied to prepay amounts borrowed thereunder. The amount of the excess cash flow payment, with respect to 2006, included in current maturities was $26.5 at December 31, 2006 and such amount was paid in February 2007. At the time of the excess cash flow payment, the Company wrote-off deferred financing fees of $0.6.

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

Loans under the Company’s Prior Credit Facilities bore, at the Company’s option, interest at:

Concurrent with the completion of M & F Worldwide’s acquisition of Clarke American Corp. (since renamed Harland Clarke Holdings) in December 2005, the Company issued $175.0 principal amount of 11.75% Senior Notes due December 15, 2013 (the ‘‘2013 Senior Notes’’). All of these notes were either repurchased in a tender offer that closed on May 3, 2007 or redeemed on June 4, 2007 for total consideration of $220.1, including prepayment premiums and consent payments totaling $37.3 and accrued interest of $7.8. The 2013 Senior Notes were to mature on December 15, 2013 and paid interest at a rate per annum of 11.75% on June 15 and December 15 of each year. The 2013 Senior Notes were unsecured and were subordinated to all of the Company’s secured indebtedness.

In connection with the extinguishment of the Company’s Prior Credit Facilities and the 2013 Senior Notes, the Company recorded a total loss on early extinguishment of debt of $54.6, consisting of the following: the $37.3 prepayment premiums and consent payments on the 2013 Senior Notes, the $3.9 prepayment penalty on the Prior Credit Facilities, a non-cash expense of $1.5 for the write-off of unamortized original discount on the Prior Credit Facilities and a non-cash expense of $11.9 for the write-off of unamortized deferred financing fees related to the 2013 Senior Notes and the Prior Credit Facilities.

Subsidiaries of the Company have outstanding capital lease obligations with principal balances totaling $4.3 and $4.6 at September 30, 2007 and December 31, 2006, respectively. These obligations have imputed interest rates ranging from 3.6% to 21.9% and have required payments, including interest, of $0.5 in the fourth quarter of 2007, $1.9 in 2008, $1.7 in 2009, and $0.3 in 2010. A subsidiary of the Company also had $0.5 and $1.0 outstanding under an information technology financing obligation at September 30, 2007 and December 31, 2006, respectively.

During February 2006, the Company entered into interest rate hedge transactions in the form of three-year interest rate swaps with a total notional amount of $150.0, which became effective on July 1, 2006 and are accounted for as cash flow hedges. The hedges were designed to swap the underlying variable rate for a fixed rate of 4.992%. The purpose of the hedge transactions was to limit the Company’s risk on a portion of its variable interest rate Prior Credit Facilities. On May 1, 2007, the 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. In accordance with SFAS No. 133, as amended and interpreted, the Company is amortizing the fair value of the derivative liability of $0.4 as of May 1, 2007 over the remaining life of the derivative contract using the straight-line method in interest expense in the consolidated statements of operations.

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

During June 2007, the Company entered into interest rate derivative transactions in the form of a two-year interest rate swap with a notional amount of $255.0 and a three-year interest rate swap with a notional amount of $255.0, which became effective on June 29, 2007 and are accounted for as cash flow hedges. The two-year hedge swaps the underlying variable rate for a fixed rate of 5.323% and the three-year hedge swaps the underlying variable rate for a fixed rate of 5.362%. The purpose of these hedge transactions is to limit the Company’s risk on a portion of its variable rate Term Loan and comply with the terms of the Credit Agreement.

During August 2007, the Company entered into an 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 and is accounted for as a cash flow hedge. The hedge swaps the underlying variable rate for a fixed rate of 4.997%. The purpose of this hedge transaction is to limit the Company’s risk on a portion of its variable rate Term Loan and comply with the terms of the Credit Agreement.

As of September 30, 2007 and December 31, 2006, the Company recorded a liability of $11.7 and an asset of $0.1, respectively, related to these derivative instruments in other liabilities and other assets in the accompanying consolidated balance sheets.

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 has undertaken 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. To the extent such guarantees were not so assumed, replaced or terminated at the closing of the acquisition of Clarke American Corp., at December 15, 2005, Honeywell had posted a letter of credit for the benefit of M & F Worldwide in an amount of $60.0 expiring on December 15, 2007 to secure its indemnification obligations covering the guarantees. The face amount of the letter of credit is subject to adjustment, based on the agreement of the parties, and was $27.0 at September 30, 2007. Since the Company believes the likelihood is remote that it will have to pay any amounts under such guarantees it has not recorded any liability in the accompanying financial statements.

Various legal proceedings, claims and investigations are pending against the Company, including those relating to commercial transactions, product liability, environmental, safety and health 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.

Prior to the Harland Acquisition, the Company developed a restructuring plan for its checks and related products business, which is now contained in the Harland Clarke segment, to streamline and

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

redesign the manufacturing plant and contact center network in order to take advantage of high-capacity technology and economies of scale, to redefine sales territories and consolidate sales divisions, and to restructure the segment’s corporate staff.

During the year ended December 31, 2006, the Company established $3.3 in reserves with respect to the checks and related products business related to the closure of two production facilities and a reduction in force of the segment’s corporate staff. In connection with the facilities closures, the Company sold $0.5 of assets in January 2007 and recognized an insignificant gain.

During the period January 1, 2007 through April 30, 2007, the Company established $1.5 in reserves with respect to the checks and related products business related to the closure of one contact center and one printing plant. These closures will be completed in 2007 with a total expected expenditure of approximately $2.0, net of an estimated gain from the planned sale of a facility.

During the second quarter of 2007, as a result of the Harland Acquisition, the Company adopted a plan to restructure its business, focusing on improving operating margins through consolidating facilities and reducing duplicative selling, general and administrative expenses, executive and shared services costs. The Company’s planned initiatives primarily include the following:

As discussed in Note 3, the Company recorded $12.5 of severance and severance-related costs for the termination of certain Harland employees and $5.4 of costs for the closure of certain Harland facilities in purchase accounting in accordance with EITF 95-3. In addition to these restructuring liabilities recorded in purchase accounting, during the three and nine months ended September 30, 2007 the Company expensed $1.6 and $2.4, respectively, net of adjustments, for severance and severance-related costs for the termination of certain of the Company’s historical employees and $0.3 and $1.2, respectively, of costs for the closure of certain of the Company’s historical facilities.

Of the liabilities recorded in purchase accounting, $9.3 relates to the Harland Clarke segment, $7.7 relates to the Harland Financial Solutions segment and $0.9 relates to the Corporate segment. All of the restructuring costs expensed during the three and nine months ended September 30, 2007 relate to the Harland Clarke segment.

With respect to the restructuring costs totaling $3.6 that were expensed subsequent to the Harland Acquisition, the Company expects to complete the planned facilities closures and employee terminations by April 2008. The Company expects to spend approximately $1.5 for the closure of certain pre-Harland Acquisition facilities, and approximately $2.6 for the termination of certain pre-Harland Acquisition employees.

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

The following details the components of the Company’s restructuring accruals for the nine months ended September 30, 2007 and 2006:


	Beginning Balance			Established in Harland Acquisition Purchase Accounting			Expensed			Paid in Cash				Ending Balance
Nine months ended September 30, 2007:
Severance and severance-related		$	1.7		$	12.5		$	3.6		$	(12.9	)		$	4.9
Facilities closures			1.0			5.4			0.7			(1.4	)			5.7
Other			—			—			0.6			(0.5	)			0.1
Total		$	2.7		$	17.9		$	4.9		$	(14.8	)		$	10.7
Nine months ended September 30, 2006:
Severance and severance-related		$	1.8		$	—		$	1.8		$	(1.5	)		$	2.1
Facilities closures			1.6			—			0.1			(0.6	)			1.1
Total		$	3.4		$	—		$	1.9		$	(2.1	)		$	3.2

Restructuring accruals are reflected in other current liabilities and other liabilities in the Company’s consolidated balance sheets. The Company expects to pay the remaining severance through December 2007 and the remaining facilities closure costs and other costs through February 2010.

In addition to the amounts disclosed in the table above, the Company also incurred other costs related to the facility closures, including inventory write-offs, training, hiring, relocation and travel of $0.2 and $0.4 during the three and nine months ended September 30, 2007, respectively and $0.1 and $0.4 during the three and nine months ended September 30, 2006, respectively.

In accordance with SEC Staff Accounting Bulletin 79, ‘‘Accounting for Expenses or Liabilities Paid by Principal Stockholder(s),’’ the Company expensed $0.7 and $1.5 during the three and nine months ended September 30, 2007, respectively, for services provided to the Company by M & F Worldwide. This amount is reflected in selling, general and administrative expenses and accrued expenses. Such expenses during the three and nine months ended September 30, 2006 were not significant.

During the nine months ended September 30, 2007, the Company paid a cash dividend in the amount of $1.8 to M & F Worldwide to cover certain public company related expenses.

M & F Worldwide paid $10.0 in June 2007 to MacAndrews & Forbes Holdings Inc. for its service in sourcing, analyzing, negotiating and executing the Harland Acquisition. As discussed in Note 3, the Company reimbursed M & F Worldwide for that payment during the third quarter of 2007 and has included this fee in the purchase price for the Harland Acquisition. As also discussed in Note 3 above, the Company paid $3.0 to M & F Worldwide during the nine months ended September 30, 2007 to reimburse it for professional fees paid by M & F Worldwide relating to the Harland Acquisition.

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

The following discussion regarding the Company’s financial condition and results of operations for the three and nine months ended September 30, 2007 and September 30, 2006 should be read in connection with the more detailed financial information contained in the Company’s consolidated financial statements and their notes included elsewhere in this quarterly report.

Harland Clarke Holdings Corp. (‘‘Harland Clarke Holdings’’ and, together with its subsidiaries, the ‘‘Company’’) is a holding company that conducts its operations through its direct and indirect wholly owned subsidiaries and was incorporated in Delaware on October 19, 2005. On December 15, 2005, CA Investment Corp., an indirect wholly owned operating subsidiary of M & F Worldwide Corp. (‘‘M & F Worldwide’’) purchased 100% of the capital stock of Novar USA Inc. (‘‘Novar’’) and was renamed ’’Clarke American Corp.’’ Clarke American Corp. is 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 a subsidiary of the Company was merged with and into Harland, with Harland continuing after the merger as the surviving corporation and as a wholly owned subsidiary of the Company (the ‘‘Harland Acquisition’’). After the closing of the Harland Acquisition, the Company changed its name on May 2, 2007 from Clarke American Corp. to Harland Clarke Holdings Corp.

As a result of the Harland Acquisition, the Company reorganized its business and corporate structure along three business segments, Harland Clarke (which consists of the combined check business and related products and services of Clarke American Corp. and Harland), Harland Financial Solutions and Scantron.

On December 19, 2006, M & F Worldwide entered into an agreement and plan of merger (the ‘‘Merger Agreement’’) with Harland, under which a wholly owned subsidiary of M & F Worldwide would merge with and into Harland, with Harland continuing after the merger as the surviving corporation and as a wholly owned subsidiary of the Company. The closing of the Harland Acquisition and the related financing transactions described below occurred on May 1, 2007. The cash consideration paid was $52.75 per share, or a total of approximately $1,423.0 million, for the outstanding equity of Harland in accordance with the Merger Agreement. Subsequent to the completion of the Harland Acquisition, the Company was renamed Harland Clarke Holdings Corp. on May 2, 2007.

To fund the purchase price in the Harland Acquisition, to refinance the Company’s and Harland’s prior existing indebtedness, and to pay the fees and expenses for the Harland Acquisition and the related financings:

The Harland Acquisition has greatly increased the Company’s revenues, the related cost of revenues and selling, general and administrative expenses. As a result of the application of purchase accounting under Statement of Financial Accounting Standards No. 141, ‘‘Business Combinations,’’ the Company’s depreciation and amortization expense has also increased significantly.

Having completed the Harland Acquisition, the Company is focused on improving operating margins by reducing selling general and administrative expenses, shared services costs and cost of sales.

This section 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, 2006.

There was no material change to the Company’s Critical Accounting Policies and Estimates included in the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2007 as filed on August 9, 2007 with the U.S. Securities and Exchange Commission (‘‘SEC’’) and is available on their website at www.sec.gov.

In September 2006, the Financial Accounting Standards Board (‘‘FASB’’) issued SFAS No. 157, ‘‘Fair Value Measurement.’’ SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, but does not expand the use of fair value to any new circumstance. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the anticipated impact of SFAS No. 157 on its consolidated results of operations and financial position.

Subsequent to the completion of the Harland Acquisition on May 1, 2007, the Company reorganized its business along three reportable segments together with a corporate group for certain support services. The reorganization aligns the Company’s operations on the basis of products, services and industry. The Company’s previously existing Financial Institution and Direct to Consumer segments were combined with Harland’s similar operations; this business segment now operates under

the name of Harland Clarke and is referred to as the Harland Clarke segment. The Company also added two new reportable segments for business lines acquired in the Harland Acquisition: the Harland Financial Solutions segment and the Scantron segment. Management measures and evaluates the reportable segments based on operating income. Prior period results in the tables below have been restated to conform to the business segment changes.

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

The operating results for the three months ended September 30, 2007, as reflected in the accompanying consolidated statements of operations and described below, include the acquired Harland operations from May 1, 2007, the date of the Harland Acquisition.

Net revenues increased by $277.5 million in the 2007 period as compared to the 2006 period, primarily as a result of the Harland Acquisition which accounted for $263.4 million of the increase.

Net revenues from the Harland Clarke segment increased by $177.1 million to $332.4 million in the 2007 period from $155.3 million in the 2006 period, primarily as a result of the Harland Acquisition which accounted for $163.1 million of the increase. The remaining $14.0 million of the increase was primarily due to an increase in revenues from a large client and higher revenues per unit, partially offset by a decline in units.

Net revenues from the Harland Clarke, Harland Financial Solutions and Scantron segments include reductions of $0.2 million, $3.1 million and $0.5 million, respectively, for a fair value adjustment to deferred revenues recorded in the purchase accounting for the Harland Acquisition. The fair value adjustment is a one-time reduction in deferred revenues for these segments attributable to the purchase accounting for the Harland Acquisition. Net revenues will continue to be affected by this adjustment until all acquired deferred revenue is recognized in the consolidated statement of operations. The Company expects that the substantial majority of the reduction in net revenues resulting from the deferred revenue fair value adjustment will be recognized during the twelve month period following the Harland Acquisition.

Cost of revenues increased by $163.8 million in the 2007 period as compared to the 2006 period, primarily as a result of the Harland Acquisition which accounted for $158.1 million of the increase.

Cost of revenues from the Harland Clarke segment increased by $119.3 million to $215.3 million in the 2007 period from $96.0 million in the 2006 period, primarily as a result of the Harland Acquisition which accounted for $113.7 million of the increase. The remaining $5.6 million of the increase was primarily due to increased delivery expenses, partially offset by cost reductions and lower operating expenses resulting from a facility closure during the second quarter of 2007. Cost of revenues as a percentage of revenues for the Harland Clarke segment increased to 64.8% in the 2007 period as compared to 61.8% in the 2006 period, primarily related to the depreciation and amortization of fair value adjustments recorded in the purchase accounting for the Harland Acquisition.

Cost of revenues as a percentage of revenues for the Harland Financial Solutions and Scantron segments were 43.9% and 47.0%, respectively, in the 2007 period. Cost of revenues in the 2007 period for the Scantron segment includes $0.1 million for a fair value adjustment to inventory recorded in the purchase accounting for the Harland Acquisition, which will not recur.

Selling, general and administrative expenses increased by $70.5 million in the 2007 period as compared to the 2006 period, primarily as a result of the Harland Acquisition which accounted for $66.8 million of the increase.

Selling, general and administrative expenses for the Harland Clarke segment increased by $23.8 million to $59.6 million in the 2007 period from $35.8 million in the 2006 period, primarily as a result of the Harland Acquisition, which accounted for $20.1 million of the increase. The remaining $3.7 million of the increase resulted primarily from $3.1 million of impairment adjustments to intangible assets (see Note 5 to the consolidated financial statements) and various other expenses related to integration activities, partially offset by cost reductions. Selling, general and administrative expenses as a percentage of revenues for the Harland Clarke segment were 17.9% in the 2007 period as compared to 23.1% in the 2006 period.

Selling, general and administrative expenses were $34.7 million and $7.0 million for the 2007 period for the Harland Financial Solutions and Scantron segments, respectively, and relate to operations acquired in the Harland Acquisition.

Corporate selling, general and administrative expenses of $5.0 million in the 2007 period relate to corporate costs resulting from the increased size of the business subsequent to the Harland Acquisition.

The Company recorded $2.0 million of restructuring costs, net of adjustments, for the Harland Clarke segment in the 2007 period related primarily to the closure of a printing plant and a contact center. The Company recorded $1.0 million of restructuring costs for the Harland Clarke segment in the 2006 period related to changes in the senior leadership structure and other costs related to reductions in workforce.

Interest income was $2.0 million in the 2007 period as compared to a nominal amount in the 2006 period. The increase in interest income was due to higher cash and cash equivalents balances in the 2007 period as compared to the 2006 period. The higher cash balances were primarily due to increased cash and cash equivalents on hand subsequent to the closing of the Harland Acquisition resulting from acquisition related financing transactions and cash provided by operating activities.

Interest expense was $52.6 million in the 2007 period as compared to $15.4 million in the 2006 period. The increase in interest expense was primarily due to higher amounts of long-term debt outstanding as a result of the financing transactions completed in connection with the Harland Acquisition.

Other income (expense), net was $0.1 million in the 2007 period as compared to a nominal amount in the 2006 period. These amounts primarily relate to non-recurring miscellaneous income.

The Company’s effective tax rate was a provision of 47.2% in the 2007 period and a benefit of 2.8% in the 2006 period. The change is primarily due to the effects of changes in state tax rates on deferred tax balances recorded in the 2006 period and incremental state and local taxes recorded in the 2007 period.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

The operating results for the nine months ended September 30, 2007, as reflected in the accompanying consolidated statements of operations and described below, include the acquired Harland operations from May 1, 2007, the date of the Harland Acquisition.

Net revenues increased by $462.6 million in the 2007 period as compared to the 2006 period, primarily as a result of the Harland Acquisition which occurred on May 1, 2007 and accounted for $438.1 million of the increase.

Net revenues from the Harland Clarke segment increased by $298.9 million to $773.3 million in the 2007 period from $474.4 million in the 2006 period, primarily as a result of the Harland

Acquisition which accounted for $274.4 million of the increase. The remaining $24.5 million of the increase was primarily due to higher revenues per unit and an increase in revenues from a large client, partially offset by a decline in units.

Net revenues from the Harland Clarke, Harland Financial Solutions and Scantron segments include reductions of $0.5 million, $6.4 million and $1.3 million, respectively, for a fair value adjustment to deferred revenues recorded in the purchase accounting for the Harland Acquisition. The fair value adjustment is a one-time reduction in deferred revenues for these segments attributable to the purchase accounting for the Harland Acquisition. Net revenues will continue to be affected by this adjustment until all acquired deferred revenue is recognized in the consolidated statement of operations. The Company expects that the substantial majority of the reduction in net revenues resulting from the deferred revenue fair value adjustment will be recognized during the twelve month period following the Harland Acquisition.

Cost of revenues increased by $279.0 million in the 2007 period as compared to the 2006 period, primarily as a result of the Harland Acquisition which occurred on May 1, 2007 and accounted for $269.6 million of the increase.

Cost of revenues for the Harland Clarke segment increased by $200.6 million to $494.0 million in the 2007 period from $293.4 million in the 2006 period, primarily as a result of the Harland Acquisition which accounted for $191.2 million of the increase. The remaining $9.4 million of the increase was primarily due to increased delivery expenses, partially offset by cost reductions and a decrease in non-cash amortization expenses related to fair value adjustments to assets recorded as part of the acquisition of Clarke American Corp. by M & F Worldwide on December 15, 2005. Cost of revenues in the 2006 period includes $1.3 million for a fair value adjustment to inventory recorded in the purchase accounting for the acquisition of Clarke American Corp. which did not recur in the 2007 period. Cost of revenues in the 2007 period includes $1.4 million for a fair value adjustment to inventory recorded in the purchase accounting for the Harland Acquisition, which will not recur. Cost of revenues as a percentage of revenues for the Harland Clarke segment increased to 63.9% in the 2007 period as compared to 61.8% in the 2006 period, primarily related to the depreciation and amortization of fair value adjustments recorded in the purchase accounting for the Harland Acquisition.

Cost of revenues as a percentage of revenues for the Harland Financial Solutions and Scantron segments were 45.0% and 60.4%, respectively, in the 2007 period. Cost of revenues in the 2007 period for the Scantron segment includes $3.0 million for a fair value adjustment to inventory recorded in the purchase accounting for the Harland Acquisition, which will not recur.

Selling, general and administrative expenses increased by $122.3 million in the 2007 period as compared to the 2006 period, primarily as a result of the Harland Acquisition which occurred on May 1, 2007 and accounted for $116.2 million of the increase.

Selling, general and administrative expenses for the Harland Clarke segment increased by $41.1 million to $151.6 million in the 2007 period from $110.5 million in the 2006 period, primarily as a result of the Harland Acquisition, which accounted for $35.0 million of the increase. The remaining $6.1 million of the increase was primarily due to $5.1 million of incremental bonus expense associated with various incentive plans resulting from improved performance of the business and $3.1 million of impairment adjustments to intangible assets (see Note 5 to the consolidated financial statements), partially offset by cost reductions. Selling, general and administrative expenses as a percentage of revenues for the Harland Clarke segment was 19.6% in the 2007 period as compared to 23.3% in the 2006 period.

Selling, general and administrative expenses were $58.6 million and $11.6 million for the 2007 period for the Harland Financial Solutions and Scantron segments, respectively, and relate to operations acquired in the Harland Acquisition which occurred on May 1, 2007.

Corporate selling, general and administrative expenses of $11.0 million in the 2007 period relate to additional corporate infrastructure costs resulting from the increased size of the business subsequent to the Harland Acquisition and $2.4 million of non-recurring retention bonus expenses.

The Company recorded $4.9 million of restructuring costs, net of adjustments, for the Harland Clarke segment in the 2007 period related primarily to this initiative, as well as a restructuring plan implemented prior to the Harland Acquisition, which combined will result in the closure of two printing plants and a contact center, as well as costs to redefine sales territories and consolidate sales divisions. The Company recorded $1.9 million of restructuring costs for the Harland Clarke segment in the 2006 period related to changes in the senior leadership structure and other costs related to reductions in workforce.

Interest income was $3.3 million in the 2007 period as compared to a nominal amount in the 2006 period. The increase in interest income was due to higher cash and cash equivalents balances in the 2007 period as compared to the 2006 period. The higher cash balances were primarily due to increased cash and cash equivalents on hand subsequent to the closing of the Harland Acquisition resulting from acquisition related financing transactions and cash provided by operating activities.

Interest expense was $113.1 million in the 2007 period as compared to $44.6 million in the 2006 period. The increase in interest expense was primarily due to higher amounts of long-term debt outstanding subsequent to May 1, 2007 as a result of the financing transactions completed in connection with the Harland Acquisition.

The loss on early extinguishment of debt of $54.6 million in the 2007 period relates to the refinancing transactions completed in connection with the Harland Acquisition. This loss consists of payments of $37.3 million for prepayment premiums and consent payments on the 2013 Senior Notes, a $3.9 million prepayment penalty on the Company’s prior credit facilities, a non-cash expense of $1.5 million for the write-off of unamortized original discount on the prior credit facilities, and a non-cash expense of $11.9 million for the write-off of unamortized deferred financing fees related to the 2013 Senior Notes and the prior credit facilities (see Note 10 to the consolidated financial statements).

Other income (expense), net was $0.2 million in the 2007 period as compared to a nominal amount in the 2006 period. These amounts primarily relate to non-recurring miscellaneous income.

The Company’s effective tax rate was a benefit of 33.2% in the 2007 period and a provision of 26.7% in the 2006 period. The change is primarily due to the effects of changes in state tax rates on deferred tax balances recorded in the 2006 period and incremental state and local taxes recorded in the 2007 period.

The Company’s net cash provided by operating activities during the nine months ended September 30, 2007 was $130.0 million as compared to $67.3 million during the nine months ended September 30, 2006. The increase in net cash provided by operating activities of $62.7 million was primarily due to an increase in cash flow from operations, partially offset by a smaller net cash inflow from changes in working capital in the 2007 period as compared to the 2006 period.

The Company’s net cash used in investing activities was $1,454.0 million during the nine months ended September 30, 2007 as compared to $11.2 million during the nine months ended September 30, 2006. The increase in cash used in investing activities was primarily due to the Harland Acquisition and Peldec assets purchase.

The Company’s net cash provided by financing activities was $1,480.8 million during the nine months ended September 30, 2007 as compared to net cash used in financing activities of $33.8 million during the nine months ended September 30, 2006. The financing activities during the nine months ended September 30, 2007 included borrowings to fund the Harland Acquisition, refinance the outstanding 2013 Senior Notes and Harland and Clarke American Corp. credit agreements and pay related fees and expenses. The financing activities during the nine months ended September 30, 2006 were primarily scheduled repayments of credit agreements and other borrowings and the funding of the net change in cash overdrafts.

Estimated interest requirements for the Company’s outstanding long-term debt decreased from $1,477.5 million as of June 30, 2007 to $1,376.5 million as of September 30, 2007 primarily due to the

impact of a decline in interest rates on the Company’s floating rate debt. Other contractual obligations and commitments have not changed materially since June 30, 2007. See the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2007 with respect to the Company’s other contractual obligations and commitments.

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

The Company anticipates that its future capital expenditures and upfront contract acquisition payments will be largely consistent with the combined historical levels of such payments for the Company and Harland. The Company expects that payments related to restructuring programs will increase in the next twelve months to support the achievement of planned cost savings.

The Company believes that its cash and cash equivalents, borrowings available under its credit agreement (as further discussed in Note 10 to the Company’s consolidated financial statements included in this quarterly report) 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.

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 and future borrowings may not be available to it under its credit facility in an amount sufficient to enable it to repay its debt or to fund its other liquidity needs. As of September 30, 2007, the Company had $84.2 million of additional availability under its revolving credit facility (after giving effect to the issuance of $15.8 million of letters of credit). The Company may also use its revolving credit facility to fund potential future acquisitions. If future cash flow from operations and other capital resources is insufficient to pay the Company’s obligations as they mature or to fund its liquidity

needs, the Company may be forced to reduce or delay business activities and capital expenditures, sell assets, obtain additional debt or equity capital or restructure or refinance all or a portion of its debt on or before maturity. The Company may not be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all. In addition, the terms of the Company’s existing and future indebtedness may limit its ability to pursue any of these alternatives.

This quarterly report on Form 10-Q for the quarter ended September 30, 2007, 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, 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. 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 quarterly report on Form 10-Q for the quarter ended June 30, 2007 under the heading ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates.’’

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

The Company encourages investors to read carefully the risk factors described in the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2007 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.

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

At September 30, 2007, the Company had $1,795.5 million of term loans outstanding under its credit agreement, $15.8 million of letters of credit outstanding under its revolving credit facility,

$305.0 million of floating rate senior notes and $310.0 million of 9.50% fixed rate senior notes. All of these outstanding loans bear interest at variable rates, with the exception of the $310.0 million of fixed rate senior notes. Accordingly, the Company is subject to risk due to changes in interest rates. The Company believes that a hypothetical 10% increase or decrease in interest rates applicable to its floating rate debt outstanding at September 30, 2007 would have resulted in an increase or decrease in its interest expense for the three months ended September 30, 2007 of approximately $2.8 million.

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 2006 and 2007 in the form of swaps with notional amounts totaling $910.0 million as further described in the notes to the consolidated financial statements included elsewhere in this quarterly report. These derivatives swap the underlying variable rates for fixed rates ranging from 4.992% to 5.362%.

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

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

There was no material development in legal proceedings during the three months ended September 30, 2007.

There was no material change to the Company’s risk factors as disclosed in the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2007, as filed on August 9, 2007 with the SEC and is available on their website at www.sec.gov.

There was no event of default upon senior securities during the three months ended September 30, 2007.

There was no matter submitted to a vote of security holders during the nine months ended September 30, 2007.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Delaware (State or other jurisdiction of incorporation or organization)			84-1696500 (I.R.S. Employer Identification No.)
2939 Miller Road, Decatur, GA (Address of principal executive offices)			30035 (Zip code)


Buildings			30 – 40 years
Machinery and equipment			3 – 15 years
Leasehold improvements			1 – 20 years
Computer software			3 – 5 years
Furniture, fixtures and transportation equipment			3 – 8 years


	Pro Forma
	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007				2006
Net revenues		$	432.7		$	411.9		$	1,284.3			$	1,263.9
Operating income			73.2			53.8			71.5				168.7
Net income (loss)			12.7			3.8			(95.5	)			10.0
Depreciation and amortization (excluding amortization of deferred financing fees)			39.6			40.9			119.6				124.0


	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


	Transition report pursuant to section 13 or 15(d) of the securities exchange act of 1934


Part I.	Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations	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	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	37
Part II.	Other Information
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Submission of Matters to a Vote of Security Holders	38
Item 5.	Other Information	38
Item 6.	Exhibits	38


	September 30, 2007			December 31, 2006
Finished goods		$	6.5		$	6.1
Work-in-progress			6.9			5.3
Raw materials			16.4			2.2
		$	29.8		$	13.6


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


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


	•	Scantron segment — Provides data collection and testing and assessment products and services sold primarily to educational and commercial customers. This segment operates in the United States and Canada.


	•	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


1.	Description of the Business and Basis of Presentation


2.	Summary of Significant Accounting Policies


3.	Acquisitions


11.	Commitments and Contingencies


	•	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.


	•	consolidation of various facilities in the Harland Clarke segment;


	•	workforce rationalization in sales and marketing, information technology, production support, executive, finance, human resources, legal and other support functions; and


	•	consolidation of certain redundant outsourcing and other professional services, such as consulting.


	•	The Company entered into a $1,800.0 million senior secured term loan facility and a $100.0 million revolving credit facility; and


	•	The Company issued $305.0 million aggregate principal amount of Senior Floating Rate Notes due 2015 and $310.0 million aggregate principal amount of 9.50% Senior Fixed Rate Notes due 2015.


$ in millions	Three Months Ended September 30, 2007				Three Months Ended September 30, 2006
Consolidated Net Revenues:
Harland Clarke Segment		$	332.4			$	155.3
Harland Financial Solutions Segment			79.0				—
Scantron Segment			21.9				—
Eliminations			(0.5	)			—
Total		$	432.8			$	155.3


$ in millions	Nine Months Ended September 30, 2007				Nine Months Ended September 30, 2006
Consolidated Net Revenues:
Harland Clarke Segment		$	773.3			$	474.4
Harland Financial Solutions Segment			131.1				—
Scantron Segment			33.3				—
Eliminations			(0.7	)			—
Total		$	937.0			$	474.4


	•	Capital Expenditures. The Company’s capital expenditures are primarily related to infrastructure investments, internally developed software, cost reduction programs, marketing initiatives and other projects that support future revenue growth. During the nine months ended September 30, 2007 and 2006, the Company incurred $17.2 million and $10.5 million of capital expenditures and $0.3 million and $0.7 million of capitalized interest, respectively. Capital expenditures for the nine months ended September 30, 2007 include those relating to the acquired Harland operations since May 1, 2007, the date of the Harland Acquisition.


	•	Upfront Contract Payments. During the nine months ended September 30, 2007 and 2006, the Company made $11.1 million and $10.6 million of upfront contract payments to its clients, respectively. Payments for the nine months ended September 30, 2007 include those relating to the acquired Harland operations since May 1, 2007, the date of the Harland Acquisition.


	•	Restructuring/Cost Reductions. Restructuring accruals and purchase accounting reserves have been established for anticipated severance payments, costs related to facilities closures and other expenses related to the planned restructuring or consolidation of some of the Company’s historical operations, as well as related to the Harland Acquisition. During the nine months ended September 30, 2007 and 2006, the Company made $14.8 million and $2.1 million of payments for restructuring, respectively. Payments for the nine months ended September 30, 2007 include those relating to the acquired Harland operations since May 1, 2007, the date of the Harland Acquisition.


	•	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;


	•	the maturity of the paper check industry, including a faster than anticipated decline in check usage due to increasing use of alternative payment methods and other factors;


	•	adverse changes among the large financial institution clients on which we depend, resulting in decreased revenues;


	•	our ability to successfully integrate Harland into our business and manage future acquisitions;


	•	our ability to retain our and Harland’s historical clients after the Harland Acquisition;


	•	our ability to implement any or all components of our business strategy or realize all of the expected cost savings or synergies;


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

Three months ending December 31, 2007

Year ending December 31, 2008

Year ending December 31, 2009

Year ending December 31, 2010

Year ending December 31, 2011