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 June 30, 1998
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
DELUXE CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-021-6800
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
3680 Victoria St. N., St. Paul, Minnesota 55126-2966
(Address of principal executive offices) (Zip Code)
(612) 483-7111
(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 August 3,1998 was 80,781,464.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
PART I. FINANCIAL INFORMATION
DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, 1998 December 31,
(Unaudited) 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 126,607 $ 171,438
Marketable Securities 18,432 8,021
Trade accounts receivable 152,778 151,201
Inventories:
Raw material 20,369 22,950
Semi-finished goods 9,196 9,132
Finished goods 22,873 23,768
Supplies 10,822 11,146
Deferred advertising 10,825 15,763
Deferred income taxes 50,277 50,345
Prepaid expenses and other current assets 49,714 48,849
----------- -----------
Total current assets 471,893 512,613
----------- -----------
LONG-TERM INVESMENTS 49,465 52,910
PROPERTY, PLANT, AND EQUIPMENT
Land 38,015 38,832
Buildings and improvements 279,045 288,270
Machinery and equipment 556,864 562,637
Construction in progress 6,443 346
----------- -----------
Total 880,367 890,085
Less accumulated depreciation 474,848 475,077
----------- -----------
Property, plant and equipment - net 405,519 415,008
INTANGIBLES
Cost in excess of net assets acquired - net 54,431 54,435
Internal use software - net 104,542 74,584
Other intangible assets - net 36,598 38,814
----------- -----------
Total intangibles 195,571 167,833
----------- -----------
TOTAL ASSETS $ 1,122,448 $ 1,148,364
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITES
Accounts payable $ 70,047 $ 73,516
Accrued liabilities:
Wages, including vacation pay 69,521 62,513
Employee profit sharing and pension 15,858 40,517
Accrued income taxes 23,516 31,960
Accrued rebates 37,919 36,708
Other 126,376 129,263
Long term debt due within one year 6,294 7,078
----------- -----------
Total current liabilities 349,531 381,555
----------- -----------
LONG-TERM DEBT 110,406 109,986
DEFFERRED INCOME TAXES 6,024 6,040
OTHER LONG-TERM LIABILITIES 39,881 40,535
SHAREHOLDERS' EQUITY
Common shares - $1 par value (authorized 500,000,000 shares;
issued: 1998 - 80,716,008 shares; 1997 - 81,325,925 shares) 80,716 81,326
Additional paid-in capital 3,384 4,758
Retained earnings 533,113 525,302
Unearned compensation (342) (649)
Net unrealized gain - marketable securities 137
Cumulative translation adjustment (402) (489)
----------- -----------
Total shareholders' equity 616,606 610,248
----------- -----------
TOTAL LIABILITIES AND SHARHOLDERS' EQUITY $ 1,122,448 $ 1,148,364
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands except per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
QUARTERS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 474,791 $ 463,750 $ 963,762 $ 953,854
OPERATING EXPENSES
Cost of sales 214,962 214,854 438,574 442,049
Selling, general and administrative 191,803 186,828 385,644 383,595
--------- --------- --------- ---------
Total 406,765 401,682 824,218 825,644
--------- --------- --------- ---------
INCOME FROM OPERATIONS 68,026 62,068 139,544 128,210
OTHER INCOME (EXPENSE)
Other income 4,880 3,474 8,192 9,106
Interest expense (1,935) (2,487) (4,158) (4,872)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 70,971 63,055 143,578 132,444
PROVISION FOR INCOME TAXES 28,716 25,598 57,751 53,562
--------- --------- --------- ---------
NET INCOME $ 42,255 $ 37,457 $ 85,827 $ 78,882
========= ========= ========= =========
NET INCOME PER COMMON SHARE $ 0.52 $ 0.46 $ 1.06 $ 0.96
- Basic and Diluted
CASH DIVIDENDS PER COMMON SHARE $ 0.37 $ 0.37 $ 0.74 $ 0.74
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 85,827 $ 78,882
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 28,860 29,026
Amortization of intangibles 10,780 14,132
Stock purchase discount 3,074 3,406
Net loss (gain) on sales of businesses 1,964 (1,814)
Changes in assets and liabilities, net of effects from discontinued
operations and sales of businesses:
Trade accounts receivable (4,285) (12,077)
Inventories (1,261) 4,160
Accounts payable (3,263) (373)
Other assets and liabilities (21,621) (5,103)
--------- ---------
Net cash provided by continuing operations 100,075 110,239
Net cash used by discontinued operations (192)
--------- ---------
Net cash provided by operating activities 100,075 110,047
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of marketable securities with maturities of more
than 3 months 11,692
Purchases of marketable securities with maturities of more than 3
months (22,066) (8,000)
Net change in marketable securities with maturities of three months or
less (4,960)
Purchases of capital assets (60,117) (39,821)
Net proceeds from sales of businesses and discontinued operations, net
of cash sold 1,784 1,797
Other 10,166 1,571
--------- ---------
Net cash used in investing activities (58,541) (49,413)
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on short-term debt (16,783)
Proceeds from long-term debt 292
Payments on long-term debt (3,483) (3,494)
Payments to retire common stock (36,743) (11,322)
Proceeds from issuing stock under employee plans 13,620 11,414
Cash dividends paid to shareholders (60,051) (60,822)
--------- ---------
Net cash used in financing activities (86,365) (81,007)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (44,831) (20,373)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 171,438 142,571
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 126,607 $ 122,198
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated balance sheet as of June 30, 1998 and the consolidated
statements of income and the consolidated statements of cash flows for the
quarters and the six month periods ended June 30, 1998 and 1997 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 consolidated 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 consolidated annual financial statements and
notes.
2. As of June 30, 1998, the Company had uncommitted bank lines of credit of
$170 million available at variable interest rates. As of that date, there
were no amounts 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 June 30, 1998, the Company had no commercial paper
outstanding and no indebtedness outstanding 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 June
30, 1998, no such notes were issued or outstanding.
3. During April 1998, the Company announced that it had reached an agreement
to sell PaperDirect, Inc. ("PaperDirect") and the Social Expressions
component ("Social Expressions") of Current, Inc. In July 1998, the Company
announced that this agreement had been terminated. These businesses are
still currently held for sale. In May 1998, the Company announced that it
is holding its Card Services business for sale. These businesses, along
with the international component of Deluxe Electronic Payment Systems,
Inc., are accounted for in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." These businesses
contributed revenue of approximately $52 million and $51 million in the
second quarters of 1998 and 1997, respectively, and revenue of $128 million
and $121 million during the first six months of 1998 and 1997,
respectively. They contributed no material operating profit or loss during
these same periods. The direct mail check printing business of Current will
remain with Deluxe.
4. Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which
requires disclosure of comprehensive income and its components in the
Company's financial statements. The Company's total comprehensive income
for the quarters ended June 30, 1998 and 1997 was $42.4 million and $37.7
million, respectively, and $86.0 million and $78.5 million for the first
six months of 1998 and 1997, respectively. The Company's comprehensive
income consists of net income, unrealized holding gains and losses on
securities and foreign currency translation adjustments.
5. During 1998, the Company will adopt Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which requires the disclosure of financial and descriptive
information about the reportable operating segments of the Company. The
Company will also adopt Statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" during 1998, which revises employers' disclosures about pensions
and other postretirement benefit plans. The Company does not anticipate
that the effect of these pronouncements will have a material impact on
reported operating results.
6. The following table reflects the calculation of basic and diluted earnings
per share (unaudited dollars and shares outstanding in thousands, except
per share amounts).
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
---------------------- -------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income per share-basic:
Net income $42,255 $37,457 $85,827 $78,882
Weighted average shares outstanding 80,668 82,142 80,847 82,130
Net income per share-basic $ .52 $ .46 $ 1.06 $ .96
======= ======= ======= =======
Net income per share-diluted:
Net income $42,255 $37,457 $85,827 $78,882
Weighted average shares outstanding 80,668 82,142 80,847 82,130
Dilutive impact of options 184 104 188 99
Shares contingently issuable 11 13 7 2
------- ------- ------- -------
Weighted average shares and potential
dilutive shares outstanding 80,863 82,259 81,042 82,231
------- ------- ------- -------
Net income per share-diluted $ .52 $ .46 $ 1.06 $ .96
======= ======= ======= =======
</TABLE>
5
<PAGE>
7. The Company's balance sheets reflect restructuring accruals of $27.4
million and $39.5 million as of June 30, 1998 and December 31, 1997,
respectively, for employee severance costs, and $6.6 million and $3.7
million as of June 30, 1998 and December 31, 1997, respectively, for
estimated losses on asset dispositions. The majority of the severance costs
are expected to be paid in 1998 and early 1999 with cash generated from the
Company's operations.
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 Electronic Payment Systems and Deluxe Direct.
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 and Canada and payment
systems protection services, including check authorization, account verification
and collection services to financial institutions and retailers. 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. Through Deluxe Direct, the Company
provides specialty papers to small businesses and direct mail greeting cards,
gift-wrap and related products to households.
Results of Operations - Quarter and Six Months Ended June 30, 1998 Compared to
the Quarter and Six Months Ended June 30, 1997
Net sales were $475 million for the second quarter of 1998, up 2.4% from the
second quarter of 1997 when sales were $464 million. Net sales were $964 million
for the first six months of 1998, flat over the comparable period in 1997 when
sales for the first six months were $954 million. Deluxe Financial Services'
revenue for the six months was flat versus the first six months of 1997.
Quarterly revenues increased slightly over the second quarter of 1997 due to
increased volume in the payment protection businesses, increased prices in the
check printing business, and revenue from a new practice of charging check
printing customers for placing orders via telephone as opposed to electronic
channels. These increases were offset by decreased volume in the check printing
and database marketing businesses. Deluxe Electronic Payment Systems' revenue
increased 23% over both the second quarter and the first six months of 1997 due
to increased volume in a variety of product lines. Deluxe Direct's revenue
decreased approximately 8.5% from the second quarter of 1997 and 5.8% from the
first six months of 1997, due primarily to divestitures.
Cost of sales was flat versus both the second quarter and first half of 1997.
Deluxe Financial Services' cost of sales decreased approximately 3% compared to
the second quarter and first half of 1997 due primarily to decreased volume in
the check printing and database marketing businesses and a more profitable
product mix and productivity improvements within the check printing business.
Deluxe Electronic Payment Systems' cost of sales increased approximately 20%
over the second quarter and first half of 1997 primarily due to increased sales
volume. Deluxe Direct's cost of sales decreased 10.2% from the second quarter of
1997 and 3.0% from the first half of 1997, consistent with its reduced sales.
Selling, general and administrative expenses increased $5 million or 2.7% over
the second quarter of 1997 and $2.0 million or 1% from the first six months of
1997. Deluxe Financial Services' selling, general and administrative expenses
increased 3% over the second quarter of 1997 and 1% over the first half of 1997,
due primarily to the growth of the collections business and increased marketing
expenses within the database marketing businesses. Deluxe Electronic Payment
Systems' selling, general and administrative expenses increased 16% over the
second quarter of 1997 and 12% over the first half of 1997 due to increased
sales volume, as well as increased telecommunications and computer rent expense.
Deluxe Direct's selling, general and administrative expenses decreased over the
second quarter and first six months of 1997 by approximately 8% due primarily to
divestitures.
Net income was $42.3 million for the second quarter of 1998, or 8.9% of sales,
compared to $37.5 million for the second quarter of 1997, or 8.1% of sales. Net
income for the six months ended June 30, 1998 was $85.8 million, or 8.9% of
sales compared to $78.8 million, or 8.3% of sales in 1997. The increase for both
periods is primarily attributable to the changes discussed above. Additionally,
for the quarter, other income was $2 million higher in 1998, due to a loss
recognized in 1997 for the sale of a business.
Financial Condition - Liquidity
Cash provided by operations was $100.1 million for the first six months of 1998
compared with $110.0 million for the first six months of 1997. 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 June 30, 1998 was $122.4 million compared to $131.1 million on
December 31, 1997. The Company's current ratio was 1.4 to 1 on June 30, 1998,
and 1.3 to 1 on December 31, 1997.
6
<PAGE>
Financial Condition - Capital Resources
Purchases of capital assets totaled $60.1 million for the first half of 1998
compared to $39.8 million during the comparable period one year ago. The
increase represents investments in a new financial system, a new customer
interface system, as well as other strategic initiatives designed to improve
productivity and profitability. As of June 30, 1998, the Company had uncommitted
bank lines of credit of $170 million available at variable interest rates. As of
that date, there were no amounts 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 June 30, 1998, the Company had no commercial paper
outstanding and no indebtedness outstanding 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 June 30, 1998, no such notes were issued or
outstanding. Cash dividends totaled $60.1 million in the first six months of
1998 compared to $60.8 million in the first six months of 1997.
Year 2000
In 1996, the Company initiated a companywide program to prepare its computer
systems and applications for the year 2000. During 1997, the Company identified
the systems affected, determined a resolution strategy for each affected system,
and began executing these resolution strategies. As of July 1998, management
believes that the overall project is 60% complete. Computerized assets in each
category have been either certified year 2000 compliant in accordance with the
Company's internal standards, or are in repair and testing phases. Based on
current assessments, management estimates that 95% of the Company's critical
assets will be certified year 2000 compliant by the end of 1998 and the overall
project will be 75% complete at that point.
The scope of the Company's year 2000 effort encompasses all computerized assets
across the Company. Included in the assessment and repair are PC's and related
equipment, data centers, networks, facilities, third party systems and internal
department applications, as well as the production applications in support of
the Company's products and services. In addition to these computerized assets,
the Company is also assessing the year 2000 compliancy of certain third parties,
including both important non-IT providers and key customers. Contingency plans
are being developed where the Company's risk assessment determines it to be
necessary to ensure continued provision of the Company's products and services.
The Company expects to incur expenses of approximately $22.5 million over the
life of the project, consisting of both internal staff costs and consulting
expenses, with $9.3 million having been incurred to date.
Because of the nature of the Company's business, the year 2000 issue would, if
unaddressed, pose a significant business risk for the Company. The Company
presently believes that with the planned modifications to existing systems and
the replacement of other systems, the year 2000 compliance issue will be
resolved in a timely manner and will not pose significant operational problems
for the Company. As previously noted, the Company has communicated with its key
suppliers and customers to determine their year 2000 readiness and the extent to
which the Company is vulnerable to any third party year 2000 issues. However,
there can be no guarantee that the systems of other companies on which the
Company's systems rely will be converted in a timely manner or in a manner that
is compatible with the Company's systems. A failure by such a company to convert
their systems in a timely manner or a conversion that renders such systems
incompatible with those of the Company could have a material adverse effect on
the Company.
Outlook
Throughout the remainder of 1998, the Company will continue its efforts to
reduce costs and improve productivity throughout the organization. It is
anticipated that certain of these initiatives will result in a significant
charge against earnings in 1998 for severance and other costs. At the same time,
the Company will continue to invest in major infrastructure improvements. The
Company also expects to continue its efforts to complete its divestiture program
by selling its remaining non-strategic businesses and has begun a strategic
assessment of its remaining direct marketing assistance businesses due to
lagging performance. Revenue generated by the Company's direct marketing
businesses is not material to the Company's financial results.
7
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual shareholders' meeting on May 5, 1998:
70,189,545 shares were represented (87.09% of the 80,595,391 shares
outstanding and entitled to vote at the meeting).
1. Election of Directors:
The nominees listed in the proxy statement were: John A. Blanchard III,
Whitney MacMillan, Dr. James J. Renier, Barbara B. Grogan, Allen F.
Jacobson, Stephen P. Nachtsheim, Calvin W. Aurand, Jr., Donald R.
Hollis, Robert C. Salipante, Jack Robinson and Hatim A. Tyabji. The
results were as follows:
Election of Directors For Withhold
--------------------- ---------- ---------
John A. Blanchard III 68,942,754 1,246,791
Whitney MacMillan 60,261,733 9,927,812
Dr. James J. Renier 68,968,560 1,220,985
Barbara B. Grogan 68,976,761 1,212,784
Allen F. Jacobson 68,892,667 1,296,878
Stephen P. Nachtsheim 69,011,776 1,177,769
Calvin W. Aurand, Jr. 69,009,051 1,180,494
Donald R. Hollis 68,992,543 1,197,002
Robert C. Salipante 68,996,526 1,193,614
Jack Robinson 68,988,881 1,200,664
Hatim A. Tyabji 68,996,528 1,193,017
2. Ratification of appointment of Deloitte & Touche LLP as Independent
auditors:
For: 69,815,902
Against: 216,706
Abstain: 156,937
Item 5. Other Information
RISK FACTORS AND CAUTIONARY STATEMENTS
When used in this Quarterly Report on 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. This discussion supersedes the discussion in Item 5 of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
8
<PAGE>
Earnings Estimates; Cost Reductions. 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 it
expects to achieve at least 3 to 6 percent annual growth in revenues and 5 to 9
percent annual growth in earnings in 1998, 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.
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 reasonableness of the assumptions on which they are based.
Sale of Businesses. The Company has a continuing intention to divest the
remaining businesses comprising its Deluxe Direct segment. Although the Company
had entered into a divestiture agreement for the sale of PaperDirect and the
Social Expressions business with a potential buyer, that agreement was
terminated due to the inability of the buyer to timely provide the necessary
assurances of its ability to fund the purchase of these businesses. The
occurrence of this event has delayed the anticipated sale and could result in
further write-offs by the Company, some of which could be significant. In
addition, the 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. The delay has also postponed
the receipt and use by the Company of the proceeds expected to be generated
thereby.
Other Dispositions and Acquisitions. In connection with its ongoing
restructuring, the Company may also consider divesting or discontinuing the
operations of various business units and assets and the Company may undertake
one or more significant acquisitions. Any such divestiture or discontinuance
could result in write-offs by the Company, some or all of which could be
significant. In addition, a significant acquisition could result in future
earnings dilution for the Company's shareholders.
Timing and Amount of Anticipated Cost Reductions. With regard to the results of
the Company's ongoing cost reduction efforts (including the Company's current
review of its Selling, General and Administrative cost levels), 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 upon which some of the anticipated savings depend 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. The Company has delayed the
planned roll-out of its on-line ordering system in order to correct certain
deficiencies identified during the initial phases of implementation and to
incorporate certain improvements. The Company expects to again begin converting
customers to this new system in the fourth quarter of 1998. Although the Company
believes that the current delay will not materially affect its current plant
closing schedule, there can be no assurances such will be the case or that
additional sources of delays will not be encountered because of the complexities
inherent in the development of software products as sophisticated as those
needed to accomplish this task. Any such event could adversely affect the
planned consolidation of the Company's printing facilities and delay the
realization or reduce the amount of the anticipated expense reductions.
In addition, the achievement of the targeted 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 and certain administrative and support organizations, the disposition of
unprofitable or low-margin businesses, headcount reductions and other efforts.
The optimum means of realizing many of these strategies is, particularly in the
case of the Company's selling, general and administrative cost reduction
efforts, 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. In
9
<PAGE>
addition, the Company may incur charges against its earnings reflective of the
anticipated cost of some of the programs. 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.
Effect of Financial Institution Consolidation. There is an ongoing trend towards
increasing consolidation within the banking industry that has resulted in
increased competition and consequent 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 business. Events such as the 1997 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 production in
the retail prices of its products.
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 prices 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 electronic and other 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 payment
methods will achieve consumer acceptance and replace checks cannot be predicted
with certainty. A surge in the popularity of any of these alternative payment
methods could have 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.
HCL Joint Venture. There can be no assurance that the software, transaction
processing services and 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. In addition, it is possible that the United
States government may impose economic or trade sanctions upon India that may
affect the joint venture as a result of India's recent nuclear tests.
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.
Debit Bureau. The Company has recently announced an alliance with several
entities that is intended to offer decision support tools and information to
retailers and financial institutions that offer or accept direct debit-based
products, such as checking accounts, ATM cards and debit cards. To date, this
effort has primarily been directed towards the creation of the supporting data
warehouse and research regarding the utility and value of the data available to
the Company for use in this area. There can be no assurance that this effort
will result in the introduction of a significant number of new products or the
generation of incremental revenues in material
10
<PAGE>
amounts. In any event, the continued development of the debit bureau is expected
to require a significant level of investment by the Company.
Limited Source of Supply. The Company's check printing business utilizes a paper
printing plate material that is available from only a limited number of sources.
The Company believes it has a reliable source of supply for this material and
that it maintains an inventory sufficient to avoid any production disruptions in
the event of an interruption of its supply. In the event, however, that the
Company's current supplier becomes unwilling or unable to supply the required
printing plate material at an acceptable price and the Company is unable to
locate a suitable alternative source within a reasonable time frame, the Company
would be forced to convert its facilities to an alternative printing process.
Any such conversion would require the unanticipated investment of significant
sums and there can be no assurance that the conversion could be accomplished
without production delays.
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.
Year 2000. In 1996, the Company initiated a companywide program to prepare its
computer systems and applications for the year 2000. The scope of the Company's
year 2000 effort encompasses all computerized assets across the Company.
Included in the assessment and repair are PC's and related equipment, data
centers, networks, facilities, third party systems and internal department
applications, as well as the production applications in support of the Company's
products and services. In addition to these computerized assets, the Company is
also assessing the year 2000 compliancy of certain third parties, including both
important non-IT providers and key customers. Contingency plans are being
developed where the Company's risk assessment determines it to be necessary to
ensure continued provision of the Company's products and services.
Because of the nature of the Company's business, the year 2000 issue would, if
unaddressed, pose a significant business risk for the Company. The Company
presently believes that with the planned modifications to existing systems and
the replacement of other systems, the year 2000 compliance issue will be
resolved in a timely manner and will not pose significant operational problems
for the Company, although there can be no absolute assurances in this regard. As
previously noted, the Company has communicated with its key suppliers and
customers to determine their year 2000 readiness and the extent to which the
Company is vulnerable to any third party year 2000 issues. There can be no
guarantee that the systems of other companies on which the Company's systems
rely will be converted in a timely manner or in a manner that is compatible with
the Company's systems. A failure by such a company to convert their systems in a
timely manner or a conversion that renders such systems incompatible with those
of the Company could have a material adverse effect on the Company.
11
<PAGE>
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
- ----------- ----------- ----------------
12.2 Computation of Ratio of Earnings to Fixed Charges Filed herewith
27.1 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.
12
<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 August 14, 1998 /s/ J.A. Blanchard III
--------------- ------------------------------------
J.A. Blanchard III, President
and Chief Executive Officer
(Principal Executive Officer)
Date August 14, 1998 /s/ Thomas W. VanHimbergen
--------------- ------------------------------------
Thomas W. VanHimbergen
Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
13
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description Page Number
- ----------- ----------- -----------
12.2 Computation of Ratio of Earnings to Fixed Charges
27.1 Financial Data Schedule
Exhibit 12.2
DELUXE CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Six Months
Ended Years Ended December 31,
----- -------------------------------------------------------------------
June 30,
1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
Income from Continuing Operations
before Income Taxes $143,578 $115,150 $118,765 $169,319 $246,706 $235,913 $324,783
Interest expense
(excluding capitalized interest) 4,158 8,822 10,649 13,099 9,733 10,070 15,371
Portion of rent expense under
long-term operating leases
representative of an interest factor 6,935 13,621 13,467 14,761 13,554 13,259 12,923
Amortization of debt expense 61 122 121 84 84 84 84
-------- -------- -------- -------- -------- -------- --------
TOTAL EARNINGS $154,732 $137,715 $143,002 $197,262 $270,077 $259,326 $353,161
Fixed charges
Interest Expense
(including capitalized interest) $ 4,425 $ 9,742 $ 11,978 $ 14,714 $ 10,492 $ 10,555 $ 15,824
Portion of rent expense under
long-term operating leases
representative of an interest factor 6,935 13,621 13,467 14,761 13,554 13,259 12,923
Amortization of debt expense 61 122 121 84 84 84 84
-------- -------- -------- -------- -------- -------- --------
TOTAL FIXED CHARGES $ 11,421 $ 23,485 $ 25,566 $ 29,559 $ 24,130 $ 23,898 $ 28,831
RATIO OF EARNINGS
TO FIXED CHARGES: 13.5 5.9 5.6 6.7 11.2 10.9 12.2
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 126,607
<SECURITIES> 18,432
<RECEIVABLES> 152,778
<ALLOWANCES> 0
<INVENTORY> 52,438
<CURRENT-ASSETS> 471,893
<PP&E> 880,367
<DEPRECIATION> 474,848
<TOTAL-ASSETS> 1,122,448
<CURRENT-LIABILITIES> 349,531
<BONDS> 110,406
0
0
<COMMON> 80,716
<OTHER-SE> 535,890
<TOTAL-LIABILITY-AND-EQUITY> 1,122,448
<SALES> 963,762
<TOTAL-REVENUES> 963,762
<CGS> 438,574
<TOTAL-COSTS> 824,218
<OTHER-EXPENSES> (8,192)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,158
<INCOME-PRETAX> 143,578
<INCOME-TAX> 57,751
<INCOME-CONTINUING> 85,827
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85,827
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.06
</TABLE>
