UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarterly period ending September 30, 1997
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or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________________ to _______________________
Commission file number: 1-7945
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DELUXE CORPORATION
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(Exact name of registrant as specified in its charter)
MINNESOTA 41-0216800
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3680 Victoria St. N., St. Paul, Minnesota 55126-2966
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(Address of principal executive offices) (Zip code)
(612) 483-7111
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes__X__ No____
The number of shares outstanding of registrant's common stock, par value $1.00
per share, at November 4, 1997 was 81,352,126.
<PAGE>
Item I. Financial Statements PART I. FINANCIAL INFORMATION
DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, 1997 December 31,
(Unaudited) 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 109,227 $ 142,571
Marketable securities 11,541
Trade accounts receivable 159,568 145,475
Inventories:
Raw material 21,826 20,194
Semi-finished goods 10,433 14,549
Finished goods 26,033 21,295
Supplies 10,068 11,503
Deferred advertising 13,622 14,222
Prepaid income taxes 31,543
Deferred income taxes 31,808 31,413
Prepaid expenses and other current assets 49,527 48,302
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Total current assets 475,196 449,524
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LONG-TERM INVESTMENTS 54,587 59,138
PROPERTY, PLANT, AND EQUIPMENT
Land 41,004 42,563
Buildings and improvements 298,792 307,018
Machinery and equipment 550,696 553,955
Construction in progress 2,680 1,382
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Total 893,172 904,918
Less accumulated depreciation 478,299 458,060
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Property, plant, and equipment - net 414,873 446,858
INTANGIBLES
Cost in excess of net assets acquired - net 62,305 139,593
Other intangible assets - net 97,879 81,327
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Total intangibles 160,184 220,920
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TOTAL ASSETS $ 1,104,840 $ 1,176,440
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 70,267 $ 63,810
Accrued liabilities:
Wages, including vacation pay 66,049 56,471
Employee profit sharing and pension 30,323 52,879
Accrued rebates 36,391 33,975
Other 173,047 110,625
Short-term debt 17,011
Long-term debt due within one year 6,262 6,606
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Total current liabilities 382,339 341,377
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LONG-TERM DEBT 106,918 108,937
DEFERRED INCOME TAXES 13,510 13,210
SHAREHOLDERS' EQUITY
Common shares - $1 par value (authorized 500,000,000 shares; issued: 81,171,452) 81,171 82,056
Additional paid-in capital
Retained earnings 522,065 631,151
Unearned Compensation (703) (937)
Net Unrealized Change - Marketable Securities 11
Cumulative translation adjustment (471) 646
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Total shareholders' equity 602,073 712,916
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,104,840 $ 1,176,440
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------- ------------------------------
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
NET SALES $ 443,041 $ 460,520 $ 1,349,864 $ 1,415,188
OPERATING EXPENSES
Cost of sales 200,022 209,670 597,599 671,875
Selling, general and administrative 205,179 176,409 555,890 530,211
Goodwill impairment charge 82,893 82,893
Employee profit sharing and pension 10,085 13,690 33,353 42,343
Employee bonus and stock purchase discount 2,701 4,762 9,758 14,851
------------ ------------ ------------ ------------
Total 500,880 404,531 1,279,493 1,259,280
------------ ------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS (57,839) 55,989 70,371 155,908
OTHER (EXPENSE) INCOME
Other (expense) income (44,399) 4,031 (35,294) 6,939
Interest expense (2,152) (1,994) (7,023) (7,300)
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (104,390) 58,026 28,054 155,547
(BENEFIT) PROVISION FOR INCOME TAXES (36,875) 24,502 16,687 65,046
------------ ------------ ------------ ------------
NET (LOSS) INCOME ($ 67,515) $ 33,524 $ 11,367 $ 90,501
============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING 81,900,587 82,331,984 82,031,089 82,374,954
NET (LOSS) INCOME PER COMMON SHARE ($ 0.82) $ 0.41 $ 0.14 $ 1.10
CASH DIVIDENDS PER COMMON SHARE $ 0.37 $ 0.37 $ 1.11 $ 1.11
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1997 and 1996
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 11,367 $ 90,501
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 55,895 50,652
Goodwill Impairment Charge 82,893
Amortization of intangibles 22,010 29,227
Stock purchase discount 5,049 5,723
Net gain on sales of businesses (535) (1,881)
Changes in assets and liabilities, net of effects from acquisitions, discontinued
operations, and sales of businesses:
Trade accounts receivable (11,907) (8,532)
Inventories (1,363) 9,727
Accounts payable 6,298 (6,572)
Other assets and liabilities 28,694 31,532
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Net cash provided by continuing operations 198,401 200,377
Net cash used by discontinued operations (174) (1,784)
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Net cash provided by operating activities 198,227 198,593
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of marketable securities with maturities of more than 3 months 6,250
Net change in marketable securities with maturities of 3 months or less (11,500)
Purchases of capital assets (68,578) (62,393)
Payments for acquisitions, net of cash acquired (10,600) (10,947)
Net proceeds from sales of businesses and discontinued operations, net of cash sold 2,198 26,317
Other 6,157 11,913
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Net cash used in investing activities (82,323) (28,860)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (5,380) (9,051)
Payments to retire common stock (53,589) (30,791)
Proceeds from issuing stock under employee plans 17,757 22,145
Net payments on short-term debt (16,783) (36,252)
Cash dividends paid to shareholders (91,253) (91,547)
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Net cash used in financing activities (149,248) (145,496)
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (33,344) 24,237
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 142,571 13,668
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 109,227 $ 37,905
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated balance sheet as of September 30, 1997, the
consolidated statements of income for the quarters ended September 30,
1997 and 1996 and the nine months ended September 30, 1997 and 1996, and
the consolidated statements of cash flows for the nine months ended
September 30, 1997 and 1996 are unaudited. In the opinion of management,
all adjustments necessary for a fair presentation of such financial
statements are included. Other than those discussed in the notes below,
such adjustments consist only of normal recurring items. Interim results
are not necessarily indicative of results for a full year.
The financial statements and notes are presented in accordance with
instructions for Form 10-Q, and do not contain certain information
included in the Company's annual financial statements and notes.
2. As of September 30, 1997, the Company had uncommitted bank lines of
credit of $180.0 million available at variable interest rates. As of
that date, nothing was drawn on those lines. The Company also had a $150
million committed line of credit available for borrowing and as support
for commercial paper. As of September 30, 1997, the Company had no
commercial paper outstanding and no indebtedness was outstanding under
its committed lines of credit. Additionally, the Company had a shelf
registration in place for the issuance of up to $300 million in
medium-term notes. Such notes could be used for general corporate
purposes, including working capital, capital expenditures, possible
acquisitions and repayment or repurchase of outstanding indebtedness and
other securities of the Company. As of September 30, 1997, no such notes
were issued or outstanding.
3. During the first quarter of 1996, the Company recorded pretax charges of
$34.8 million related to the closing of 21 of its check printing plants
and the movement of PaperDirect's operations from New Jersey to existing
company facilities in Colorado and Minnesota. The $34.8 million of
charges consisted of employee severance costs and expected losses on the
disposition of plant and equipment. Expenses of $32 million were
included in cost of goods sold and $2.8 million were included in
selling, general and administrative expense. As of September 30, 1997,
15 of the 21 plants had been fully or partially closed.
During the third quarter of 1997, the Company recorded pretax
restructuring charges of $24.5 million. The restructuring charges
include some additional costs for the closing of the 21 plants discussed
above as well as costs associated with the continued consolidation of
the Company's core businesses. The restructuring charges consisted of
employee severance costs of $21.6 million and $2.9 million for expected
losses on the disposition of plant and equipment. Expenses of $7.7
million were included in cost of goods sold, $13.9 million were
included in selling, general and administrative and $2.9 million were
included in other expense.
The Company's balance sheets reflect restructuring accruals of $41.9
million and $29.1 million as of September 30, 1997 and December 31,
1996, respectively, for employee severance costs, and $6.2 million and
$3.8 million as of September 30, 1997 and December 31, 1996,
respectively, for estimated losses on asset dispositions. The majority
of the severance costs are expected to be disbursed in the remainder of
1997 and 1998 with cash generated from the Company's operations.
4. In February, 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128,
EARNINGS PER SHARE, effective for interim and annual periods ending
after December 15, 1997. In June, 1997, the FASB issued SFAS No. 130,
REPORTING COMPREHENSIVE INCOME and SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, both effective for
interim and annual periods beginning after December 15, 1997. The effect
of these statements is not expected to materially change the Company's
reported operating results.
5. During December 1996, the Company announced its plans to divest three of
the business units in its Deluxe Direct segment -- Nelco, Inc.,
PaperDirect, Inc. and the Social Expressions unit of Current, Inc. In
accordance with SFAS 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, the Company recorded
a charge of $82.2 million in the third quarter of 1997 to properly state
the carrying value of these three businesses at their fair value less
costs to sell. The charge consisted of $70.5 million of goodwill and
$11.7 million of tangible long term assets. The resultant carrying value
of these businesses at September 30, 1997 was $89.7 million. Together,
these business units recorded sales of approximately $47.8 and $60.0
million and contributed net losses (including the charge) of
approximately $77.6 and $6.2 million in the third quarters of 1997 and
1996, respectively. These business units recorded aggregate sales of
approximately $151.0 and $168.6 million and contributed net losses
(including the charge) of approximately $76.9 and $17.0 million in the
first nine months of 1997 and 1996, respectively. In addition, the
Company recorded a goodwill impairment charge of $12.4 million primarily
related to the Deluxe Electronic Payment Systems unit.
6. In July, 1997 the Company sold the assets of the check printing business
of PaperDirect (Europe) Limited (f/k/a/ Deluxe (UK) Limited) and in
October, 1997, the Company sold the assets of Nelco, Inc. In July, 1997,
the Company acquired the assets of Fusion Marketing Group, Inc. The
effect of these sales and this acquisition did not have a material
impact on the operating results of the Company.
<PAGE>
7. During the third quarter of 1997, the Company recorded a $40 million
pretax charge to reserve for an adverse judgment against one of the
Company's subsidiaries. The charge will also reserve for potential legal
and other related costs. Although management believed it was prudent to
reserve for the action at this time, the Company believes the verdict is
erroneous and plans to pursue the remedies available to seek its
reversal.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations Company Profile
The Company has organized its many business units into three reporting segments,
Deluxe Financial Services, Deluxe Direct and Deluxe Electronic Payment Systems.
Through Deluxe Financial Services, the Company provides check printing, direct
marketing assistance, business forms and related services to financial
institutions and their customers in the United States, Canada and the United
Kingdom and payment systems protection services, including check authorization,
account verification, and collection services to financial institutions and
retailers. Through Deluxe Direct, the Company provides specialty papers to small
businesses; tax forms and electronic tax filing services to tax preparers; and
direct mail greeting cards, gift wrap, and related products to households.
Through Deluxe Electronic Payment Systems, the Company provides electronic funds
transfer and other software services to financial institutions and electronic
benefit transfer services to state governments.
Results of Operations - Quarter and Nine Months Ended September 30, 1997
Compared to the Quarter and Nine Months Ended September 30, 1996
Net sales were $443.0 million for the third quarter of 1997, down 3.8% from the
third quarter of 1996, when sales were $460.5 million. Net sales were $1,349.9
million for the first nine months of 1997, down 4.6% from 1996, when sales for
the first six months were $1,415.2 million. Deluxe Financial Services' revenue
increased 1.7% over the third quarter of 1996 and 3.2% over the first nine
months of 1996 due to increased volume and acquisitions in the payment
protection business and increased volume in the check printing business,
partially offset by competitive price discounting in the check printing
business. Deluxe Direct's revenue decreased 37.1% from the third quarter of 1996
and 41.0% from the first nine months of 1996, respectively, due primarily to
divestitures and lower volume at the direct mail businesses as a result of
reductions in solicitation mailings. Deluxe Electronic Payment Systems' revenue
increased 19.0% over the third quarter of 1996 and 10.3% over the first nine
months of 1996 due to increased volume in a variety of product lines.
Cost of sales decreased $9.6 million, or 4.6%, from the third quarter and $74.3
million, or 11.1%, from the first nine months of 1996. Included in the 1997
third quarter results was a charge of $7.7 million related to the continued
consolidation of check printing plants. Included in 1996 first quarter results
was a $32.0 million restructuring charge primarily related to the consolidation
of check printing plants. Deluxe Financial Services' costs of sales were flat in
the third quarter of 1997 compared to the third quarter of 1996 reflecting
production efficiencies gained at the business forms business as well as the
impact of acquisitions. Deluxe Financial Services' cost of sales was
significantly lower for the first nine months of 1997 compared to the first nine
months of 1996 primarily due to the 1996 restructuring charge and the production
efficiencies gained in 1997. Deluxe Direct's cost of sales decreased
significantly for both the third quarter and the first nine months of 1997 due
to divestitures and reduced sales. Deluxe Electronic Payment Systems' cost of
sales increased slightly due to increased sales volume, offset somewhat by
improved cost controls.
Selling, general and administrative expense increased $28.8 million or 16.3% in
the third quarter of 1997 over the third quarter of 1996 and $25.7 million, or
4.8% over the first nine months of 1996. Included in 1997 third quarter results
was a charge totaling $39.6 million related to check printing plant
consolidation, job reductions and the write-down of impaired assets. Included in
the 1996 first quarter results was a $2.8 million charge primarily related to
the consolidation of check printing plants. Deluxe Financial Services' selling,
general and administrative expense was up slightly for the third quarter of 1997
over the third quarter of 1996 and increased significantly for the first nine
months of 1997 compared to the first nine months of 1996 due primarily to
acquisitions and growth in the payment protection and direct marketing
businesses. Deluxe Direct's selling, general and administrative expense
decreased significantly over 1996 for both the third quarter and the nine month
period due to divestitures and the suspension of amortization and depreciation
of the businesses held for sale. Deluxe Electronic Payment Systems' selling,
general and administrative expense for the quarter and the nine month period
ended September 30, 1997 was flat as compared to the comparable periods in 1996.
The net loss for the third quarter of 1997 was $67.5 million, compared to net
income of $33.5 million for the third quarter of 1996. Net income for the nine
months ended September 30, 1997 was $11.4 million compared to $90.5 million in
1996. The significant decreases in 1997 were primarily related to the special
charges discussed above as well as an $82.9 million pretax charge for the
write-down of goodwill, relating primarily to businesses held for sale.
Additionally, the Company recorded non-operating charges of $49.8 million
primarily related to a reserve for an unfavorable legal decision in October,
1997, related potential legal and other costs and other non-operating items.
Although management believed it was prudent to reserve for the action at this
time, the Company believes the verdict is erroneous and plans to pursue the
remedies available to seek its reversal.
Financial Condition - Liquidity
Cash provided by operations was $198.2 million for the first nine months of
1997, compared with $198.6 million for the first nine months of 1996. Cash from
operations represents the Company's primary source of working capital for
financing capital expenditures and paying cash dividends. The Company's working
capital on September 30, 1997 was $92.9 million compared to $108.1 million on
December 31, 1996. The Company's current ratio on September 30, 1997 was 1.2 to
1 compared to 1.3 to 1 on December 31, 1996.
<PAGE>
Financial Condition - Capital Resources
Purchases of capital assets totaled $68.6 million in the first nine months of
1997 compared to $62.4 million during the comparable period one year ago. As of
September 30, 1997, the Company had uncommitted bank lines of credit of $180.0
million available at variable interest rates. As of that date, nothing was drawn
on those lines. The Company also had a $150 million committed line of credit
available for borrowing and as support for commercial paper as of such date. As
of September 30, 1997, the Company had no commercial paper outstanding and no
indebtedness under its committed line of credit. Additionally, the Company had a
shelf registration in place for the issuance of up to $300 million in
medium-term notes. Such notes could be used for general corporate purposes,
including working capital, capital expenditures, possible acquisitions and
repayment or repurchase of outstanding indebtedness and other securities of the
Company. As of September 30, 1997, no such notes were issued or outstanding.
Cash dividends totaled $91.3 million in the first nine months of 1997 compared
to $91.5 million in the first nine months of 1996.
PART II - OTHER INFORMATION
Item 5. Other Information
Mellon Litigation
In October, 1997, the jury in the action Mellon Bank, N.A. v. Deluxe Data
Systems, Inc. and Deluxe Corporation pending in the Western District of
Pennsylvania rendered a $30 million verdict against Deluxe Data Systems, Inc.
(Deluxe Electronic Payment Systems, Inc. ("DEPS")). No liability was found
against Deluxe Corporation. In rendering the verdict, the jury found that DEPS
(i) breached an agreement to team with Mellon to submit a bid for the Southern
Alliance of States electronic benefits transfer project and, if successful, to
implement the project, (ii) breached a fiduciary owed to Mellon,
(iii)intentionally interfered with Mellon's prospective contractual relations
and (iv) engaged in unfair competition against Mellon. The Company and DEPS
believe that the verdict is erroneous and plan to pursue the remedies available
to seek its reversal.
RISK FACTORS AND CAUTIONARY STATEMENTS
When used in this Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases and in oral
statements made with the approval of an authorized executive officer, the words
or phrases "should result," "are expected to," "will continue," "will
approximate," "is anticipated," "estimate," "project" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are
necessarily subject to certain risks and uncertainties, including those
discussed below, that could cause actual results to differ materially from the
Company's historical experience and its present expectations or projections.
Caution should be taken not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The factors listed below could
affect the Company's financial performance and could cause the Company's actual
results for future periods to differ from any opinions or statements expressed
with respect thereto. Such differences could be material and adverse.
The Company will not undertake and specifically declines any obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances occurring after
the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
Earnings Estimates. From time to time, the authorized representatives of the
Company may make predictions or forecasts regarding the Company's future
results, including estimated earnings or earnings from operations. Any forecast,
including the Company's current statement that its 1997 adjusted earnings from
operations will approximate $2.15 per share, regarding the Company's future
performance reflects various assumptions. These assumptions are subject to
significant uncertainties and, as a matter of course, many of them will prove to
be incorrect. Further, the achievement of any forecast depends on numerous
factors (including those described in this discussion), many of which are beyond
the Company's control. As a result, there can be no assurance that the Company's
performance will be consistent with any management forecasts and the variation
from such forecasts may be material and adverse. Investors are cautioned not to
base their entire analysis of the Company's business and prospects upon isolated
predictions, but instead are encouraged to utilize the entire available mix of
historical and forward-looking information made available by the Company and
other information affecting the Company and its products when evaluating the
Company's prospective results of operations.
In addition, authorized representatives of the Company may occasionally comment
on the perceived reasonableness of published reports by independent analysts
regarding the Company's projected future performance. Such comments should not
be interpreted as an endorsement or adoption of any given estimate or range of
estimates or the assumptions and methodologies upon which such estimates are
based. Generally speaking, the Company does not make public its own internal
projections, budgets or estimates. Undue reliance should not be placed on any
comments regarding the conformity, or lack thereof, of any independent estimates
with the Company's own present expectations regarding its future results of
operations.
<PAGE>
The methodologies employed by the Company in arriving at its own internal
projections and the approaches taken by independent analysts in making their
estimates are likely different in many significant respects. Although the
Company may presently perceive a given estimate to be reasonable, changes in the
Company's business, market conditions or the general economic climate may have
varying effects on the results obtained through the use of differing analyses
and assumptions. The Company expressly disclaims any continuing responsibility
to advise analysts or the public markets of its view regarding the current
accuracy of the published estimates of outside analysts. Persons relying on such
estimates should pursue their own independent investigation and analysis of
their accuracy and the reasonableness of the assumptions on which they are
based.
Sales of Businesses. The Company has indicated its continuing intention to
divest the remaining businesses comprising its Deluxe Direct segment, but it has
not reached agreement with any prospective buyers nor has it received what it
considers an acceptable bid for any of such companies. As a result, the
possibility exists that the Company will not identify a suitable buyer or
receive an acceptable price for the entities to be divested. A failure to
identify an appropriate buyer and/or reach an acceptable purchase price could
materially delay the anticipated sales and/or could result in further write-offs
by the Company, some of which could be significant. In addition, a delay in the
execution of these sales could cause the Company to incur continued operating
losses from the businesses sought to be divested or make unanticipated
investments in those businesses, and would postpone the receipt and use by the
Company of the proceeds expected to be generated thereby.
Other Dispositions. In connection with its ongoing restructuring, the Company
may also consider divesting or discontinuing operating or using other business
units and assets. Any such divestiture of discontinuance could result in
write-offs by the Company, some or all of which could be significant.
Effect of Financial Institution Consolidation. There is an ongoing trend towards
increasing consolidation within the banking industry that has resulted in
increased competition and pressure on check prices. This concentration greatly
increases the importance to the Company of retaining its major customers and
attracting significant additional customers in an increasingly competitive
environment. Although the Company devotes considerable efforts towards the
development of a competitively priced, high quality suite of products for the
financial services and retail industries, there can be no assurance that
significant customers will not be lost nor that any such loss can be
counterbalanced through the addition of new customers or by expanded sales to
the Company's remaining customers.
Raw Material Postage Costs and Delivery Costs. Increases in the price of paper
and the cost of postage can adversely affect the profitability of the Company's
printing and mail order businesses. Events such as the recent UPS strike can
also adversely impact the Company's margins by imposing higher delivery costs.
Competitive pressures and overall trends in the marketplace may have the effect
of inhibiting the Company's ability to reflect increased costs of sales in
the retail prices of its products.
Timing and Amount of Anticipated Cost Reductions. With regard to the results of
the Company's ongoing cost reduction efforts, there can be no assurance that the
anticipated cost savings will be fully realized or will be achieved within the
time periods expected. The implementation of the printing plant closures is, in
large part, dependent upon the successful development of the software needed to
streamline the check ordering process and redistribute the resultant order flow
among the Company's remaining printing plants. Because of the complexities
inherent in the development of software products as sophisticated as those
needed to accomplish this task, there can be no assurance that unanticipated
development or conversion delays will not occur or that the delays currently
being experienced by the Company in connection with such development and
conversion will not continue beyond the Company's current expectations. Any such
occurrence (or the continuation of any such delay beyond current expectations)
could adversely affect the planned consolidation of the Company's printing
facilities and delay or reduce the amount of the anticipated expense reductions.
In addition, the achievement of the expected level of cost savings is dependent
upon the successful execution of a variety of other cost reduction strategies.
These additional efforts include the consolidation of the Company's purchasing
process, the disposition of unprofitable or low-margin businesses and other
efforts. The optimum means of actualizing many of these strategies is, in some
cases, still being evaluated by the Company. Unexpected delays, complicating
factors and other hindrances are common in these types of endeavors and can
arise from a variety of sources, some of which are likely to have been
unanticipated. A failure to timely achieve one or more of the Company's primary
cost reduction objectives could materially reduce the benefit to the Company of
its cost savings programs and strategies or substantially delay the full
realization of their expected benefits.
Further, there can be no assurance that increased expenses attributable to other
areas of the Company's operations or to increases in raw material, labor,
equipment or other costs will not offset some or all of the savings expected to
be achieved through the cost reduction efforts. Competitive pressures and other
market factors may also require the Company to share the benefit of some or all
of any savings with its customers or otherwise adversely affect the prices it
receives or the market for its products. As a result, even if the expected cost
reductions are fully achieved in a timely manner, such reductions are not likely
to be fully reflected by commensurate gains in the Company's net income, cash
position, dividend rate or the price of its Common Stock.
<PAGE>
Competition. Although the Company believes it is the leading check printer in
the United States, it faces considerable competition from other smaller
companies in both its traditional marketing channel to financial institutions
and from direct mail marketers of checks. From time to time, one or more of
these competitors reduce the price of their products in an attempt to gain
market share. The corresponding pricing pressure placed on the Company has
resulted in reduced profit margins in the past and there can be no assurance
that similar pressures will not be exerted in the future.
Check printing is, and is expected to continue to be, an essential part of the
Company's business and the principal source of its operating income for at least
the next several years. A wide variety of alternative payment delivery systems,
including credit cards, debit cards, smart cards, ATM machines, direct deposit
and bill paying services, home banking applications and Internet-based retail
services, are in various stages of maturity or development and additional
systems will likely be introduced. Although the Company expects that there will
continue to be a substantial market for checks for the foreseeable future, the
rate and the extent to which these alternative systems will achieve consumer
acceptance and replace checks cannot be predicted. A surge in the popularity of
any of these alternative payment methods could have a material, adverse effect
on the demand for the Company's primary products and its account verification,
payment protection and collection services. The creation of these alternative
payment methodologies has also resulted in an increased interest in transaction
processing as a source of revenue, which has led to increased competition for
the Company's transaction processing businesses.
Seasonality. A significant portion of the revenues and earnings of the Company's
Deluxe Direct segment is dependent upon its results of operations during the
fourth quarter. As a result, the results reported for this division during the
first three quarters of any given year are not necessarily indicative of those
which may be expected for the entire year.
HCL Joint Venture. There can be no assurance that the software and transaction
processing products and software development services proposed to be offered by
the Company's joint venture with HCL Corporation of New Delhi, India will
achieve market acceptance in either the United States or India. In addition, the
Company has no operational experience in India and only limited international
exposure to date. Operations in foreign countries are subject to numerous
potential obstacles including, among other things, cultural differences,
political unrest, export controls, governmental interference or regulation (both
domestic and foreign), currency fluctuations, personnel issues and varying
competitive conditions. There can be no assurance that one or more of these
factors, or additional causes or influences, many of which are likely to have
been unanticipated and beyond the ability of the Company to control, will not
operate to inhibit the success of the venture. As a result, there can be no
assurance that the HCL joint venture will generate significant revenues or
profits or provide an adequate return on any investment by the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
Exhibit No. Description Method of Filing
----------- ----------- ----------------
12.3 Computation of Ratio of Filed herewith
Earnings to Fixed Charges
27.3 Financial Data Schedule Filed herewith
(b) The registrant did not, and was not required to, file any
reports on form 8-K during the quarter for which this report is
filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELUXE CORPORATION
------------------
(Registrant)
Date November 14, 1997 /s/ J.A. Blanchard III
-------------------- ---------------------------------------------
J.A. Blanchard III, President
and Chief Executive Officer
(Principal Executive Officer)
Date November 14, 1997 /s/ Thomas W. VanHimbergen
-------------------- ---------------------------------------------
Thomas W. VanHimbergen, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
12.3 Computation of Ratio of Earnings to Fixed
Changes
27.3 Financial Data Schedule
Exhibit 12.3
DELUXE CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Nine Months Years Ended December 31,
Ended --------------------------------------------------------------------
September 30, 1997 1996 1995 1994 1993 1992 1991
------------------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
Income from Continuing Operations
before Income Taxes $28,054 $118,765 $169,319 $246,706 $235,913 $324,783 $295,493
Interest expense
(excluding capitalized interest) 7,023 10,649 13,099 9,733 10,070 15,371 8,220
Portion of rent expense under
long-term operating leases
representative of an interest factor 10,419 13,467 14,761 13,554 13,259 12,923 11,807
Amortization of debt expense 91 121 84 84 84 84 71
------- -------- -------- -------- -------- -------- --------
TOTAL EARNINGS $45,587 $143,002 $197,262 $270,077 $259,326 $353,161 $315,591
Fixed charges
Interest Expense
(including capitalized interest) $ 7,551 $ 11,978 $ 14,714 $ 10,492 $ 10,555 $ 15,824 $ 8,990
Portion of rent expense under
long-term operating leases
representative of an interest factor 10,419 13,467 14,761 13,554 13,259 12,923 11,807
Amortization of debt expense 91 121 84 84 84 84 71
------- -------- -------- -------- -------- -------- --------
TOTAL FIXED CHARGES $18,061 $ 25,566 $ 29,559 $ 24,130 $ 23,898 $ 28,831 $ 20,868
RATIO OF EARNINGS
TO FIXED CHARGES: 2.5 5.6 6.7 11.2 10.9 12.2 15.1
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUN-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 109,227
<SECURITIES> 11,541
<RECEIVABLES> 159,568
<ALLOWANCES> 0
<INVENTORY> 58,292
<CURRENT-ASSETS> 475,196
<PP&E> 893,172
<DEPRECIATION> 478,299
<TOTAL-ASSETS> 1,104,840
<CURRENT-LIABILITIES> 382,339
<BONDS> 0
0
0
<COMMON> 81,171
<OTHER-SE> 520,902
<TOTAL-LIABILITY-AND-EQUITY> 1,104,840
<SALES> 443,041
<TOTAL-REVENUES> 0
<CGS> 200,022
<TOTAL-COSTS> 500,880
<OTHER-EXPENSES> 44,399
<LOSS-PROVISION> (36,875)
<INTEREST-EXPENSE> 2,152
<INCOME-PRETAX> (104,390)
<INCOME-TAX> (36,875)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (67,515)
<EPS-PRIMARY> (.82)
<EPS-DILUTED> 0
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