UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
Commission file number 1-7945.
DELUXE CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota 41-0216800
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3680 Victoria St. N., Shoreview, Minnesota 55126-2966
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (651) 483-7111.
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $1.00 per share New York Stock Exchange
(Title of Class) (Name of each exchange on which
registered)
Securities registered pursuant to Section 12(g) of the Act: None.
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. _x_ Yes __ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is $2,671,087,198 based on the last sales price of the registrant's
common stock on the New York Stock Exchange on March 8, 1999. The number of
outstanding shares of the registrant's common stock as of March 8, 1999, was
79,405,544.
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Documents Incorporated by Reference:
1. Portions of the registrant's annual report to shareholders for the fiscal
year ended December 31, 1998 are incorporated by reference in Parts I and
II.
2. The registrant's proxy statement, which was filed with the Securities
Exchange Commission on March 31, 1999, is incorporated by reference in
Part III.
PART I
ITEM 1. NARRATIVE DESCRIPTION OF BUSINESS
Deluxe Corporation (collectively with its subsidiaries, the "Company") is a
leading provider of integrated risk management, electronic transaction services
and paper payments to the financial services and retail industries. The Company
is headquartered in Shoreview, Minnesota, and has facilities in the United
States, Canada and the United Kingdom. The Company's products and services are
sold primarily in the United States.
The Company's operations are conducted by Deluxe Corporation and 25
subsidiaries. During 1998, the Company classified its operations into six
business segments: Deluxe Paper Payment Systems, Deluxe Payment Protection
Systems, Deluxe Electronic Payment Systems, Deluxe Direct Response, Deluxe
Government Services and Deluxe Direct. The businesses in the Company's Deluxe
Direct Response and Deluxe Direct segments were divested in 1998. The Company is
also a party to a joint venture with HCL Corporation of India. Each of the
Company's business units is discussed below.
The Company was incorporated under the laws of the State of Minnesota in
1920. From 1920 until 1988, the Company was named Deluxe Check Printers,
Incorporated. The Company's principal executive offices are located at 3680
Victoria St. N., Shoreview, Minnesota 55126-2966, telephone (651) 483-7111.
Deluxe Paper Payment Systems
Deluxe Paper Payment Systems ("DPPS") provides check printing services to
financial services companies and markets checks and business forms directly to
households and small businesses. DPPS sold checks to more than 10,000 financial
institutions and fulfilled approximately 103 million check order units in 1998.
Depositors commonly submit initial check orders and reorders to their financial
institutions, which forward them to one of DPPS' printing plants. Printed checks
are shipped directly by DPPS to the depositors and DPPS' charges are typically
paid directly from the depositors' accounts. DPPS, through a separate
subsidiary, also provides direct mail checks to consumers and small businesses.
DPPS endeavors to produce and ship all check orders within two days after
receipt of the order. DPPS generated revenues of approximately $1.3 billion in
1998, accounting for approximately 66% of the Company's total revenues in 1998.
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Payment systems and methods have been changing in the United States in
recent years as banking and other industries have introduced alternatives to the
traditional check, including, among others, charge cards, credit cards, debit
cards and electronic payment systems. Sales of checks have also been subject to
increased competition and consequent pressure on prices. In addition, the direct
mail segment of the check market is growing as a lower-priced alternative to
financial institution checks and, in 1998, represented an estimated 18 percent
of the personal check industry. These developments have produced a mature market
for checks and have created pricing pressure on DPPS' check sales.
The Company believes that checks will likely remain an important part of
consumers' payment options for many years. To stabilize its check printing
operations and improve profitability, the Company has focused in recent years on
controlling expenses and increasing efficiency (see "Recent Developments"). The
Company has also focused on higher margin products and services, such as
specially designed checks and licensed check designs. At the same time, the
growing direct mail check segment has been an opportunity for DPPS' direct mail
personal check operations.
In addition, Deluxe Business Forms & Supplies, a business unit of DPPS,
produces and markets short-run computer and business forms and checks. Both
product lines are sold primarily through direct mail, telephone marketing and
new account referrals from financial institutions.
Deluxe Payment Protection Systems
The Company offers integrated payment protection services through the
subsidiaries in its Deluxe Payment Protection Systems division: Chex Systems,
Inc. ("Chex Systems"); Deluxe Payment Protection Systems, Inc.; and NRC Holding
Corporation ("NRC") and its subsidiaries. Chex Systems is the leader in the
account verification business, providing risk management information to
approximately 78,000 financial institution offices. Through its Shared Check
Authorization Network ("SCAN"), Deluxe Payment Protection Systems, Inc. operates
one of the nation's leading check verification services with a network
consisting of thousands of retail locations that share risk-management
information. NRC is one of the largest U.S. collections agencies, processing
approximately $4.5 billion in placements in 1998 for more than 8,000 credit
grantors. Deluxe Payment Protection Systems had revenues of $216 million in
1998, or approximately 11% of the Company's total revenues.
Deluxe Electronic Payment Systems
The Deluxe Electronic Payment Systems ("DEPS") business segment is composed
of Deluxe Electronic Payment Systems, Inc., which provides electronic funds
transfer processing and software and is the nation's largest third-party
transaction processor for regional automated teller machine (ATM) networks. DEPS
also provides services in emerging debit markets, including retail point-of-sale
("POS") transaction processing. DEPS processed approximately five billion
transactions in 1998 and had net sales of approximately $131 million in 1998.
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Deluxe Government Services
Deluxe Government Services provides electronic benefit transfer ("EBT")
services to state governments. The business manages, supports and controls the
electronic payment of government food and cash benefits for the purchase of
goods and services in a retail environment and the distribution of cash in a
bank network and retail environment. Deluxe Government Services currently
supports, alone or in conjunction with other providers, electronic benefit
transfer programs in 12 states and three consortiums comprising 21 states.
Deluxe Government Services also provides Medicaid verification services in New
York. Deluxe Government Services produced approximately $44 million in revenues
in 1998.
Deluxe Direct
Deluxe Direct, which was divested in 1998, marketed specialty papers, and
other products to small businesses and sold direct mail greeting cards, gift
wrap and related products to households. Deluxe Direct had net sales of
approximately $224 million in 1998 and generated approximately 12% of the
Company's total revenues in that year. Deluxe Direct marketed its products
primarily through the Social Expressions division of Current, Inc. ("Current")
and Paper Direct, Inc. ("Paper Direct").
Current is a direct mail supplier of social expression products, including
greeting cards, gift wrap, small gifts and related products. Current's Social
Expression business is seasonal and holiday-related. Historically, more than
one-third of Current's annual sales have been made in the fourth quarter.
Current's direct mail check business was not included in the divestiture and is
included in "Deluxe Paper Payment Systems." Paper Direct is a direct mail
marketer of specialty papers, presentation products and pre-designed forms for
laser printing and desktop publishing.
Deluxe Direct Response
Deluxe Direct Response, which was divested in 1998, developed targeted
direct mail marketing campaigns for financial institutions and it also sold
personalized plastic ATM cards and credit and debit cards to financial
institutions and retailers and driver's licenses and other identification cards
to government agencies. Deluxe Direct Response provided database products from
the Company's Deluxe Data Resources, FUSION MarketingSM and Deluxe
MarketWise(TM) businesses and fulfillment services that included printing and
mailing direct mail marketing pieces (including letter checks offered to credit
card holders) and tracking customer response rates. The Deluxe Direct Response
business unit contributed approximately $43 million in revenues in 1998.
RECENT DEVELOPMENTS
In the first quarter of 1996, the Company announced a plan to close 21 of
its financial institution check printing plants over a two-year period. Four
additional closings are scheduled to occur in 1999 and 2000. The plant closings
were made possible by
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advancements in the Company's telecommunications, order processing and printing
technologies. As of December 31, 1998, the production functions at all 21 of the
plants included in the 1996 announcement were closed. The front-end operations
of three of these plants remain open and are expected to close in 1999.
During the third quarter of 1998, the Company recorded pretax restructuring
charges of $39.5 million. The charges included costs associated with reducing
SG&A expenses, discontinuing production of the Deluxe Direct Response segment's
direct mail products and closing four additional financial institution check
printing plants in 1999 and early 2000. The Company anticipates eliminating 800
SG&A positions within sales and marketing, finance and accounting, human
resources and information services. Approximately 60 positions will be
eliminated by discontinuing production of direct mail products. The closing of
four additional financial institution check printing plants will affect
approximately 870 employees.
During 1998, the Company sold substantially all of the assets of PaperDirect
(UK) Limited, ESP Employment Screening Partners, Inc., Social Expressions and
the businesses within its Deluxe Direct Response segment. The Company also sold
all of the outstanding stock of PaperDirect. The aggregate net sales prices for
these businesses was $113.7 million, consisting of cash proceeds of $87.9
million and notes receivable of $25.8 million.
In February 1999, the Company acquired all of the outstanding shares of
eFunds Corporation for $13 million. eFunds provides electronic check conversion
solutions for financial services companies and retailers.
In January 1998, the Company awarded options to substantially all of its
employees (excluding foreign employees and employees of businesses held for
sale) allowing them, subject to certain limitations, to purchase 100 shares of
common stock at $33 per share. The options become exercisable when the value of
the Company's common stock reaches $49.50 per share or January 30, 2001,
whichever occurs first. Options for the purchase of 1.7 million shares of common
stock were issued under this program.
The Company has also entered into agreements with unrelated third parties to
create a decision and analytic capability called Debit BureauSM. Debit BureauSM
uses a data warehouse that integrates debit data from the Company's various
business units to enhance products and services that will help financial
institutions and retailers with their debit-related decisions. The first service
enhanced with information developed by this Debit BureauSM, due for release in
June 1999, is Fraud FinderSM, which is intended to rank the potential for
identity manipulations and fraud in connection with new account openings at
financial services companies.
In 1997, the Company formed a joint venture with HCL Corporation ("HCL") of
New Delhi, India, to help modernize India's banking industry. The joint venture
provides software and programming capabilities to the Company and U.S. financial
institutions. The results of the joint venture did not have a material effect on
the Company's operations in 1998.
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EMPLOYEES
The Company had approximately 15,100 full- and part-time employees as of
February 28, 1999. It has a number of employee benefit plans, including a 401(k)
plan, retirement and profit sharing plans and medical and hospitalization plans.
The Company has never experienced a work stoppage or strike and considers its
employee relations to be good.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The information appearing under the caption "Note 14. Business Segment
Information" on pages 28-30 of the Company's Annual Report (the "Annual Report")
for the year ended December 31, 1998 is incorporated by reference.
FINANCIAL INFORMATION ABOUT DOMESTIC OPERATIONS AND EXPORT SALES
The information appearing under the caption "Note 14. Business Segment
Information" on page 30 of the Annual Report is incorporated by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are elected by the Board of Directors
each year. The term of office of each executive officer will expire at the
annual meeting of the Board of Directors that will be held after the regular
shareholders meeting on May 4, 1999. The principal occupation of each executive
officer is with the Company, and their positions are as follows:
Executive
Officer
Name Position Age Since
---- -------- --- -----
John A. Blanchard III Chairman of the Board, President 56 1995
and Chief Executive Officer
Lawrence J. Mosner Executive Vice President 56 1995
Thomas W. VanHimbergen Senior Vice President and Chief 50 1997
Financial Officer
Ronald E. Eilers Senior Vice President and 51 1996
General Manager, Deluxe
Paper Payment Systems
John H. LeFevre Senior Vice President, Secretary 55 1994
and General Counsel
Warner F. Schlais Vice President and Chief 46 1997
Information Officer
Sonia St. Charles Vice President, 38 1998
Human Resources
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MR. BLANCHARD has served as President and Chief Executive Officer of the
Company since May 1, 1995 and as Chairman of the Board of Directors since May 6,
1996. From January 1994 to April 1995, Mr. Blanchard was executive vice
president of General Instrument Corporation, a supplier of systems and equipment
to the cable and satellite television industry. From 1991 to 1993, Mr. Blanchard
was chairman and chief executive officer of Harbridge Merchant Services, a
national credit card processing company. Previously, Mr. Blanchard was employed
by American Telephone & Telegraph Company for 25 years, most recently as senior
vice president responsible for national business sales. Mr. Blanchard also
serves as a director of Wells Fargo and Company and Saville Systems PLC.
MR. MOSNER has served as Executive Vice President of the Company with
overall responsibility for all of its day-to-day operations since July 1997. Mr.
Mosner served as Senior Vice President of the Company from November 1995 until
October 1996, when he became President of Deluxe Direct, Inc. ("DDI") a
subsidiary of the Company that provided management services to the companies in
its Deluxe Direct business unit. As a Senior Vice President of the Company and
President of DDI, Mr. Mosner served as the Principal Executive Officer of Deluxe
Direct. In February 1997, Mr. Mosner returned to the office of Senior Vice
President of the Company and he served as President of its Deluxe Financial
Services business unit until he became Executive Vice President of the Company.
Mr. Mosner was executive vice president and chief operating officer of Hanover
Direct, a direct marketing company, with responsibility for non-apparel
products, from 1993 until he joined the Company. Previously, he was employed for
28 years by Sears, Roebuck and Company, where he was Vice President of catalog
merchandising from 1991 to 1993.
MR. VANHIMBERGEN became Senior Vice President and Chief Financial Officer of
the Company in May 1997. From 1996 until he joined the Company, Mr. VanHimbergen
served as senior vice president and chief financial officer of Federal-Mogul
Corporation ("Federal-Mogul") and from 1994 until 1996, Mr. VanHimbergen served
as vice president and chief financial officer of Allied Signal Automotive, Inc.
("Allied Signal"). Prior to joining Allied Signal, Mr. VanHimbergen was employed
by Tenneco Corporation ("Tenneco") from 1988 through 1994, where he served in a
variety of capacities, including vice president and chief financial officer for
Tenneco Automotive from 1993 to 1994. Tenneco, Allied Signal and Federal Mogul
are global manufacturers and distributors of automotive parts. From 1971 through
1988, Mr. VanHimbergen served in various financial, human resource and treasury
positions for A.O. Smith Corporation, a diversified manufacturer and distributor
and a provider of electronic payment systems and information services.
MR. EILERS joined the Company in 1988 when it purchased Current. From 1990
to 1995, Mr. Eilers served as Vice President and General Manager of Current's
direct mail check business. In 1995, Mr. Eilers became President of PaperDirect,
Inc. and the manager of the Company's business forms division. Mr. Eilers became
a Vice President of DDI in October 1996 and he succeeded Mr. Mosner as the
President of DDI in February 1997. In August 1997, Mr. Eilers became a Senior
Vice President of the Company and he now manages its Deluxe Paper Payment
Systems business.
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MR. LEFEVRE has served as Senior Vice President, General Counsel and
Secretary of the Company since February 1994. From 1978 to February 1994, Mr.
LeFevre was employed by Wang Laboratories, Inc. From 1988 until February 1994,
he held various positions in Wang Laboratories' law department, including
corporate counsel, vice president, general counsel and secretary. Wang
Laboratories was in the business of manufacturing and selling computer hardware
and software and related services.
MR. SCHLAIS became Vice President and Chief Information Officer of the
Company in December 1997. Mr. Schlais joined the Company in 1995 as Vice
President of Applications Development supporting the Company's Deluxe Financial
Services business unit. Prior to joining the Company, Mr. Schlais was employed
by United Airlines, Inc. ("United Airlines") for 21 years, most recently as its
director, I.T. planning and technology. United Airlines is a provider of air
transportation.
MS. ST. CHARLES became Vice President, Human Resources in June 1996 and an
executive officer of the Company in April 1998. From August 1994 until June
1996, Ms. St. Charles served as Vice President, Human Resources for PaperDirect.
Prior to this position, Ms. St. Charles worked as an independent human resources
and organizational development consultant.
ITEM 2. PROPERTIES
The Company conducts its operations in 60 principal facilities, 58 of which
are used for production and service operations, located in 22 states, Canada and
the United Kingdom. These facilities total approximately 3,974,000 square feet.
The Company's headquarters occupies a 158,000-square-foot building in Shoreview,
Minnesota. DPPS has two principal facilities in Shoreview, Minnesota, totaling
approximately 252,000 square feet. These sites are devoted to sales,
administration and marketing. Deluxe Payment Protection Systems has four
principal facilities in Bloomington, Minnesota, Columbus, Ohio and Bothell,
Washington totaling approximately 144,000 square feet. Deluxe Electronic Payment
Systems' primary administrative facility occupies a 171,000 square foot building
in Milwaukee, Wisconsin and its principal data processing centers are located in
New Berlin, Wisconsin and Scottsdale, Arizona. Deluxe Government Services shares
space with Deluxe Electronic Payment Systems in Milwaukee, Wisconsin and has
three service facilities in Baltimore, Maryland, Centerville, Utah and Trenton,
New Jersey totaling approximately 4,500 square feet. Deluxe Direct's principal
office facility was a 148,000-square-foot building in Colorado Springs,
Colorado. All but four of the Company's production facilities are one-story
buildings and most were constructed and equipped in accordance with the
Company's plans and specifications.
More than half of the Company's total production area has been constructed
during the past 20 years. The Company owns 31 of its principal facilities and
leases the remainder for terms expiring from 1999 to 2011. Depending upon the
circumstances, when a lease expires, the Company either renews the lease or
constructs a new facility to replace the leased facility.
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In 1996, the Company announced a plan to close 21 of its financial
institution check printing plants. Four additional plant closings scheduled for
1999 and 2000 were announced in 1998. These plant closings were made possible by
advancements in the Company's telecommunications, order processing and printing
technologies. Upon the completion of this restructuring, the Company's nine
remaining plants will be equipped with sufficient capacity to produce at or
above current order volumes. As of December 31, 1998, the production operations
of all 21 of the plants included in the 1996 plan had been closed. The front-end
operations of three of the plants remain open and are expected to close in 1999.
As a result of its consolidation efforts, the Company currently owns 9
facilities that are either currently vacant or which the Company expects to
vacate prior to July 1999. These facilities, which total approximately 462,000
square feet, are or will be held for sale.
ITEM 3. LEGAL PROCEEDINGS
In October 1997, the jury in the action Mellon Bank, N.A. v. Deluxe Data
Systems, Inc. and Deluxe Corporation which was pending in the Western District
of Pennsylvania reached a $30 million verdict against Deluxe Electronic Payment
Systems, Inc. (f/k/a Deluxe Data Systems, Inc.) in litigation pertaining to a
potential bid to provide electronic benefits transfer services to a number of
southeastern states. No liability was found against Deluxe Corporation. In
January 1999, the United States Court of Appeals for the Third Circuit affirmed
the judgment of the district court and the Company paid $32.2 million to Mellon
Bank (which amount includes post-judgment interest) in February 1999. The
Company is reviewing whether a further appeal is warranted.
Other than the above-described action and other routine litigation
incidental to its business, there are no material pending legal proceedings to
which the Company or any of its subsidiaries is a party or to which any of the
Company's property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information appearing under the caption "Financial Highlights" on page
1, and "Shareholder Information" on page 33 of the Annual Report is incorporated
by reference. The number of shareholders indicated in the "Financial Highlights"
is based on the number of the Company's record holders.
ITEM 6. SELECTED FINANCIAL DATA
The information appearing under the caption "Five-Year Summary" on page 13
of the Annual Report is incorporated by reference.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information appearing under the caption "Management's Discussion and
Analysis" on pages 6 through 12 of the Annual Report is incorporated by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information appearing under the caption "Market Risk Disclosure" on page
11 of the Annual Report is incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, notes and independent auditors' report on pages 14
through 31 of the Annual Report and the information appearing under the caption
"Summarized Quarterly Financial Data" (unaudited) on page 31 of the Annual
Report is incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT, AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's proxy statement, which was filed with the Securities and
Exchange Commission on March 31, 1999, is incorporated by reference, other than
the sections entitled "Compensation Committee Report on Executive Compensation"
and "Total Shareholders Return."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following financial statements, schedules and independent auditors'
report and consent are filed with or incorporated by reference in this report:
Financial Statements Page in
-------------------- Annual Report
-------------
Consolidated Balance Sheets at December 31, 1998 and 1997........14
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Consolidated Statements of Income for each of the three years
in the period ended December 31, 1998........................15
Consolidated Statements of Comprehensive Income for each of
the three years in the period ended December 31, 1998........15
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998..................16
Notes to Consolidated Financial Statements.......................17 - 30
Independent Auditors' Report ....................................31
Supplemental Financial Information (Unaudited):
Summarized Quarterly Financial Data .............................31
Independent Auditors' Consent to the incorporation by
reference of its reports in the Company's registration
statements numbered 2-96963, 33-53585, 33-57261, 33-32279,
33-58510, 33-62041, 333-03625 and 33-48967...................F-1
Schedules other than those listed above are not required or are not
applicable, or the required information is shown in the consolidated financial
statements or notes.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on October 22, 1998 (as amended
by an Amendment on Form 8-K/A-1 filed on October 22, 1998) containing a
disclosure of Risk Factors and Cautionary statements pursuant to Item 5
of such Form.
(c) The following exhibits are filed as part of or are incorporated in this
report by reference:
Exhibit Method of
Number Description Filing
- ------ ----------- ------
3.1 Articles of Incorporation (incorporated by reference to *
the Company's Annual Report on Form 10-K for the year
ended December 31, 1990).
3.2 Bylaws, (incorporated by reference to Exhibit 3.1 of the *
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998).
4.1 Amended and Restated Rights Agreement, dated as of January *
31, 1997, by and between the Company and Norwest Bank
Minnesota, National Association, as Rights Agent, which
includes as Exhibit A thereto, the form of Rights
Certificate (incorporated by reference to Exhibit 4.1 to
the Company's Amendment No. 1 on Form 8-A/A-1 (File No.
001-07945) filed with the Securities and Exchange
Commission (the
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"Commission") on February 7, 1997).
4.2 Indenture, relating to up to $150,000,000 of debt *
securities (incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-3
(33-32279) filed with the Commission on November 24,
1989).
4.3 Amended and Restated Credit Agreement, dated as of July 8, *
1997, among the Company, Bank of America National Trust
and Savings Association, as agent, and the other financial
institutions party thereto, related to a $150,000,000
committed line of credit (incorporated by reference to
Exhibit 4.3 to the Company's Annual Report on Form 10-K
(the "1997 10-K") for the year ended December 31, 1997).
10.1 Deluxe Corporation 1996 Annual Incentive Plan (as amended *
August 9, 1996) (incorporated by reference to Exhibit 10.4
to the Company's report on Form 10-Q for the Quarter ended
September 30, 1996 (the "September 1996 10-Q"), filed with
the Commission on November 14, 1996).
10.2 Deluxe Corporation Stock Incentive Plan (as amended *
October 31, 1997), including the Deluxe Corporation
Non-Employee Director Stock and Deferral Plan attached as
Annex 1 thereto (incorporated by reference to Exhibit 10.2
to the 1997 10-K).
10.3 Deluxe Corporation Performance Share Plan (incorporated by *
reference to Exhibit 10.6 to the September 1996 10-Q).
10.4 Deluxe Corporation Employee Stock Purchase Plan *
(incorporated by reference to Exhibit 10.7 to the
September 1996 10-Q).
10.5 Deluxe Corporation Deferred Compensation Plan *
(incorporated by reference to Exhibit (10)(A) to the 10.5
Company's Annual Report on Form 10-K for the year ended
December 31, 1995 (the "1995 10-K")).
10.6 Deluxe Corporation Supplemental Benefit Plan (incorporated *
by reference to Exhibit (10)(B) to the 1995 10-K).
10.7 Description of Deluxe Corporation Non-employee Director *
Retirement and Deferred Compensation Plan (incorporated by
reference to Exhibit 10.14 to the Company's Annual Report
on
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Form 10-K for the year ended December 31, 1996 (the "1996
10-K").
10.8 Description of Initial Compensation and Employment *
Arrangement with John A. Blanchard III (incorporated by
reference to Exhibit 10(G) to the 1995 10-K).
10.9 Deluxe Corporation 1998 DeluxeSHARES Plan (incorporated by *
reference to Exhibit 10.9 to the 1997 10-K).
10.10 Description of modification to the Deluxe Corporation *
Non-Employee Director Retirement and Deferred Compensation
Plan (incorporated by reference to Exhibit 10.10 to the
1997 10-K).
10.11 Description of John A. Blanchard III Supplemental Pension *
Plan (incorporated by reference to Exhibit 10(H) in the
1995 10-K).
10.12 Description of Compensation Agreement with Harold V. *
Haverty (incorporated by reference to Exhibit 10(J) to the
1995 10-K).
10.13 Consulting Agreement, made and entered into as of November *
1, 1996, between the Company and Donald R. Hollis
(incorporated by reference to Exhibit 10.21 to the 1996
10-K).
10.14 Description of Severance Arrangement with Thomas W. *
VanHimbergen. (incorporated by reference to Exhibit 10.15
to the 1997 10-K).
10.16 Description of Severance Arrangement with Lawrence J.
Mosner (incorporated by reference to Exhibit 10.19 to the
1997 10-K).
10.17 Description of non-employee Director Compensation Filed
Arrangements. herewith
10.18 Stock and Asset Purchase Agreement made as of December 31, *
1998 among Deluxe Corporation, Current, Inc., Se/PDI
Acquisition Corporation and Taylor Corporation
(incorporated by reference to Exhibit 10.21 to the
Company's Current Report on Form 8-K dated January 15,
1999).
10.19 Executive Retention Agreement, dated as of January 9, *
1998, between John A. Blanchard and Deluxe Corporation
(incorporated by reference to Exhibit 10.3 to the
Company's
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Quarterly Report on Form 10-Q for the quarter ended March
31, 1998 (the "May 1998 10-Q").
10.20 Executive Retention Agreement, dated as of January 9, *
1998, between Ronald E. Eilers and Deluxe Corporation
(incorporated by reference to Exhibit 10.5 of the May 1998
10-Q).
10.21 Executive Retention Agreement, dated as of January 9, *
1998, between Deluxe Corporation and John H. LeFevre
(incorporated by reference to Exhibit 10.6 of the May 1998
10-Q).
10.22 Executive Retention Agreement, dated as of January 9, *
1998, between Deluxe Corporation and Lawrence J. Mosner
(incorporated by reference to Exhibit 10.7 of the May 1998
10-Q).
10.23 Schedule identifying other Executive Retention Agreements Filed
omitted for this Report on Form 10-K and the differences herewith
between such Agreements and those filed herewith.
12.4 Statement re: computation of ratios. Filed
herewith
13 1998 Annual Report to shareholders. Filed
herewith
21.1 Subsidiaries of the Registrant. Filed
herewith
23 Consent of Experts and Counsel (incorporated by reference *
to page F-1 of this Annual Report on Form 10-K).
24.1 Power of attorney. Filed
herewith
27.1 Financial Data Schedule for the year ended December 31, Filed
1998. herewith
27.2 Financial Data Schedule for the year ended December 31, Filed
1997. herewith
99.1 Risk Factors and Cautionary Statements. Filed
herewith
- ----------------
*Incorporated by reference
14
<PAGE>
Note to recipients of Form 10-K: Copies of exhibits will be furnished upon
written request and payment of the Company's reasonable expenses ($.25 per page)
in furnishing such copies.
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of St.
Paul, State of Minnesota.
DELUXE CORPORATION
Date: March 31, 1999 By: /s/ John A. Blanchard III
------------------------------------
John A. Blanchard III
Chairman of the Board of Directors,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities
indicated on March 31,1999.
SIGNATURE TITLE
- --------- -----
By /s/ John A. Blanchard III Chairman of the Board of Directors,
- --------------------------------- President and Chief Executive Officer
John A. Blanchard III (Principal Executive Officer)
By /s/ Thomas W. VanHimbergen Senior Vice President and Chief Financial
- --------------------------------- Officer (Principal Financial Officer and
Thomas W. VanHimbergen Principal Accounting Officer)
*
- ---------------------------------
Whitney MacMillan Director
*
- ---------------------------------
James J. Renier Director
*
- ---------------------------------
Barbara B. Grogan Director
*
- ---------------------------------
Stephen P. Nachtsheim Director
*
- ---------------------------------
Calvin W. Aurand, Jr. Director
*
- ---------------------------------
Donald R. Hollis Director
*
- ---------------------------------
Robert C. Salipante Director
*
- ---------------------------------
Jack Robinson Director
*
- ---------------------------------
Hatim A. Tyabji Director
*By: /s/ John A. Blanchard III
- ---------------------------------
John A. Blanchard III
Attorney-in-Fact
15
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
2-96963, 33-53585, 33-57261, 333-03625 and 33-48967 on Form S-8 and 33-32279,
33-58510 and 33-62041 on Form S-3 of our report dated January 26, 1999,
incorporated by reference in this Annual Report on Form 10-K of Deluxe
Corporation for the year ended December 31, 1998.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Minneapolis, Minnesota
March 26, 1999
F-1
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this report:
Exhibit Page
Number Description Number
- ------ ----------- ------
10.17 Description of non-employee Director Compensation
Arrangements.
10.23 Schedule Identifying other Executive Retention Agreement
Omitted from this Report on form 10-K
12.4 Statement re: computation of ratios.
13 1998 Annual Report to shareholders.
21.1 Subsidiaries of the Registrant.
24.1 Power of attorney.
99.1 Risk Factors and Cautionary Statements
27.1 Financial Data Schedule for the year ended December 31,
1998.
27.2 Financial Data Schedule for the year ended December 31,
1997.
Exhibit 10.17
DESCRIPTION OF NON-EMPLOYEE DIRECTORS
COMPENSATION ARRANGEMENTS
Directors who are employees of the Company do not receive compensation for their
service on the Board other than their compensation as employees. During 1998,
Directors who were not employees of the Company ("Independent Directors") each
received a $50,000 annual board retainer, payable quarterly. An additional
$12,500 annual committee retainer was paid to the chair of each committee and a
$7,500 annual committee retainer was paid to each other member of a committee.
Fees are not paid for attendance at meetings. In addition to the foregoing,
Independent Directors may receive compensation for the performance of duties
assigned by the Board or its Committees that are considered beyond the scope of
the ordinary responsibilities of Directors or Committee members.
In November 1997, the Company adopted the Deluxe Corporation Non-Employee Stock
and Deferral Plan (the "Director Plan"). The purpose of the Director Plan is to
provide an opportunity for Independent Directors to increase their ownership of
Common Stock and thereby align their interest in the long-term success of the
Company with that of the Company's other shareholders. Under the Director Plan,
each Independent Director may irrevocably elect to receive, in lieu of cash,
shares of Common Stock having a fair market value equal to at least 50% of his
or her annual board and committee retainer (collectively, the "Retainer"). The
shares of Common Stock receivable pursuant to the Director Plan are issued
quarterly or, at the option of the Independent Director, credited to the
Director in the form of deferred restricted stock units. These units vest and
are converted into shares of Common Stock on the earlier of the tenth
anniversary of the February 1st of the year following the year in which the
Independent Director ceases to serve on the Company's Board of Directors or such
other date as is elected by the Independent Director in his or her deferral
election.
Each restricted stock unit receives dividend equivalent payments equal to the
dividend payment on one share of Common Stock. Any restricted stock units issued
pursuant to the Director Plan will vest and be converted into shares of Common
Stock in connection with certain defined changes in control of the Company. All
shares of Common Stock issued pursuant to the Director Plan are issued under the
Stock Incentive Plan and must be held by the Independent Director receiving them
for a minimum period of six months from the date of issuance.
Harold V. Haverty, the Company's former President and Chief Executive Officer,
served as a director emeritus between November 1997 and the Company's 1998
annual meeting of shareholders, when he retired. Mr. Haverty continued to
receive his Retainer (payable in cash) as a director emeritus.
Each new Independent Director receives a one-time grant of 1,000 shares of
restricted stock under the Stock Incentive Plan as of the date of his or her
initial election to the Board of Directors. The restricted stock vests in equal
installments on the dates of the
<PAGE>
Company's regular shareholders' meetings in each of the three years following
the date of grant, provided that the Director remains in office immediately
following the regular meeting. Restricted stock awards also vest immediately
upon an Independent Director's retirement from the Board in accordance with the
Company's policy with respect to mandatory retirement.
In 1997, each Independent Director elected at the 1997 Meeting received a
non-qualified option to purchase 1,000 shares of the Company's Common Stock
under the Stock Incentive Plan on the date of the 1997 Meeting. These options
have an exercise price equal to the fair market value of the underlying Common
Stock on the date of grant, became fully exercisable six months after the date
of grant and will expire on the tenth anniversary of such date. The options also
terminate three months following the date upon which a participant ceases to be
a Director of the Company. This option program was discontinued in 1998.
Benefits under the Company's previous Board retirement plan were frozen
following the adoption of the Director Plan. As a result, no additional benefits
will be accrued for current Directors or be offered to newly elected Directors.
Under the current provisions of the Board retirement plan, Independent Directors
with at least five years of service as an Independent Director who resign or are
not nominated for re-election will receive an annual payment equal to the annual
Board retainer in effect on July 1, 1997 ($30,000 per year) for the number of
years during which the retiree served on the Board as an Independent Director
prior to October 31, 1997. In calculating a Director's eligibility for benefits
under this plan, partial years of service are rounded up to the nearest whole
number. Retirement payments do not extend beyond the lifetime of the retiree and
are contingent upon the retiree's remaining available for consultation with
management and refraining from engaging in any activity in competition with the
Company. All of the current Independent Directors (other than Hatim Tyabji) are
eligible for benefits under this plan. Allen F. Jacobson, who retired from the
Board in January 1999, is entitled to receive benefits under this plan for up to
seven years following his retirement and Whitney MacMillan, who will retire from
the Board in May 1999, will be eligible to receive benefits for up to 10 years
following his retirement.
DRH Strategic Consulting, Inc., a corporation controlled by Donald Hollis and
for which Mr. Hollis serves as President ("DRH"), provides, through the services
of Mr. Hollis, advisory services to the Company and its joint venture with HCL
Corporation of India (the "Joint Venture") regarding their respective
strategies, technology and product plans and assists the Company and the Joint
Venture in communicating their strategic initiatives to the financial services
industry. DRH was paid a total of $106,250 in consulting fees by the Joint
Venture in 1998, which amount was paid by the Company for the account of the
Joint Venture, and reimbursed by such entities for an aggregate of ($50,077) of
expenses incurred in providing such services. Consulting fees are not paid under
this arrangement for Mr. Hollis' attendance at Board and Committee meetings.
Exhibit 10.23
SCHEDULE IDENTIFYING OTHER
EXECUTIVE RETENTION AGREEMENTS
OMITTED FROM THIS REPORT ON FORM 10-K
The Registrant has also entered into Executive Retention Agreements with Morris
Goodwin Jr., Lois M. Martin, Thomas W. VanHimbergen and Sonia W. St. Charles.
Apart from the names of the parties thereto and, with respect to Ms. St.
Charles, the dates of execution, these agreements are substantially identical to
the Agreements between the Registrant and John H. LeFevre, a copy of which was
filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
Exhibit 12.4
DELUXE CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Year
Ended Years Ended December 31,
----- --------------------------------------------------------------------
December 31, 1998 1997 1996 1995 1994 1993 1992
----------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
- --------
Income from Continuing Operations
before Income Taxes $246,540 $115,150 $118,765 $169,319 $246,706 $235,913 $324,783
Interest expense
(excluding capitalized interest) 8,273 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 15,126 13,621 13,467 14,761 13,554 13,259 12,923
Amortization of debt expense 122 122 121 84 84 84 84
---- ---- ---- --- --- --- --
TOTAL EARNINGS $270,061 $137,715 $143,002 $197,262 $270,077 $259,326 $353,161
Fixed charges
- -------------
Interest Expense
(including capitalized interest) 9,664 $ 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 15,126 13,621 13,467 14,761 13,554 13,259 12,923
Amortization of debt expense 122 122 121 84 84 84 84
---- ---- ---- --- --- --- --
TOTAL FIXED CHARGES $ 24,912 $ 23,485 $ 25,566 $ 29,559 $ 24,130 $ 23,898 $ 28,831
RATIO OF EARNINGS
TO FIXED CHARGES: 10.8 5.9 5.6 6.7 11.2 10.9 12.2
</TABLE>
EXHIBIT 13
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET SALES $1,931,796 $1,919,366
- --------------------------------------------------------------------------------------------------------
NET INCOME(1) 145,408 44,672
--------------------------------------------------------------------------
Return on sales 7.53% 2.33%
Per share - basic 1.80 .55
Per share - diluted 1.80 .55
Return on average shareholders' equity 23.85% 6.75%
- --------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PER SHARE 1.48 1.48
- --------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 608,910 610,248
- --------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES
OUTSTANDING (THOUSANDS) 80,648 81,854
- --------------------------------------------------------------------------------------------------------
NUMBER OF SHAREHOLDERS 15,805 16,897
- --------------------------------------------------------------------------------------------------------
NUMBER OF EMPLOYEES 15,296 18,937
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) NET INCOME INCLUDES REORGANIZATION AND OTHER SPECIAL CHARGES IN BOTH 1998
AND 1997. SEE MANAGEMENT'S DISCUSSION AND ANALYSIS ON PAGE 6.
NET SALES CASH FROM OPERATIONS
(DOLLARS IN BILLIONS) (DOLLARS IN MILLIONS)
[BAR CHART] [BAR CHART]
94 1.83 94 193.8
95 1.94 95 209.3
96 1.98 96 290.7
97 1.92 97 295.8
98 1.93 98 294.8
NET INCOME PER SHARE - BASIC NET INCOME
(DOLLARS) (DOLLARS IN MILLIONS)
[BAR CHART] [BAR CHART]
94 1.71 94 140.9
95 1.06 95 87.0
96 .80 96 65.5
97 .55 97 44.7
98 1.80 98 145.4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
- --------------------------------------------------------------------------------
This discussion summarizes the significant factors that affected the
consolidated operating results and financial condition of Deluxe Corporation
during the three years ended December 31, 1998. Over this period, the Company
has undergone a significant transformation. First, the Company redefined its
strategy to focus on information-based products and related services. As a
result, the Company has divested many non-strategic businesses over the past
three years and reorganized to improve the profitability of its ongoing
businesses. The Company has also focused on reducing its cost structure. It
closed the production functions at 21 plants under a 1996 plant closure plan.
The front-end operations of three of the plants remain open and are expected to
close in 1999. The Company has also undertaken widespread initiatives to reduce
its selling, general and administrative (SG&A) expenses. Because of this
transformation, the Company has recorded significant consolidation,
restructuring and reorganization costs and gains and losses on sales of
businesses, which together, have had a significant impact on the operating
results and cash position of the Company. The following discussion considers
these items separately when analyzing the Company's financial and operational
progress and is based on the organization of the Company's businesses into six
operating segments: Deluxe Paper Payment Systems, Deluxe Payment Protection
Systems, Deluxe Electronic Payment Systems, Deluxe Direct Response, Deluxe
Government Services and Deluxe Direct.
Deluxe Paper Payment Systems provides check printing services to
financial services companies and markets checks and business forms directly to
households and small businesses. Deluxe Payment Protection Systems provides
payment protection, collections and risk management services to financial
institutions and retailers. Deluxe Electronic Payment Systems provides
electronic funds transfer processing and software services to the financial and
retail industries. Deluxe Direct Response, which was sold in 1998, provided
direct marketing, customer database management and related services to the
financial industry and other businesses. Deluxe Government Services provides
electronic benefits transfer services to state governments. Deluxe Direct, which
was sold in 1998, primarily sold greeting cards, stationery and specialty paper
products through direct mail. All segments operate primarily in the United
States. Deluxe Electronic Payment Systems also has international operations. In
analyzing the results of the segments, corporate expenses are allocated to the
segments as a fixed percentage of segment revenues. This allocation includes
expenses for support functions such as human resources, information services and
finance. Charges for certain corporate liabilities are not allocated to the
segments.
OVERALL SUMMARY
- --------------------------------------------------------------------------------
In 1998, the Company's sales increased .6%. Revenues lost due to divestitures
were more than offset by growth in Deluxe Payment Protection Systems, Deluxe
Electronic Payment Systems and Deluxe Government Services. 1998 net income was
$145.4 million, compared to $44.7 million in 1997 and $65.5 million in 1996.
Basic earnings per share were $1.80 in 1998, compared to $.55 in 1997 and $.80
in 1996. Return on average assets was 12.4% for 1998, compared to 3.8% in 1997
and 5.3% in 1996. Return on average shareholders' equity was 23.9% in 1998,
compared to 6.8% in 1997 and 8.8% in 1996. These results included pretax
reorganization and other special charges of $70.2 million in 1998, $180 million
in 1997 and $142.3 million in 1996.
REORGANIZATION AND OTHER SPECIAL CHARGES
- --------------------------------------------------------------------------------
Over the last few years, the Company has engaged in a strategic reorganization,
examining each business and its product offerings, short- and long-term
profitability and strategic fit within the Company. The Company has also taken
steps to reduce its cost structure to improve profitability. These efforts have
resulted in consolidating operating and administrative facilities, eliminating
products and businesses, and restructuring the Company's management and
organization. The result is a reduced level of sales offset by improved
operating profitability and expected future cost reductions, which will be
reflected primarily in reduced facility, materials and employee expenses in the
Company's operating results. Competitive pricing measures, increased expenses
and other factors will offset a portion of the savings expected from cost
reduction efforts.
1998 CHARGES - During 1998, the Company recorded pretax reorganization and other
special charges of $70.2 million. These consisted of restructuring charges of
$39.5 million, losses on existing contracts and relationships of the Deluxe
Government Services segment of $36.4 million, offset by a gain on the sale of
the Company's Deluxe Card Services business.
The restructuring charges were related to the Company's initiatives to
reduce its SG&A expenses, discontinue production of the Deluxe Direct Response
segment's direct mail products, and close four additional financial institution
check printing plants.
6 Deluxe Corporation
<PAGE>
The losses on long-term contracts and relationships of the Deluxe
Government Services segment resulted from a continuing strong economy, record
low unemployment and welfare reform. These factors reduced the transaction
volumes and expected future revenues of this business well below original
expectations. Additionally, this business has experienced actual and expected
future telecommunications, installation, help desk and other costs that have
been significantly higher than originally anticipated, resulting in expected
future losses on its existing electronic benefits transfer contracts and
relationships.
These charges are reflected throughout the 1998 consolidated statement
of income according to the nature of the charge, with $47.1 million in cost of
sales expense, $22 million in SG&A expense and $1.1 million in other income.
1997 CHARGES - During 1997, the Company recorded pretax reorganization,
restructuring and other special charges of $180 million. These charges consisted
of $99 million, which was related to impairment losses, and $81 million, which
was mainly related to production consolidation, legal proceedings and other
asset impairments.
During 1996, the Company announced its plans to divest three businesses
within its Deluxe Direct segment. One of these businesses was sold in 1997 and
the remaining two were sold in 1998. Additionally, the Company determined that
it would divest the international unit of its Deluxe Electronic Payment Systems
segment. In 1997, the Company recorded a pretax impairment charge of $99 million
to write these businesses down to their estimated fair values less costs to
sell. The sale of the Deluxe Direct businesses was completed in December 1998.
In January 1999, the Company determined that the international unit of Deluxe
Electronic Payment Systems maintained a continuing strategic importance within
the segment and it is no longer held for sale. This determination is not
expected to have a significant impact on the Company's operating results or
financial position.
The special charge in 1997 included restructuring charges of $24.5
million. These charges included additional costs associated with the Company's
1996 plan for closing 21 financial institution check printing plants, severance
related to implementing process improvements in the post-press phase of check
production, implementing a new order processing and customer service system, and
reducing support functions at corporate operations and other businesses. As of
December 31, 1998, the production functions at all 21 plants were closed. The
front-end operations of three of the plants remain open and are expected to
close in 1999. In 1999, the new order processing and customer service system and
the improved post-press production process are expected to be substantially
completed.
During 1997, a judgment was entered against Deluxe Electronic Payment
Systems, Inc. (DEPS), in the U.S. District Court for the Western District of
Pennsylvania. The case, which related to the Deluxe Government Services
business, was brought against DEPS by Mellon Bank in connection with a potential
bid to provide electronic benefits transfer services for the Southern Alliance
of States. In September 1997, the Company recorded a pretax charge of $40
million to reserve for this judgment and other related costs. In 1998, Mellon's
motion for prejudgment interest was denied by the district court and the Company
reversed $4.2 million of the $40 million liability. This reversal is reflected
in other income in the 1998 consolidated statement of income. The Company's
appeal of this judgment was denied by the Third Circuit Court of Appeals in
January 1999, and the Company paid $32.2 million to Mellon in February 1999. The
Company is reviewing whether a further appeal is warranted.
These charges are reflected throughout the 1997 consolidated statement
of income according to the nature of the charge, with $82.9 million in goodwill
impairment charge, $7.7 million in cost of sales expense, $39.6 million in SG&A
expense and $49.8 million in other expense.
1996 CHARGES - During 1996, having decided to sell the three businesses in the
Deluxe Direct segment, the Company recorded a pretax goodwill impairment charge
of $111.9 million to write these businesses down to their estimated fair values
less costs to sell. Additionally, the Company recorded net pretax charges of
$30.4 million in 1996 for restructuring, gains and losses on sales of businesses
occurring in 1996, and other reorganization costs.
These charges are reflected throughout the 1996 consolidated statement
of income according to the nature of the charge, with $111.9 million in goodwill
impairment charge, $39.2 million in cost of sales expense, $24.6 million in SG&A
expense and a $33.4 million gain in other income.
BALANCE SHEET IMPACT - As a result of the charges in all three years, the
December 31, 1998, consolidated balance sheet includes a restructuring accrual
of $45.7 million for employee severance costs and $6.8 million for estimated
losses on asset dispositions. The majority of these severance costs are expected
to be paid in 1999 and early 2000 from cash generated from the Company's
operations. The December 31, 1998, consolidated balance sheet also reflects a
liability of $34.4 million for the 1997 legal proceedings and $35.4 million for
the remaining losses on Deluxe Government Services contracts and relationships.
As noted above, the judgment in the legal proceedings was paid in February 1999.
The Deluxe Government Services contracts have varying terms through 2006.
Deluxe Corporation 7
<PAGE>
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following segment results exclude the above-mentioned reorganization and
other special charges.
NET SALES - In 1998, the Company's net sales increased .6%. Revenues lost due to
divestitures were more than offset by growth in the Deluxe Payment Protection
Systems, Deluxe Electronic Payment Systems and Deluxe Government Services
segments. Excluding businesses divested in both years, the Company's
consolidated net sales increased 2.9% from 1997.
Deluxe Payment Protection Systems' sales increased 11.9% to $215.7
million, reflecting volume increases in the collections business and in account
inquiry services provided to financial institutions. Deluxe Electronic Payment
Systems' sales increased 12.2% to $130.9 million, because of new customers and
increased transaction volumes. Deluxe Government Services' sales increased 63.1%
to $44 million, reflecting new customers and increased activity for existing
customers. Offsetting the increases in these segments were decreases in other
segments. Deluxe Paper Payment Systems' sales decreased .6% to $1,279.8 million,
primarily because of lower volume in financial institution check printing
resulting from lost customers. This decrease was partially offset by increased
volume for the direct mail check business and new pricing strategies within the
financial institution market. Deluxe Direct Response's sales decreased 18.1% to
$43.4 million, because of lost customers, price decreases for its direct mail
products and the sale of Deluxe Card Services in the third quarter of 1998.
Deluxe Direct's sales decreased 10.7% to $223.9 million, mostly because of
business divestitures. Additionally, lower catalog circulation caused volume to
decline in the remaining businesses.
In 1997, the Company's net sales decreased 3% from 1996. Revenues lost
due to divestitures within the Deluxe Direct segment were partially offset by
increased sales for all other segments. Excluding businesses divested in both
years, the Company's consolidated net sales increased 1.2% from 1996.
Deluxe Direct's sales decreased 35.2% to $250.8 million in 1997, as a
result of actions initiated in 1996 to increase its profitability. These
included sales of businesses, reduced catalog circulation and elimination of
unprofitable product lines. Additionally, response rates for the direct mail
businesses declined from 1996. The decrease within this segment was offset by
increases in all other segments. Deluxe Paper Payment Systems' sales increased
1.1% to $1,288.2 million in 1997, reflecting increased volume for financial
institution and direct mail check offerings. However, competitive pricing
pressures on financial institution check printing products partially offset
volume increases. Deluxe Payment Protection Systems' sales increased 30.5% to
$192.8 million, primarily because of higher collection service volume and
increased account verification inquiries from financial institutions. Deluxe
Electronic Payment Systems' sales increased 6.9% to $116.6 million, primarily
from increased volume in financial institution ATM processing. Deluxe Direct
Response's sales increased 5.9% to $53 million, because of acquisitions in 1996
and 1997. Deluxe Government Services' sales increased 29.1% to $27 million,
because of new customers and increased volume for existing customers.
GROSS MARGIN - The Company's consolidated gross margin was 52.7% in 1998,
compared to 54.0% in 1997 and 50.3% in 1996. With the reorganization and other
special charges excluded, consolidated gross margin was 55.2% in 1998, compared
to 54.4% in 1997 and 52.3% in 1996.
Deluxe Paper Payment Systems' gross margin increased to 63.1% in 1998
from 60.7% in 1997. The slight sales decrease was more than offset by cost
savings realized from closing financial institution check printing plants and
other efficiency improvements. Deluxe Electronic Payment Systems' margin
increased to 28.1% in 1998 from 25.6% in 1997, because of increased transaction
volumes and reduced employee benefit costs achieved from revising its employee
benefit and incentive compensation programs. Deluxe Government Services' margin
improved from negative 9.9% in 1997 to negative 2.4% in 1998, reflecting
increased volume and the accrual of future contract and relationship losses in
the third quarter of 1998. These margin increases were offset by decreases in
other segments. Deluxe Payment Protection Systems' margin decreased to 43.8% in
1998 from 47.7% in 1997. Revenue growth was more than offset by increased
information services and other infrastructure costs, reflecting the Company's
investment in this segment. Deluxe Direct Response's margin decreased to 27.0%
in 1998 from 29.6% in 1997, because of decreased volume and lower prices for
direct mail products, without a corresponding decrease in costs. Deluxe Direct's
margin decreased to 52.5% in 1998 from 53.3% in 1997, reflecting the divestiture
of a higher margin business in late 1997.
In 1997, Deluxe Paper Payment Systems' margins increased to
60.7% from 58.5% in 1996. The competitive pricing pressures experienced by
financial institution check printing were more than offset by improved product
mix and production efficiencies and by reduced costs from revising the employee
benefits program. Deluxe Electronic Payment Systems' margins increased to 25.6%
in 1997 from 19.4% in 1996, primarily because of decreased consulting expenses
and cost containment. Deluxe Direct's margins increased to 53.3% in 1997 from
48.4% in 1996, reflecting better cost control and inventory management in the
direct mail businesses and the sale of businesses with poorer margins. These
margin increases were offset by decreases in other segments. Deluxe Payment
Protection Systems' margin decreased to 47.7% from 49.8% in
8 Deluxe Corporation
<PAGE>
1996, because of increased costs related to the growth of the collections
business. Deluxe Direct Response's margin decreased to 29.6% from 33.6% in 1996,
reflecting the acquisition of lower margin businesses in 1996 and 1997. Deluxe
Government Services' margin decreased from a loss of 5.8% in 1996 to a loss of
9.9% in 1997, primarily because of increased costs for telecommunications,
interchange fees and help desk.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) - In 1998, the Company's SG&A
expenses decreased $25.2 million, or 3.2%. Excluding the reorganization and
other special charges discussed above, SG&A expenses in 1998 decreased $7.6
million, or 1%. SG&A expenses for Deluxe Direct Response decreased 10.3% from
1997, primarily because of lower selling expenses due to sales of businesses
within the segment in 1998 and reduced discretionary spending. Deluxe Government
Services' SG&A expenses decreased 33.5% from 1997, because of lower legal
expenses. Deluxe Direct's SG&A expenses decreased 17.2% from 1997, primarily
because of reduced catalog circulation and lower costs from reorganizing this
segment's marketing function. These SG&A expense reductions were partially
offset by increases in other segments. Deluxe Paper Payment Systems' SG&A
expenses increased .8% from 1997, because of costs associated with implementing
a new order processing and customer service system and increased selling
expenses for the direct mail check business related to an increased volume in
telephone orders. Because of increased selling and marketing costs associated
with the growth of and investment in their businesses, Deluxe Payment Protection
Systems' SG&A expenses increased 11.3% from 1997 and Deluxe Electronic Payment
Systems' SG&A expenses increased 18.8% from 1997.
In 1997, the Company's SG&A expenses were flat compared to expenses in
1996. Excluding the reorganization and other special charges discussed above,
SG&A expenses in 1997 decreased $14.6 million, or 1.9%. Deluxe Electronic
Payment Systems' SG&A expenses were flat compared to expenses in 1996. The
Deluxe Direct segment's SG&A expenses decreased 36.4% from 1996, mainly because
the assets of the businesses held for sale were no longer depreciated and
amortized. This segment also had reduced catalog costs resulting from lower
paper costs and simplified designs. These SG&A expense reductions were partially
offset by increases in other segments. Deluxe Paper Payment Systems' SG&A
expenses increased 5.9%. Financial institution check printing SG&A expenses
increased because of increased customer service call center volume and duplicate
costs from maintaining an old customer service system as a new system was
implemented. Although call center volume increased on an annual basis, it
decreased in the fourth quarter of 1997, compared to the fourth quarter of 1996.
During this time, the Company began charging financial institution customers for
placing orders via telephone as opposed to electronic channels. Deluxe Payment
Protection Systems' SG&A expenses increased 31.6%, reflecting increased
infrastructure costs and selling expenses related to the growth of the
collections business. Deluxe Direct Response's SG&A expenses increased 115.3%
from 1996, because of acquisitions in 1996 and 1997. Deluxe Government Services'
SG&A expenses increased 26.7%, because of increased employee compensation
expense.
OTHER INCOME (EXPENSE) - Other expense for the Company was $.1 million in 1998,
compared to expense of $40.6 million in 1997 and other income of $31.7 million
in 1996. These changes resulted primarily from the reorganization and other
special charges discussed above. With these charges removed, other income was $1
million in 1998, compared to income of $9.2 million in 1997 and expense of $1.8
million in 1996. The decrease in 1998 is due primarily to a $10.5 million loss
recorded on the sale of PaperDirect, Inc., and the Social Expressions component
of Current, Inc., in the fourth quarter of 1998. The improvement in 1997 over
1996 is from gains realized from selling check printing facilities and from
increased earnings realized from investing cash obtained through divestitures.
PROVISION FOR INCOME TAXES - In 1998, the Company's effective tax rate decreased
to 41% from 61.2% in 1997 and 44.9% in 1996. The decrease in 1998 is due to
increased pretax income in 1998, combined with a lower base of non-deductible
expenses due primarily to the non-deductible goodwill impairment charge
recognized in 1997. The increase in 1997 is due primarily to lower pretax income
combined with an increased base of non-deductible expenses consisting primarily
of the non-deductible goodwill impairment charge recorded by the Company. In
1996, the effect of the goodwill impairment charge was offset by tax benefits
recognized for the sales of businesses and businesses held for sale. With the
effect of the reorganization and other special charges removed in each year, the
Company's tax rate was 40.3% in 1998, 40.5% in 1997 and 40.2% in 1996.
NET INCOME - 1998 net income increased to $145.4 million from $44.7 million in
1997. The primary reason for the increase was the lower amount of reorganization
and other special charges discussed above. With the charges and their related
tax effects removed, the Company's net income was $189.1 million in 1998 and
$175.6 million in 1997.
1997 net income decreased to $44.7 million from $65.5 million in 1996.
The primary reason for the decrease was the higher amount of reorganization and
other special charges discussed above. With the charges and their related tax
effects removed, the Company's net income was $175.6 million in 1997 and $156
million in 1996.
Deluxe Corporation 9
<PAGE>
FINANCIAL CONDITION
- --------------------------------------------------------------------------------
LIQUIDITY - Funds provided by operations are the Company's primary source of
working capital for financing capital expenditures and paying dividends. Cash
provided by operations was $294.8 million in 1998, compared to $295.8 million in
1997. Improved operating results in 1998 were offset by an increase in severance
payments over 1997. Cash provided by operations increased in 1997 from $290.7
million in 1996. This increase was due to better cash management and improved
profitability resulting from operating cost reductions. Working capital was
$167.9 million as of December 31, 1998, compared to $131.1 million and $108.1
million on December 31, 1997 and 1996, respectively. The year-end current ratio
for 1998 was 1.4 to 1, compared to a year-end ratio of 1.3 to 1 for 1997 and
1996. The increase over 1997 and 1996 is primarily the result of proceeds from
divestitures. The Company anticipates that approximately $28.8 million of cash
will be paid out in 1999 for restructuring charges, compared to $25 million in
1998. In February 1999, the Company paid a $32.2 million judgment related to its
Deluxe Government Services business to settle its 1997 legal proceedings.
CAPITAL RESOURCES - In 1998, the Company completed several divestitures from
which it derived $87.9 million in net cash proceeds. In 1997, the Company made
one business acquisition and several divestitures from which it derived $1.1
million in net cash proceeds. In 1996, the Company made numerous business
acquisitions and divestitures from which it derived $98.1 million in net cash
proceeds.
Purchases of property, plant and equipment, and intangibles required
cash outlays of $121.3 million in 1998, compared to $109.5 million in 1997 and
$92 million in 1996. The Company anticipates capital expenditures of
approximately $130 million in 1999. The 1998 expenditures and anticipated 1999
expenditures relate to information technology systems upgrades and replacement,
productivity improvements and new product development.
The Company has uncommitted bank lines of credit of $145 million
available at variable interest rates. No amounts were drawn on those lines
during 1998. The average amount drawn on those lines during 1997 was $3.1
million at a weighted average interest rate of 6.47%. There was no outstanding
balance at December 31, 1998 or 1997 on these lines of credit. The Company also
has in place a $150 million committed line of credit available for borrowing and
as support for commercial paper. As of December 31, 1998 and 1997, the Company
had no commercial paper outstanding and no indebtedness outstanding under its
committed line of credit. Additionally, the Company has a shelf registration in
place to issue 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 December 31, 1998 and 1997, no such
notes were issued or outstanding.
Cash dividends totaled $119.7 million in 1998, compared to $121.3
million in 1997 and $122 million in 1996. Dividend payments were 82.3% of
earnings in 1998, 271.6% in 1997 and 186.3% in 1996. In December 1996, the
Company's board of directors amended the Company's stock repurchase plan to
permit the repurchase of up to 10 million shares of Deluxe common stock. The
board also approved the repurchase of up to 5 million of the 10 million approved
common shares. Through December 31, 1998, the Company has repurchased 3.5
million shares under this plan. As of March 1999, the Company has repurchased
all of the 5 million shares approved by the board under the plan.
YEAR 2000 READINESS DISCLOSURE
- --------------------------------------------------------------------------------
GENERAL APPROACH AND STATE OF READINESS - In 1996, the Company initiated a
program to prepare its computer systems, applications, embedded chip equipment
and third-party suppliers/customers for the year 2000. The year 2000 issue
affects the Company and most of the other companies and governmental agencies in
the world. Historically, certain computer programs were written using two digits
rather than four to define the applicable year. As a result, some programs may
recognize a date which uses the two digits "00" as 1900 rather than the year
2000, which among other things may cause them to generate erroneous data, lose
data elements and possibly fail.
The Company is using a multiphase approach in conducting its year 2000
remediation efforts. These phases are: assessment; analysis and formulation of
remediation strategy; solution implementation; testing; and certification using
internally developed criteria. The Company has divided its internal readiness
review between "mission critical" systems and equipment and its other assets.
The project is organized around nine types of computerized assets: internally
developed applications; product-to-market software and systems; third-party
purchased software; data centers; networks; environmental systems; purchased
hardware (including embedded chip and desktop equipment); third-party
assessment; and external interfaces. During 1997, the Company assessed and
prioritized all affected areas, defined appropriate resolution strategies and
began execution of those strategies. The compliance strategies included
renovation, replacement and retirement of systems and equipment.
As of February 1999, the overall project is approximately 91% complete
and approximately 98% complete for mission critical areas. All mission critical
components are expected to complete the certification process by the end of
March 1999. Also, during 1999, the project focus will shift toward completing
customer and vendor testing and contingency execution.
10 Deluxe Corporation
<PAGE>
As part of its year 2000 review, the Company has also assessed the
readiness of the embedded chip equipment in its facilities. This assessment
included all plant manufacturing equipment, HVAC systems, building security
systems, personal computers and other office equipment such as printers, faxes
and copy machines. The most frequent method of achieving compliance in this area
is replacing non-compliant systems and equipment. This effort was approximately
94% complete as of February 1999 and is scheduled for completion by September
1999.
Another area of focus for the Company is the year 2000 readiness of its
significant suppliers and customers, both from the standpoint of technology and
product and service provision. These external organizations have been contacted
and have provided responses to year 2000 assessment requests. Site visits and
action plans are being developed as appropriate, based on the importance of the
organizations to the Company's ability to provide products and services. This
category was 98% complete as of February 1999, with completion expected at the
end of March 1999.
COSTS - The Company expects to incur project expenses of approximately $26.8
million over the life of its year 2000 project, consisting of both internal
staff costs and consulting expenses, with $16.7 million having been incurred
through December 31, 1998. Funds for the initiative are provided from a separate
budget of $26.8 million for the remediation of all affected systems. The
Company's SAP software implementation costs and other capital expenditures
associated with replacing or improving affected systems are not included in
these cost estimates. The Company has not deferred any material information
technology project as a result of the initiative.
RISK AND CONTINGENCY - Because of the nature of the Company's business, the year
2000 issue would, if unaddressed, pose a material business risk for the Company.
Business operations may be at risk, as would customer information interfaces and
the provision of products and services. The risk is increased by the potential
for the Company to fall out of compliance with policies set by the Federal
Financial Institution Examination Council, National Credit Union Agency and
other federal and regional regulatory bodies.
The Company believes that with the planned modifications to existing
systems and the replacement or retirement 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. The Company has prioritized
its renovation efforts to focus first on its mission critical internal systems
and the Company believes it is on schedule to complete this component of its
remediation efforts before the relevant year 2000 failure dates are reached. In
addition to the planned modifications, replacements and retirements, the
Company has developed risk mitigation processes and is creating contingency
plans in an effort to limit the inherent risk of the year 2000 issue. Manual
fall-back processes and procedures are being identified and put in place,
particularly in cases where vendor equipment or services begin to demonstrate
the potential to be unavailable. The Company is also preparing plans to deploy
internal teams to repair problems as they arise when the next century begins.
Ongoing audit reviews are scheduled during the latter part of 1999 and into 2000
to ensure that compliance control processes continue to be used. In addition,
the Company is enhancing its existing business resumption plans and intends to
look to its existing liability insurance programs to mitigate its loss exposure
if operational problems do arise.
MARKET RISK DISCLOSURE
- --------------------------------------------------------------------------------
As of December 31, 1998, the Company had an investment portfolio of fixed income
securities, excluding those classified as cash and cash equivalents, of $41.1
million (see Note 7 of Notes to Consolidated Financial Statements). These
securities, like all fixed income instruments, are subject to interest rate risk
and will decline in value if market interest rates increase. However, the
Company has the ability to hold its fixed income investments until maturity and
therefore the Company would not expect to recognize an adverse impact in income
or cash flows in such an event.
The Company operates internationally, and so it is subject to
potentially adverse movements in foreign currency rate changes. The Company does
not enter into foreign exchange forward contracts to reduce its exposure to
foreign currency rate changes on intercompany foreign currency denominated
balance sheet positions. Historically, the effect of movements in the exchange
rates have not been material to the consolidated operating results of the
Company.
OUTLOOK
- --------------------------------------------------------------------------------
In 1999, the Company will continue its efforts to reduce costs and improve
profitability by continuing with its plans to close financial institution check
printing plants, complete implementation of a new order processing and customer
service system, and complete implementation of post-press production process
improvements. Additionally, the Company will continue with its plans to reduce
SG&A expenses. At the same time, the Company will continue with major
infrastructure improvements and expects to complete its year 2000 readiness
project.
Having completed a divestiture program begun in 1996 and having taken
steps to improve the profitability of its ongoing businesses while investing in
its infrastructure, the Company is now positioned for growth. Its improved cash
position, low debt and available financing create the opportunity to enhance
products and services through internal developments, external alliances,
partnerships and acquisitions that are within its strategic focus.
Deluxe Corporation 11
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements and related information are
the responsibility of management. They have been prepared in conformity with
generally accepted accounting principles and include amounts that are based on
our best estimates and judgments under the existing circumstances. The financial
information contained elsewhere in this annual report is consistent with that in
the consolidated financial statements.
The Company maintains internal accounting control systems that are
adequate to provide reasonable assurance that the assets are safeguarded from
loss or unauthorized use. These systems produce records adequate for preparation
of financial information. We believe the Company's systems are effective, and
the costs of the systems do not exceed the benefits obtained.
The audit committee of the board of directors has reviewed all financial
data included in this report. The audit committee is composed entirely of
outside directors and meets periodically with the internal auditors, management
and the independent public accountants on financial reporting matters. The
independent public accountants have free access to meet with the audit
committee, without the presence of management, to discuss their audit results
and opinions on the quality of financial reporting.
The role of independent public accountants is to render an independent,
professional opinion on management's consolidated financial statements to the
extent required by generally accepted auditing standards.
Deluxe recognizes its responsibility for conducting its affairs
according to the highest standards of personal and corporate conduct. It has
distributed to all employees a statement of its commitment to conducting all
Company business in accordance with applicable legal requirements and the
highest ethical standards.
/s/ J.A. Blanchard III /s/ Thomas W. VanHimbergen
J.A. Blanchard III Thomas W. VanHimbergen
Chairman, President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
January 26, 1999
12 Deluxe Corporation
<PAGE>
FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET SALES $1,931,796 $1,919,366 $1,979,627 $1,936,719 $1,834,024
- -------------------------------------------------------------------------------------------------------------------------
SALARIES AND WAGES 532,305 572,035 586,949 551,788 519,901
- -------------------------------------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES 101,132 70,478 53,302 74,885 102,453
- -------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS(1) 145,408 44,672 65,463 94,434 144,253
Return on sales 7.53% 2.33% 3.31% 4.88% 7.87%
Per share - basic 1.80 .55 .80 1.15 1.75
Per share - diluted 1.80 .55 .79 1.15 1.75
Return on average shareholders' equity 23.85% 6.75% 8.77% 11.84% 17.86%
Return on average assets 12.37% 3.84% 5.30% 7.40% 11.50%
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME(1) 145,408 44,672 65,463 87,021 140,866
Per share - basic 1.80 .55 .80 1.06 1.71
Per share - diluted 1.80 .55 .79 1.06 1.71
- -------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PER COMMON SHARE 1.48 1.48 1.48 1.48 1.46
- -------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 608,910 610,248 712,916 780,374 814,393
- -------------------------------------------------------------------------------------------------------------------------
PURCHASES OF CAPITAL ASSETS 121,275 109,500 92,038 125,068 126,226
- -------------------------------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION EXPENSE 85,784 97,269 106,636 103,303 85,906
- -------------------------------------------------------------------------------------------------------------------------
WORKING CAPITAL INCREASE (DECREASE) 36,808 22,911 95,857 (118,116) (94,086)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 1,203,034 1,148,364 1,176,440 1,295,095 1,256,272
- -------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 106,321 109,986 108,622 110,997 110,867
- -------------------------------------------------------------------------------------------------------------------------
DEBT-TO-CAPITAL RATIO(2) 14.98% 15.96% 15.41% 17.14% 12.89%
- -------------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING
(THOUSANDS) 80,648 81,854 82,311 82,420 82,400
- -------------------------------------------------------------------------------------------------------------------------
NUMBER OF EMPLOYEES 15,296 18,937 19,643 19,286 18,839
- -------------------------------------------------------------------------------------------------------------------------
NUMBER OF PRODUCTION AND SERVICE FACILITIES 58 68 81 81 78
=========================================================================================================================
</TABLE>
(1) INCOME FROM CONTINUING OPERATIONS AND NET INCOME INCLUDE REORGANIZATION AND
OTHER SPECIAL CHARGES EACH YEAR. SEE MANAGEMENT'S DISCUSSION AND ANALYSIS ON
PAGE 6.
(2) THE CALCULATION OF THE COMPANY'S DEBT-TO-CAPITAL RATIO WAS MODIFIED IN 1998
TO CONFORM WITH THE GENERALLY ACCEPTED CALCULATION USED BY RATING AGENCIES.
RATIOS FOR ALL PRIOR PERIODS HAVE BEEN RESTATED TO REFLECT THIS NEW CALCULATION.
THIS RATIO IS CALCULATED AS FOLLOWS: THE SUM OF LONG-TERM DEBT PLUS LONG-TERM
DEBT DUE WITHIN ONE YEAR PLUS SHORT-TERM DEBT DIVIDED BY THE SUM OF LONG-TERM
DEBT PLUS LONG-TERM DEBT DUE WITHIN ONE YEAR PLUS SHORT-TERM DEBT PLUS
SHAREHOLDERS' EQUITY PLUS LONG-TERM DEFERRED INCOME TAXES.
Deluxe Corporation 13
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 (DOLLARS IN THOUSANDS) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS Cash and cash equivalents $ 268,934 $ 171,438
Marketable securities 41,133 8,021
Trade accounts receivable 145,079 151,201
----------------------------------------------------------------------------------------
Inventories:
Raw material 2,619 15,462
Semi-finished goods 7,401 9,132
Finished goods 1,981 26,503
----------------------------------------------------------------------------------------
Supplies 17,400 15,899
Deferred advertising 7,939 15,763
Deferred income taxes 63,785 50,345
Prepaid expenses and other current assets 62,961 48,849
----------------------------------------------------------------------------------------
Total current assets 619,232 512,613
- ---------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 45,208 52,910
PROPERTY, PLANT AND EQUIPMENT Land and land improvements 46,826 59,967
Buildings and building improvements 209,416 267,135
Machinery and equipment 512,683 562,983
----------------------------------------------------------------------------------------
Total 768,925 890,085
- ---------------------------------------------------------------------------------------------------------------------------
Less accumulated depreciation 424,365 475,077
Property, plant and equipment-net 344,560 415,008
- ---------------------------------------------------------------------------------------------------------------------------
INTANGIBLES Cost in excess of net assets acquired-net 42,836 54,435
Internal use software-net 118,417 74,584
Other intangible assets-net 32,781 38,814
----------------------------------------------------------------------------------------
Total intangibles 194,034 167,833
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,203,034 $ 1,148,364
===========================================================================================================================
CURRENT LIABILITIES Accounts payable $ 53,555 $ 73,516
Accrued liabilities:
Wages, including vacation pay 60,540 62,513
Employee profit sharing and pension 41,762 40,517
Accrued income taxes 33,087 31,960
Accrued rebates 34,712 36,708
Accrued contract/relationship losses 35,356
Other 185,022 129,263
Long-term debt due within one year 7,332 7,078
----------------------------------------------------------------------------------------
Total current liabilities 451,366 381,555
- --------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 106,321 109,986
- ---------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES 36,018 6,040
- ---------------------------------------------------------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES 419 40,535
- ---------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY Common shares $1 par value (authorized: 500,000,000 shares;
issued: 1998--80,480,526 shares 1997--81,325,925 shares) 80,481 81,326
Additional paid-in capital 6,822 4,758
Retained earnings 522,087 525,302
Unearned compensation (238) (649)
Accumulated other comprehensive income (242) (489)
----------------------------------------------------------------------------------------
Shareholders' equity 608,910 610,248
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,203,034 $ 1,148,364
===========================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14 Deluxe Corporation
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 1,931,796 $ 1,919,366 $ 1,979,627
- -----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES Cost of sales 912,780 883,187 983,444
Selling, general and administrative 772,381 797,566 797,174
Goodwill impairment charge 82,893 111,900
-----------------------------------------------------------------------------------
Total 1,685,161 1,763,646 1,892,518
-----------------------------------------------------------------------------------
INCOME FROM OPERATIONS 246,635 155,720 87,109
- -----------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE) Other income (expense) 8,178 (31,748) 42,305
Interest expense (8,273) (8,822) (10,649)
- -----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 246,540 115,150 118,765
=======================================================================================================================
PROVISION FOR INCOME TAXES 101,132 70,478 53,302
=======================================================================================================================
NET INCOME $ 145,408 $ 44,672 $ 65,463
=======================================================================================================================
NET INCOME PER SHARE - BASIC $ 1.80 $ .55 $ .80
=======================================================================================================================
NET INCOME PER SHARE - DILUTED $ 1.80 $ .55 $ .79
=======================================================================================================================
CASH DIVIDENDS PER COMMON SHARE $ 1.48 $ 1.48 $ 1.48
=======================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME $ 145,408 $ 44,672 $ 65,463
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME,
NET OF TAX:
Foreign currency translation adjustments 177 (1,135) 146
Unrealized gains on securities:
Unrealized holding gains arising during the year 116 242
Less reclassification adjustment for gains
included in net income (46)
----------------------------------------------------------------------------------------------
Other comprehensive income (loss) 247 (1,135) 388
- ----------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 145,655 $ 43,537 $ 65,851
==================================================================================================================================
RELATED TAX (EXPENSE) BENEFIT OF
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments $ (123) $ 1,790 $ (119)
Unrealized gains on securities:
Unrealized holding gains arising during the year (61) (130)
Less reclassification adjustment for gains
included in net income 24
==================================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deluxe Corporation 15
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 145,408 $ 44,672 $ 65,463
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 59,451 68,816 66,269
Amortization of intangibles 26,333 28,453 40,367
Goodwill impairment charge 82,893 111,900
Stock purchase discount 5,905 6,654 7,478
Net loss (gain) on sales of businesses 4,850 (866) (37,007)
Deferred income taxes 13,415 (25,733) (20,690)
Changes in assets and liabilities, net of
effects from acquisitions and sales of businesses:
Trade accounts receivable (5,241) (5,806) 13,082
Inventories 3,568 5,019 13,367
Accounts payable (6,008) 9,678 (11,456)
Other assets and liabilities 47,127 81,998 41,930
---------------------------------------------------------------------------------------------
Net cash provided by operating activities 294,808 295,778 290,703
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of marketable securities with
maturities of more than 3 months 19,199 6,250
Purchases of marketable securities with
maturities of more than 3 months (52,411) (8,000)
Purchases of capital assets (121,275) (109,500) (92,038)
Payments for acquisitions, net of cash acquired (10,600) (15,098)
Net proceeds from sales of businesses, net of cash sold 89,416 21,627 112,913
Proceeds from sales of capital assets 28,518 20,036 5,618
Other (395) (2,925) 5,870
---------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (36,948) (89,362) 23,515
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES Net payments on short-term debt (16,783) (32,428)
Payments on long-term debt (6,589) (6,818) (10,934)
Payments to retire common stock (60,323) (56,281) (48,065)
Proceeds from issuing stock under employee plans 26,230 23,654 28,088
Cash dividends paid to shareholders (119,682) (121,321) (121,976)
---------------------------------------------------------------------------------------------
Net cash used in financing activities (160,364) (177,549) (185,315)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 97,496 28,867 128,903
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 171,438 142,571 13,668
====================================================================================================================================
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 268,934 $ 171,438 $ 142,571
====================================================================================================================================
Supplementary cash flow disclosure: Interest paid $ 8,018 $ 9,620 $ 10,672
Income taxes paid 82,276 63,612 83,600
====================================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16 Deluxe Corporation
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
CONSOLIDATION - The consolidated financial statements include the accounts of
the Company and all wholly owned subsidiaries. All significant intercompany
accounts, transactions and profits have been eliminated.
CASH AND CASH EQUIVALENTS - The Company considers all cash on hand, money market
funds and other highly liquid investments with original maturities of three
months or less to be cash and cash equivalents. The carrying amounts reported in
the consolidated balance sheets for cash and cash equivalents approximate fair
value.
MARKETABLE SECURITIES - Marketable securities consist of debt and equity
securities. They are classified as available for sale and are carried at fair
value, with the unrealized gains and losses, net of tax, reported in other
comprehensive income in the shareholders' equity section of the consolidated
balance sheets. Realized gains and losses and permanent declines in value are
included in other income. The cost of securities sold is determined using the
specific identification method.
INVENTORY - Inventory is stated at the lower of cost or market. Cost is
determined using the last-in, first-out (LIFO) method for substantially all
inventory. LIFO inventories at December 31, 1998 and 1997, were approximately $5
million and $8.5 million, respectively, less than replacement cost.
In 1998, the dispositions of PaperDirect, Inc., and the Social
Expressions unit of Current, Inc. (see Note 6), included the sale of LIFO
inventories.
DEFERRED ADVERTISING - These costs consist of materials, production, postage and
design expenditures required to produce catalogs for the Company's direct mail
businesses. Such costs are amortized over periods (generally less than 12
months) that correspond to the estimated revenue streams of the individual
catalogs. The actual timing of these revenue streams may differ from these
estimates. Sales materials are charged to expense when no longer owned or
expected to be used. The total amount of deferred advertising expense for 1998,
1997 and 1996 was $100 million, $101.3 million and $107.4 million, respectively.
LONG-TERM INVESTMENTS - Long-term investments consist principally of cash
surrender values of insurance contracts, investments with maturities in excess
of one year and notes receivable. Such investments are carried at cost or
amortized cost which approximates their fair values.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment, including
leasehold and other improvements that extend an asset's useful life or
productive capabilities, are stated at historical cost. Buildings with 40-year
lives and machinery and equipment with lives of five to 11 years are generally
depreciated using accelerated methods. Leasehold and building improvements are
depreciated on a straight-line basis over the estimated useful life of the
property or the life of the lease, whichever is shorter.
INTANGIBLES - Intangibles are presented in the consolidated balance sheets net
of accumulated amortization. Amortization expense is determined on the
straight-line basis over periods of five to 30 years for cost in excess of net
assets acquired (goodwill), and three to 10 years for internal use software and
other intangibles. Other intangibles consist primarily of software to be
licensed and costs of installing electronic benefit transfer systems. Total
intangibles at December 31 were as follows (dollars in thousands):
1998 1997
- --------------------------------------------------------------------------------
Cost in excess of net assets acquired $ 63,131 $ 123,786
Internal use software 147,131 94,826
Other intangible assets 89,840 103,682
Total 300,102 $ 322,294
Less accumulated amortization (106,068) (154,461)
Intangibles - net $ 194,034 $ 167,833
================================================================================
IMPAIRMENT OF LONG-LIVED ASSETS - The Company evaluates the recoverability of
long-lived assets not held for sale by measuring the carrying amount of the
assets against the estimated undiscounted future cash flows associated with
them. Should the sum of the expected future net cash flows be less than the
carrying value of the long-lived asset, an impairment loss would be recognized.
The impairment loss would be calculated as the amount by which the carrying
value of the asset exceeds the fair value of the asset. There were no material
adjustments in 1998, 1997 or 1996 to the carrying value of long-lived assets to
be held and used.
The Company evaluates the recoverability of long-lived assets held for
disposal by comparing the asset's carrying amount with its fair value less costs
to sell. Should the fair value less costs to sell be less than the carrying
value of the long-lived asset, an impairment loss would be recognized. The
impairment loss would be calculated as the amount by which the carrying value of
the asset exceeds the fair value of the asset less costs to sell. In keeping
with this policy, the
Deluxe Corporation 17
<PAGE>
Company recorded a charge of $99 million in 1997 and $111.9 million in 1996 to
write down businesses held for disposal within its Deluxe Direct and Deluxe
Electronic Payment Systems segments (see Note 4).
INCOME TAXES - Deferred income taxes result from temporary differences between
the financial reporting basis of assets and liabilities and their respective tax
reporting bases. Future tax benefits are recognized to the extent that
realization of such benefits is more likely than not.
ACCRUED REBATES - On occasion, the Company enters into contractual agreements
with its customers for rebates on certain products it sells. The Company records
these amounts as reductions to sales and accrues them on the consolidated
balance sheets as incurred.
TRANSLATION ADJUSTMENT - The financial position and results of operations of the
Company's international subsidiaries are measured using local currencies as the
functional currencies. Assets and liabilities of these operations were
translated at the exchange rate in effect at the balance sheet date. Income
statement accounts were translated at the average exchange rate during the year.
Translation adjustments arising from the use of differing exchange rates from
period to period are included in other comprehensive income in the shareholders'
equity section of the consolidated balance sheets. Gains and losses that result
from foreign currency transactions are included in earnings.
REVENUE RECOGNITION - The Company records sales and related profits for the
majority of its operations as products are shipped and as services are
performed. Sales and estimated profits under long-term contracts are recognized
under the percentage-of-completion method. Under this method, income is
recognized based on the estimated stage of completion of individual contracts,
using the units of delivery method.
EMPLOYEE STOCK-BASED COMPENSATION - As permitted by Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
the Company continues to account for its employee stock-based compensation in
accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees." Accordingly, no compensation cost has been
recognized for fixed stock options issued under the Company's stock incentive
plan. The Company has adopted the disclosure-only provisions of SFAS No. 123
(see Note 9).
COMPREHENSIVE INCOME - In the first quarter of 1998, the Company adopted SFAS
No. 130, "Reporting Comprehensive Income," which requires disclosure of
comprehensive income and its components in the Company's financial statements.
The adoption of this statement had no impact on net income or total
shareholders' equity. The Company's comprehensive income consists of net
income, unrealized holding gains and losses on securities, and foreign currency
translation adjustments.
RECLASSIFICATIONS - Certain amounts reported in 1997 and 1996 have been
reclassified to conform with the 1998 presentation. These changes had no impact
on previously reported results of operations or shareholders' equity.
USE OF ESTIMATES - The Company has prepared the accompanying consolidated
financial statements in conformity with generally accepted accounting
principles. In this process, it is necessary for management to make certain
assumptions and related estimates affecting the amounts reported in the
consolidated financial statements and attached notes. These estimates and
assumptions are developed based upon all information available using
management's best efforts. However, actual results can differ from assumed and
estimated amounts.
NEW ACCOUNTING PRONOUNCEMENTS - In March 1998, the Accounting Standards
Executive Committee (AcSEC) of the American Institute of CPAs issued Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use," which provides guidance on accounting for costs
of internal-use computer software. The Company's early adoption of this SOP in
1998 did not have a material impact on the Company's reported operating results
or financial position.
In April 1998, AcSEC issued SOP 98-5, "Reporting the Costs of Start-up
Activities," which provides guidance on the appropriate accounting for start-up
activities. This statement is effective for the Company on January 1, 1999. In
June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which provides
guidance on accounting for derivatives and hedge transactions. This statement is
effective for the Company on January 1, 2000. The Company anticipates that the
effect of these pronouncements will not have a material impact on reported
operating results.
18 Deluxe Corporation
<PAGE>
- --------------------------------------------------------------------------------
NOTE 2 EARNINGS PER SHARE
- --------------------------------------------------------------------------------
The following table reflects the calculation of basic and diluted earnings per
share (dollars and shares outstanding in thousands, except per share amounts).
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME PER SHARE - BASIC: Net income $145,408 $ 44,672 $ 65,463
Weighted average shares outstanding 80,648 81,854 82,311
-----------------------------------------------------------------------------------
Net income per share - basic $ 1.80 $ .55 $ .80
-----------------------------------------------------------------------------------
NET INCOME PER SHARE - DILUTED: Net income $145,408 $ 44,672 $ 65,463
Weighted average shares outstanding 80,648 81,854 82,311
Dilutive impact of options 179 92 121
Shares contingently issuable 28 11 1
-----------------------------------------------------------------------------------
Weighted average shares and potential dilutive
shares outstanding 80,855 81,957 82,433
-----------------------------------------------------------------------------------
Net income per share - diluted $ 1.80 $ .55 $ .79
======================================================================================================================
</TABLE>
During 1998 and 1997, options to purchase .7 million shares were
outstanding but were not included in the computation of diluted earnings per
share. During 1996, options to purchase .9 million shares of common stock were
outstanding but were not included in the computation of diluted earnings per
share. The exercise prices of the excluded options were greater than the average
market price of the Company's common shares during the respective periods.
In January 1998, the Company awarded options to
substantially all employees (excluding foreign employees and employees of
businesses held for sale), allowing them, subject to certain conditions, to
purchase 100 shares of common stock at an exercise price of $33 per share.
Options for the purchase of 1.7 million shares of common stock were issued under
this program. Had these options been issued in previous years, the dilutive
impact of options presented above for 1997 and 1996 may have differed.
- --------------------------------------------------------------------------------
NOTE 3 RESTRUCTURING CHARGES
- --------------------------------------------------------------------------------
In the first quarter of 1996, the Company announced a plan to close 21 of its
financial institution check printing plants over a two-year period. The plant
closings were made possible by advancements in the Company's telecommunications,
order processing and printing technologies. Also, during the first quarter of
1996, the Company announced a plan to move the operating and administrative
facilities of one of its direct mail businesses from New Jersey to Colorado. In
conjunction with these plans, the Company recorded a pretax restructuring charge
of $45.4 million in 1996. The charge consisted of estimated costs for asset
dispositions ($9 million) and employee severance ($36.4 million). The severance
portion of this charge assumed the termination of approximately 1,300 employees
in production, customer service and front-end processing functions. This charge
is reflected in cost of sales ($35.2 million) and selling, general and
administrative (SG&A) expense ($10.2 million) in the 1996 consolidated statement
of income.
During the third quarter of 1997, the Company recorded pretax
restructuring charges of $24.5 million. The charges included additional costs
for closing the 21 plants discussed above and costs associated with the
continued consolidation of the Company's core businesses. The additional charge
for plant closing costs represented amounts that could not be recorded in 1996
because they did not meet the requirements for accrual in that year. Termination
of additional employees was expected to result from process improvements in the
post-press phase of check production, implementation of a new order processing
and customer service system and reductions in support functions at corporate
operations and other businesses. The restructuring charges consisted of employee
severance costs of $21.6 million and $2.9 million for expected losses on the
disposition of assets. The severance portion of this charge assumed the
termination of approximately 2,800 employees. Expenses of $7.7 million were
included in cost of sales, $13.9 million in SG&A expense and $2.9 million in
other expense in the 1997 consolidated statement of income. As of December 31,
1998, the production functions at all 21 plants were closed. The front-end
operations of three of the plants remain open and are expected to close in 1999.
Deluxe Corporation 19
<PAGE>
Implementation of the new order processing and customer service system and
improvements to the post-press production process are expected to be
substantially completed in 1999. Through December 31, 1998, termination benefits
of approximately $42.5 million have been paid to approximately 2,950 employees
under the plans included in the 1996 and 1997 charges.
During the third quarter of 1998, the Company recorded pretax
restructuring charges of $39.5 million. The charges included costs associated
with reducing SG&A expense, discontinuing production of the Deluxe Direct
Response segment's direct mail products, and closing four additional financial
institution check printing plants. The Company anticipates eliminating 800 SG&A
positions within sales and marketing, finance and accounting, human resources,
and information services. Discontinuing production of direct mail products will
result in the elimination of approximately 60 positions. The Company also plans
to close four additional financial institution check printing plants in 1999 and
early 2000, affecting approximately 870 employees. The restructuring charges
consisted of employee severance costs of $31.2 million and $8.3 million for
expected losses on the disposition of assets. Expenses of $10.9 million were
included in cost of sales, $21.1 million in SG&A expense and $7.5 million in
other expense in the 1998 consolidated statement of income. Through December 31,
1998, termination benefits of approximately $1 million have been paid to
approximately 100 employees under the 1998 plans.
The Company's consolidated balance sheets reflect restructuring accruals
of $45.7 million and $39.5 million as of December 31, 1998 and 1997,
respectively, for employee severance costs, and $6.8 million and $3.7 million as
of December 31, 1998 and 1997, respectively, for estimated losses on asset
dispositions. The majority of the severance costs are expected to be paid in
1999 and early 2000 with cash generated from the Company's operations.
- --------------------------------------------------------------------------------
NOTE 4 IMPAIRMENT LOSSES
- --------------------------------------------------------------------------------
In 1996, the Company announced plans to divest three businesses in the Deluxe
Direct segment-Nelco, Inc., PaperDirect, Inc., and the Social Expressions unit
of Current, Inc. In 1997, the Company determined that it would dispose of the
international operations of the Deluxe Electronic Payment Systems segment, and
in 1998 the Company determined that it would dispose of the businesses in the
Deluxe Direct Response segment. The Company does not depreciate or amortize any
of the long-term assets of businesses while they are held for disposal.
Based on fair market value estimates, the Company recorded charges of
$99 million in 1997 and $111.9 million in 1996 to write down the carrying
amounts of businesses held for sale to their estimated fair values less costs to
sell. These charges are included in the 1997 consolidated statement of income in
goodwill impairment charge ($82.9 million) and SG&A expense ($16.1 million), and
in the 1996 consolidated statement of income in goodwill impairment charge. The
disposal of the businesses in the Deluxe Direct and Deluxe Direct Response
segments was completed in 1998. In January 1999, the Company determined that the
international operations of the Deluxe Electronic Payment Systems segment
maintained a continuing strategic importance within the segment and is no longer
held for sale. This will not have a material impact on the results of operation
or the financial position of the Company. At December 31, 1997, the aggregate
remaining carrying amount of businesses held for sale on that date was $83
million. Together, all of the aforementioned businesses recorded sales of $270.4
million, $270.1 million and $292 million and contributed a net loss of $2.6
million, $13.2 million and $19.2 million in 1998, 1997 and 1996, respectively,
excluding the impairment charges in 1997 and 1996.
- --------------------------------------------------------------------------------
NOTE 5 ACCRUED CONTRACT/RELATIONSHIP LOSSES
- --------------------------------------------------------------------------------
During the third quarter of 1998, the Company recorded a charge of $36.4 million
to reserve for expected future losses on existing long-term contracts and
relationships of the Deluxe Government Services segment. This charge is
reflected in cost of sales in the 1998 consolidated statement of income. This
segment provides electronic benefits transfer services to state governments.
Due to a continuing strong economy, record low unemployment and welfare reform,
the actual transaction volumes and expected future revenues of this business are
well below original expectations. Additionally, actual and expected future
telecommunications, installation, help desk and other costs are significantly
higher than originally anticipated, resulting in expected future losses on the
existing electronic benefits transfer contracts and relationships of this
business.
20 Deluxe Corporation
<PAGE>
- --------------------------------------------------------------------------------
NOTE 6 BUSINESS COMBINATIONS AND DIVESTITURES
- --------------------------------------------------------------------------------
1998 DIVESTITURES - During 1998, the Company sold substantially all of the
assets of PaperDirect (UK) Limited, ESP Employment Screening Partners, Inc.,
Social Expressions, and the businesses within the Deluxe Direct Response
segment. The Company also sold all of the outstanding stock of PaperDirect, Inc.
The aggregate net sales price for these businesses was $113.7 million,
consisting of cash proceeds of $87.9 million and notes receivable of $25.8
million. The Company realized a loss of $10.5 million on the combined sale of
PaperDirect and Social Expressions. The individual gains and losses recognized
on the sales of the other businesses did not have a material impact on the
results of the Company. The consolidated financial statements of the Company
include the results of these businesses through their individual sale dates.
The following summarized, unaudited pro forma results of operations for
the years ended December 31, 1998 and 1997, assume the divestitures occurred as
of the beginning of the respective periods. No assumptions were made in the pro
forma information concerning the use of the cash received in consideration for
the sales of the businesses.
(dollars in thousands, except per share amounts) 1998 1997
- --------------------------------------------------------------------------------
Net sales $1,682,000 $1,654,812
Cost of sales 792,097 751,802
SG&A and goodwill impairment charge 638,428 650,130
Other income (expense) 9,381 (40,862)
Provision for income taxes 106,143 89,928
Net income 154,713 122,090
Net income per share - basic 1.92 1.49
Net income per share - diluted 1.91 1.49
================================================================================
1997 DIVESTITURES - During 1997, the Company sold substantially all of the
assets of Nelco, Inc., its U.K. checks business, and a product line within the
Deluxe Direct Response segment. The aggregate sales price for these businesses
was $17.4 million, consisting of cash proceeds of $11.7 million and notes
receivable of $5.7 million. The consolidated financial statements of the Company
include the results of these businesses through their individual sale dates. In
aggregate, the effect of these divestitures did not have a material impact on
the operations of the Company.
1997 ACQUISITIONS - During 1997, the Company acquired substantially all of the
assets of Fusion Marketing Group, Inc. for $10.6 million plus amounts contingent
on the future earnings of the business. Fusion provides customized database
marketing services to financial institutions. The acquisition was accounted for
under the purchase method of accounting. Accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based on their fair
values on the date of purchase. The total cost in excess of net assets acquired
of $9.6 million was recorded as goodwill and was being amortized over 15 years.
In December 1998, the Company sold the assets of this business. The effect of
this acquisition and subsequent divestiture did not have a material pro forma
impact on the Company's operations.
1996 DIVESTITURES - During 1996, the Company sold its Health Care Forms, T/Maker
Company, Financial Alliance Processing Services, Inc., U.K. forms, and internal
bank forms businesses. The aggregate sales price for these businesses was $133.3
million, consisting of cash proceeds of $116.7 million and notes receivable of
$16.6 million. The resultant aggregate net gain on these sales was $37 million.
The consolidated financial statements of the Company include the results of
these businesses through their individual sale dates. In aggregate, the 1996
consolidated financial statements of the Company include revenues from these
businesses of $118.1 million and net income of $2.6 million.
1996 ACQUISITIONS - During 1996, the Company purchased a number of businesses in
the payment protection and database marketing fields. The aggregate amount paid
for these acquisitions was $18.6 million. Additionally, under the purchase
agreements, the Company may have to pay additional amounts up to $14.3 million
contingent on the future net earnings of some of the acquired businesses. Each
acquisition was accounted for using the purchase method of accounting.
Accordingly, the consolidated financial statements of the Company include the
results of these businesses subsequent to their purchase dates. The purchase
price for each acquisition was allocated to the assets acquired and liabilities
assumed based on their fair values at the time of purchase. The aggregate cost
in excess of net assets acquired for these acquisitions was $16.5 million, which
was recorded as goodwill and is being amortized over periods ranging from five
to 25 years. In December 1998, the assets of the database marketing businesses
were sold. The combined effect of these acquisitions and the subsequent
divestiture did not have a material pro forma impact on the operations of the
Company.
1996 JOINT VENTURE - During 1997, the Company completed its 1996 agreement to
form a joint venture with HCL Corporation of India. This venture was formed to
provide software development and other services to financial institutions in the
United States and in certain foreign countries. The joint venture commenced
operations in September 1997. The results of the joint venture did not have a
material effect on the Company's operations in 1998 or 1997.
Deluxe Corporation 21
<PAGE>
- --------------------------------------------------------------------------------
NOTE 7 MARKETABLE SECURITIES
- --------------------------------------------------------------------------------
On December 31, 1998 and 1997, marketable securities available for sale
consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------------------------------------ -------------
Unrealized Unrealized Cost, which
holding holding approximates
Cost gain loss Fair value fair value
- ------------------------------------------------------------------------------------------------------------------ -------------
<S> <C> <C> <C> <C> <C>
Debt securities issued by the U.S. Treasury and other
government agencies $ 17,084 $ (97) $ 16,987 $ 8,021
Debt securities issued by states of the U.S. and political
subdivisions of states 14,677 $ 23 (2) 14,698
Corporate debt securities 9,450 (2) 9,448
----------------------------------------------------- ------------
Total marketable securities $ 41,211 $ 23 $ (101) $ 41,133 $ 8,021
----------------------------------------------------- ------------
Other debt securities (included in cash equivalents) 256,186 185 256,371 129,700
- ------------------------------------------------------------------------------------------------------------------ ------------
Total $ 297,397 $ 208 $ (101) $ 297,504 $ 137,721
================================================================================================================== ============
</TABLE>
At December 31, 1998, debt securities with a cost basis of $284.3
million and a fair value of $284.5 million mature in 1999. At December 31, 1998,
securities with a cost basis of $13.1 million and a fair value of $13 million
mature in 2000 and 2001.
Proceeds from sales of marketable securities available for sale were
$19.2 million and $6.3 million in 1998 and 1996, respectively. The Company
realized a net gain of $70,000 and a net loss of $36,000 on the sales of
marketable securities in 1998 and 1996, respectively. There were no sales of
marketable securities in 1997.
- --------------------------------------------------------------------------------
NOTE 8 PROVISION FOR INCOME TAXES
- --------------------------------------------------------------------------------
The components of the provision for income taxes are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax provision:
Federal $ 73,763 $ 84,392 $ 67,749
State 22,716 14,062 11,794
Total 96,479 98,454 79,543
- -----------------------------------------------------------------------------------------
Deferred tax provision (benefit):
Federal 4,521 (23,876) (29,581)
State 132 (4,100) 3,340
- -----------------------------------------------------------------------------------------
Total $101,132 $ 70,478 $ 53,302
=========================================================================================
</TABLE>
22 Deluxe Corporation
<PAGE>
The Company's effective tax rate on pretax income differs from the U.S.
Federal statutory tax rate of 35% as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax at Federal statutory rate $ 86,289 $ 40,303 $ 41,568
State income taxes net of Federal income tax benefit 14,851 6,442 9,837
Amortization and write-down of non-deductible intangibles 745 32,116 44,170
Recognition of excess of tax basis over book investment in subsidiaries sold and held for disposal (2,220) (3,786) (45,430)
Change in valuation allowance (542) 1,024 7,496
Other 2,009 (5,621) (4,339)
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 101,132 $ 70,478 $ 53,302
====================================================================================================================================
</TABLE>
Income before income taxes consisted of domestic income of $137.7
million and foreign losses of $22.5 million for the year ended December 31,
1997, and domestic income of $129.3 million and foreign losses of $10.5 million
for the year ended December 31, 1996. Foreign income before income taxes for the
year ended December 31, 1998 was less than five percent of the Company's total
income before income taxes.
Tax effected temporary differences which give rise to a significant
portion of deferred tax assets and liabilities at December 31, 1998 and 1997,
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred tax Deferred tax Deferred tax Deferred tax
assets liabilities assets liabilities
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Property, plant and equipment $ 22,505 $ 21,837
Capital loss carryforwards $ 25,294 $ 425
Deferred advertising 2,698 2,994
Employee benefit plans 7,490 12,599
Inventory 708 1,755
Intangibles 41,587 19,280
Net operating loss carryforwards 13,919 14,224
Excess of tax basis over book investment in subsidiaries held for disposal 34,203
Restructuring accrual 19,218 18,419
Reserve for legal proceedings 12,373 13,991
Accrued contract and relationship losses 12,375
Miscellaneous reserves and accruals 13,414 7,213
All other 14,679 7,706 9,861 7,111
- -----------------------------------------------------------------------------------------------------------------------------------
Subtotal 119,470 74,496 112,690 51,222
Valuation allowance (17,207) (17,163)
- -----------------------------------------------------------------------------------------------------------------------------------
Total deferred taxes $ 102,263 $ 74,496 $ 95,527 $ 51,222
===================================================================================================================================
</TABLE>
At December 31, 1998, net operating loss carryforwards relating to both
foreign and state jurisdictions totaled $85.2 million. Of these carryforwards,
$61.3 million expire in various years between 2002 and 2014 and $23.9 million
may be carried forward indefinitely. At December 31, 1998, the Company also had
capital loss carryforwards of $72.3 million, of which $1.2 million expire in
2002 and $71.1 million expire in 2004. In accordance with SFAS No. 109,
"Accounting for Income Taxes," the Company does not recognize deferred tax
assets for the excess of tax basis over the basis for financial reporting of
investments in subsidiaries until it becomes apparent that these temporary
differences will reverse in the foreseeable future. In December 1996, the
Company announced its intention to sell certain businesses within its Deluxe
Direct segment. These businesses were sold in 1998 (see Note 6). The deferred
tax assets relating to the investments in these subsidiaries were reflected in
the Company's consolidated financial statements at December 31, 1997.
The valuation allowance at December 31, 1998 and 1997 relates to the
uncertainty of realizing foreign and state deferred tax assets.
Deluxe Corporation 23
<PAGE>
- --------------------------------------------------------------------------------
NOTE 9 EMPLOYEE BENEFIT AND STOCK-BASED COMPENSATION PLANS
- --------------------------------------------------------------------------------
STOCK PURCHASE PLAN - The Company has an employee stock purchase plan that
enables eligible employees to purchase the Company's common stock at 75% of its
fair market value on the first business day following each three-month purchase
period. Compensation expense recognized for the difference between the
employees' purchase price and the fair value of the stock was $5.9 million, $6.7
million and $7.5 million in 1998, 1997 and 1996, respectively. Under the plan,
698,830, 840,143 and 907,424 shares were issued at prices ranging from $24.38 to
$26.16, $22.88 to $24.75 and $22.41 to $28.04 in 1998, 1997 and 1996,
respectively.
STOCK INCENTIVE PLAN - Under the stock incentive plan, stock-based awards may be
issued to employees via a broad range of methods, including non-qualified or
incentive stock options, restricted stock and restricted stock units, stock
appreciation rights and other awards based on the value of the Company's common
stock. Options become exercisable in varying amounts beginning generally one
year after the date of grant. The plan was amended in 1996 to reserve an
aggregate of 7 million shares of common stock for issuance under the plan.
Through 1998, the Company has issued restricted shares and restricted stock
units, and non-qualified and incentive stock options. At December 31, 1998,
options for 3.8 million shares remain available for issuance under the plan.
In 1998, the Company adopted the DeluxeSHARES program. Under this
program, options were awarded to substantially all employees (excluding foreign
employees and employees of businesses held for sale), allowing them, subject to
certain conditions, to purchase 100 shares of common stock at an exercise price
of $33 per share. The options become exercisable when the value of the Company's
common stock reaches $49.50 per share or January 30, 2001, whichever occurs
first. Options for the purchase of 1.7 million shares of common stock were
issued under this program.
All options allow for the purchase of shares of common stock at prices
equal to their market value at the date of grant. Information regarding the
options issued under the current plan, which was adopted in 1994, the remaining
options outstanding under the former plan adopted in 1984, and the DeluxeSHARES
plan, is as follows:
<TABLE>
<CAPTION>
Weighted-
Number of average
shares exercise price
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 1996 2,147,573 $34.81
Granted 631,250 30.63
Exercised (144,039) 30.71
Canceled (496,225) 34.54
- ---------------------------------------------------------------------------------------------
Outstanding at December 31, 1996 2,138,559 $33.92
Granted 808,400 30.92
Exercised (126,100) 29.25
Canceled (317,507) 35.07
- ---------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 2,503,352 $33.04
Granted 3,085,800 33.18
Exercised (277,848) 29.76
Canceled (689,042) 34.60
- ---------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 4,622,262 $33.10
=============================================================================================
</TABLE>
For options outstanding and exercisable at December 31, 1998, the
exercise price ranges and average remaining lives were as follows:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
- ----------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Number average average Number average
Range of exercise prices outstanding remaining life exercise price exercisable exercise price
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$27.125 to $32.875 1,494,697 6.76 years $30.39 1,116,733 $30.21
$33.00 to $35.125 2,677,500 6.48 years 33.22 74,500 33.29
$35.50 to $45.875 450,065 3.75 years 41.37 450,065 41.37
- ----------------------------------------------------------------------------------------------------------------
4,622,262 6.30 years $33.10 1,641,298 $33.41
================================================================================================================
</TABLE>
The Company issued 60,912, 72,581 and 19,752 restricted shares and
restricted stock units at weighted-average fair values of $33.22, $31.52 and
$35.25 during 1998, 1997 and 1996, respectively. These awards generally vest
over periods ranging from one to five years.
Pro forma information regarding net income and income per share has been
determined as if the Company had accounted for its employee stock-based
compensation under the fair value method of SFAS No. 123. The fair value of
these options was estimated at the date of grant using a Black-
24 Deluxe Corporation
<PAGE>
Scholes option pricing model. The following weighted-average assumptions were
used in valuing options issued in 1998: risk-free interest rate of 5.94%,
dividend yield of 4.52% and expected volatility of 21.75%. The following
weighted-average assumptions were used in valuing options issued in 1997 and
1996: risk-free interest rate of about 6%, dividend yield of approximately 4%
and expected volatility of 23%. The weighted-average expected option life was
5.90 years, 7.17 years and 6.90 years for 1998, 1997 and 1996, respectively. The
weighted-average fair value of options granted in 1998, 1997 and 1996 was $5.99,
$7.49 and $6.86 per share, respectively. For purposes of pro forma disclosures,
the estimated fair value of the options was recognized as expense over the
options' vesting periods. The Company's pro forma net income and income per
share were as follows (dollars in thousands, except per share amounts):
1998 1997 1996
- --------------------------------------------------------------------------------
Net income:
As reported $145,408 $44,672 $65,463
Pro forma 142,851 44,536 63,353
Basic net income per share:
As reported $ 1.80 $ .55 $ .80
Pro forma 1.77 .54 .77
Diluted net income per share:
As reported $ 1.80 $ .55 $ .79
Pro forma 1.77 .54 .77
================================================================================
These pro forma calculations only include the effects of grants made
subsequent to January 1, 1995. As such, these impacts are not necessarily
indicative of the effects on reported net income of future years.
PROFIT SHARING, DEFINED CONTRIBUTION AND 401(K) PLANS - The Company maintains
profit sharing plans, a defined contribution pension plan and plans established
under section 401(k) of the Internal Revenue Code to provide retirement benefits
for certain employees. The plans cover substantially all full-time employees
with approximately 15 months of service. Contributions to the profit sharing
and defined contribution plans are made solely by the Company. Employees may
contribute up to the lessor of $10,000 or 10% of their wages to the 401(k) plan.
The Company will match the first 1% of wages contributed and 50% of the next 4%
of wages contributed. All contributions are remitted to the plans' respective
trustees, and benefits provided by the plans are paid from accumulated funds by
the trustees.
Contributions to the defined contribution pension plan equaled 4% of
eligible compensation in 1998 and 6% of eligible compensation in 1997 and 1996.
Related expense for these years was $13.7 million, $18.6 million and $19.9
million, respectively. Contributions to the profit sharing plans vary based on
the Company's performance. Expense for these plans was $27.5 million, $25.6
million and $44.5 million in 1998, 1997 and 1996, respectively. The 401(k) plan
was established on January 1, 1997. Company contributions to this plan were $7.8
million and $7 million in 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
NOTE 10 POSTRETIREMENT BENEFITS
- --------------------------------------------------------------------------------
The Company provides certain health care benefits for a large number of its
retired employees. Employees included in the plan may become eligible for such
benefits if they attain the appropriate years of service and age while working
for the Company. Certain retirees' medical insurance premiums are based on the
amounts paid by active employees. Effective January 1, 1998, active employees'
premiums were reduced, thus reducing the medical premiums required to be paid by
these retirees. Additionally, for retirees who participate in the active
employees' indemnity plans, their copayment amount was increased 5%. In 1997,
the plan was also amended to provide employees who are involuntarily terminated
and who are qualified retirees at the time of termination with a bridge for
retiree medical benefits if they are terminated prior to age 53.
The following table summarizes the change in benefit obligation and plan
assets during 1998 and 1997 (dollars in thousands):
- --------------------------------------------------------------------------------
Benefit obligation, January 1, 1997 $ 59,145
Service cost 877
Interest cost 4,163
Actuarial gains and losses 6,195
Benefits paid from plan assets and general funds of the Company (4,197)
- --------------------------------------------------------------------------------
Benefit obligation, December 31, 1997 66,183
Service cost 1,218
Interest cost 4,651
Actuarial gains and losses 14,232
Effect of curtailment (1,056)
Benefits paid from general funds of the Company (4,589)
- --------------------------------------------------------------------------------
Benefit obligation, December 31, 1998 $ 80,639
================================================================================
Fair value of plan assets, January 1, 1997 $ 51,828
Actual return on plan assets 11,133
Benefits paid (2,758)
- --------------------------------------------------------------------------------
Fair value of plan assets, December 31, 1997 60,203
Actual return on plan assets 4,283
- --------------------------------------------------------------------------------
Fair value of plan assets, December 31, 1998 $ 64,486
================================================================================
Deluxe Corporation 25
<PAGE>
The funded status of the plan was as follows at December 31 (dollars in
thousands):
1998 1997
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation $ 80,639 $ 66,183
Less:
Fair value of plan assets
(debt and equity securities) 64,486 60,203
Unrecognized prior service cost 1,285 1,621
Unrecognized net loss (gain) 13,367 (2,364)
Unrecognized transition obligation 8,209 10,192
- --------------------------------------------------------------------------------
Prepaid postretirement asset recognized in the
consolidated balance sheets $ (6,708) $ (3,469)
================================================================================
Net postretirement benefit cost for the years ended December 31
consisted of the following components (dollars in thousands):
1998 1997 1996
- --------------------------------------------------------------------------------
Service cost-benefits earned
during the year $ 1,218 $ 877 $ 899
Interest cost on the accumulated
postretirement benefit obligation 4,651 4,163 4,416
Expected return on plan assets (5,719) (4,979) (4,299)
Amortization of transition obligation 680 680 1,025
Amortization of prior service cost 269 269 415
Recognized net amortization of
gains and losses (63) (78) (48)
- --------------------------------------------------------------------------------
Net postretirement benefit cost 1,036 932 2,408
Curtailment loss 315 3,019
- --------------------------------------------------------------------------------
Total postretirement benefit cost $ 1,351 $ 932 $ 5,427
================================================================================
As a result of the sale of the Social Expressions unit of Current, Inc.
(see Note 6), and a reduction in employees as a result of the Company's
cost-saving initiatives (see Note 3), the Company recognized a net
postretirement benefit curtailment loss of $.3 million in 1998. The 1996
curtailment loss of $3 million resulted from the 1996 plan to close 21 financial
institution check printing plants (see Note 3) and the sale of the Company's
Health Care Forms and internal bank forms businesses in 1996 (see Note 6).
In measuring the accumulated postretirement benefit obligation as of
December 31, 1998, the Company's health care inflation rate for 1999 was assumed
to be 7%. Inflation rates are assumed to trend downward gradually over the next
two years to 5% for the years 2000 and beyond. A one percentage point increase
in the health care inflation rate for each year would increase the accumulated
postretirement benefit obligation by approximately $11.9 million, and the
service and interest cost components of the net postretirement benefit cost by
approximately $1 million. A one percentage point decrease in the health care
inflation rate for each year would decrease the accumulated postretirement
benefit obligation by approximately $10.4 million, and the service and interest
cost components of the net postretirement benefit cost by approximately $.9
million. The discount rate used in determining the accumulated postretirement
benefit obligation as of December 31, 1998 and 1997, was 6.75% and 7.25%,
respectively. The expected long-term rate of return on plan assets used to
determine the net periodic postretirement benefit cost was 9.5% in 1998, 1997
and 1996.
- --------------------------------------------------------------------------------
NOTE 11 LEASE AND DEBT COMMITMENTS
- --------------------------------------------------------------------------------
Long-term debt was as follows at December 31 (dollars in thousands):
1998 1997
- --------------------------------------------------------------------------------
8.55% unsecured and unsubordinated notes
due February 15, 2001 $100,000 $100,000
Other 13,653 17,064
- --------------------------------------------------------------------------------
Total long-term debt 113,653 117,064
Less amount due within one year 7,332 7,078
- --------------------------------------------------------------------------------
Total $106,321 $109,986
================================================================================
In February 1991, the Company issued $100 million of 8.55% unsecured and
unsubordinated notes due February 15, 2001. The notes are not redeemable prior
to maturity. The fair values of these notes were estimated to be $106.4 million
and $106.7 million at December 31, 1998 and 1997, respectively, based on quoted
market prices.
Other long-term debt consists principally of capital leases on
equipment. The capital lease obligations bear interest rates of 3.7% to 16.2%
and are due through the year 2011. Carrying value materially approximates fair
value for these obligations.
Maturities of long-term debt for the five years ending December 31,
2003, are $7.3 million, $2.9 million, $101.8 million, $1.0 million and $.1
million, and $.6 million thereafter.
The Company has uncommitted bank lines of credit for $145 million
available at variable interest rates. No amounts were drawn on these lines
during 1998. The average amount drawn on these lines during 1997 was $3.1
million at a weighted-average interest rate of 6.47%. There was no outstanding
balance at December 31, 1998 and 1997 on these lines of credit. The Company also
has in place a $150 million committed line of credit available for borrowing and
as support for commercial paper. As of December 31, 1998 and 1997, the Company
had no commercial paper outstanding and no indebtedness outstanding under its
committed line of credit. Additionally, the Company has 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 acqui-
26 Deluxe Corporation
<PAGE>
sitions and repayment or repurchase of outstanding indebtedness and other
securities of the Company. As of December 31, 1998 and 1997, no such notes were
issued or outstanding.
Minimum future rental payments for leased facilities and equipment for
the five years ending December 31, 2003, are $31.6 million, $22.7 million, $10.5
million, $5.7 million and $2.7 million, and $4.5 million thereafter. Rental
expense was $45.4 million, $40.9 million and $40.4 million, for 1998, 1997 and
1996, respectively.
Absent certain defined events of default under the Company's $150
million committed credit facility or the indenture related to its outstanding
8.55% unsecured and unsubordinated notes due February 15, 2001, there are no
significant contractual restrictions on the ability of the Company to pay cash
dividends.
- --------------------------------------------------------------------------------
NOTE 12 COMMON STOCK PURCHASE RIGHTS
- --------------------------------------------------------------------------------
On February 5, 1988, the Company declared a distribution to shareholders of
record on February 22, 1988, of one common stock purchase right for each
outstanding share of common stock. These rights were governed by the terms and
conditions of a rights agreement entered into by the Company as of February 12,
1988. That agreement was amended and restated as of January 31, 1997 (Restated
Agreement).
Pursuant to the Restated Agreement, upon the occurrence of certain
events, each right will entitle the holder to purchase one share of common stock
at an exercise price of $150. In certain circumstances described in the Restated
Agreement, if (i) any person becomes the beneficial owner of 15% or more of the
Company's common stock, (ii) the Company is acquired in a merger or other
business combination or (iii) upon the occurrence of other events, each right
will entitle its holder to purchase a number of shares of common stock of the
Company, or the acquirer or the surviving entity if the Company is not the
surviving corporation in such a transaction. The number of shares purchasable
will be equal to the exercise price of the right divided by 50% of the
then-current market price of one share of common stock of the Company, or other
surviving entity (i.e., at a 50% discount), subject to adjustments provided in
the Restated Agreement. The rights expire January 31, 2007, and may be redeemed
by the Company at a price of $.01 per right at any time prior to the occurrence
of the circumstances described above.
- --------------------------------------------------------------------------------
NOTE 13 SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated other comprehensive income
- ------------------------------------------------------------------------------------------------------------------------------------
Additional Unrealized gain (loss) Cumulative
Common paid-in Retained Unearned on marketable translation
(Dollars in thousands) shares capital earnings compensation securities adjustment
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 82,364 $ 1,455 $ 697,036 $ (739) $ (242) $ 500
Net income 65,463
Cash dividends (121,976)
Common stock issued 1,106 35,824
Common stock retired (1,414) (37,279) (9,372)
Unearned compensation (198)
Unrealized fair value adjustments 242
Translation adjustment 146
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 82,056 0 631,151 (937) 0 646
Net income 44,672
Cash dividends (121,321)
Common stock issued 985 30,124
Common stock retired (1,715) (25,366) (29,200)
Unearned compensation 288
Translation adjustment (1,135)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 81,326 4,758 525,302 (649) 0 (489)
Net income 145,408
Cash dividends (119,682)
Common stock issued 988 31,613
Common stock retired (1,833) (29,549) (28,941)
Unearned compensation 411
Unrealized fair value adjustments 70
Translation adjustment 177
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 80,481 $ 6,822 $ 522,087 $ (238) $ 70 $ (312)
====================================================================================================================================
</TABLE>
Deluxe Corporation 27
<PAGE>
- --------------------------------------------------------------------------------
NOTE 14 BUSINESS SEGMENT INFORMATION
- --------------------------------------------------------------------------------
During the third quarter of 1998, the Company adopted SFAS 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. SFAS No. 131 also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The adoption of this statement did not affect the Company's results
of operations or financial position.
The Company has organized its business units into six operating segments
based on the nature of the products and services offered by each: Deluxe Paper
Payment Systems, Deluxe Payment Protection Systems, Deluxe Electronic Payment
Systems, Deluxe Direct Response, Deluxe Government Services and Deluxe Direct.
Deluxe Paper Payment Systems provides check printing services to financial
services companies and markets checks and business forms directly to households
and small businesses. Deluxe Payment Protection Systems provides payment
protection, collection and risk management services to financial institutions
and retailers. Deluxe Electronic Payment Systems provides electronic funds
transfer processing and software services to the financial and retail
industries. Deluxe Direct Response, which was sold in 1998, provided direct
marketing, customer database management and related services to the financial
industry and other businesses. Deluxe Government Services provides electronic
benefits transfer services to state governments. Deluxe Direct, which was sold
in 1998, primarily sold greeting cards, stationery, and specialty paper products
through direct mail. All segments operate primarily in the United States. Deluxe
Electronic Payment Systems also has international operations. No single
customer of the Company accounted for more than 10% of net sales in 1998, 1997
or 1996.
The accounting policies of the segments are the same as those described
in Note 1. In evaluating segment performance, management focuses on income from
operations. This measurement excludes special charges (e.g., restructuring
charges, asset impairment charges, charges for legal proceedings, etc.),
interest expense, investment income, income tax expense and other non-operating
items, such as gains or losses from asset disposals. Corporate expenses are
allocated to the segments as a fixed percentage of segment revenues. This
allocation includes expenses for various support functions such as human
resources, information services and finance and includes depreciation and
amortization expense related to corporate assets. The corresponding corporate
asset balances are not allocated to the segments. Most intersegment sales are
based on current market pricing.
<TABLE>
<CAPTION>
Deluxe Deluxe Deluxe
Paper Payment Electronic Deluxe Deluxe
Payment Protection Payment Direct Government Deluxe Total
1998 (dollars in thousands) Systems Systems Systems Response Services Direct segments
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales from external customers $1,277,875 $ 214,407 $ 128,976 $ 42,662 $ 43,970 $ 223,906 $1,931,796
Intersegment sales 1,956 1,304 1,880 722 5,862
Operating income (loss) excluding
special charges 312,782 29,791 1,803 (20,060) (7,423) 5,047 321,940
Special charges 11,099 623 1,381 2,513 36,630 52,246
Operating income (loss) including
special charges 301,683 29,168 422 (22,573) (44,053) 5,047 269,694
Segment assets 408,005 103,296 123,328 43,845 678,474
Depreciation and amortization
expense 37,731 9,990 13,244 2,213 6,193 69,371
Capital purchases 58,705 13,254 15,508 602 320 1,623 90,012
=================================================================================================================================
<CAPTION>
1997 (dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Net sales from external customers $1,287,367 $ 190,559 $ 115,012 $ 49,781 $ 26,965 $ 249,682 $1,919,366
Intersegment sales 786 2,280 1,584 3,187 1,137 8,974
Operating income (loss) excluding
special charges 291,626 33,984 (709) (19,742) (12,270) (5,231) 287,658
Goodwill impairment charge 9,361 3,000 70,532 82,893
Other special charges 17,696 3,270 2,000 13,480 36,446
Operating income (loss) including
special charges 273,930 33,984 (13,340) (24,742) (12,270) (89,243) 168,319
Segment assets 402,661 92,739 111,486 47,876 32,124 121,824 808,710
Depreciation and amortization
expense 34,267 8,830 17,378 8,902 3,580 12,353 85,310
Capital purchases 38,623 9,042 12,226 3,026 690 2,191 65,798
=================================================================================================================================
</TABLE>
28 Deluxe Corporation
<PAGE>
<TABLE>
<CAPTION>
Deluxe Deluxe Deluxe
Paper Payment Electronic Deluxe Deluxe
Payment Protection Payment Direct Government Deluxe Total
1996 (dollars in thousands) Systems Systems Systems Response Services Direct segments
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales from external customers $1,274,336 $ 145,507 $ 108,845 $ 46,719 $ 20,894 $ 383,326 $1,979,627
Intersegment sales 406 2,248 181 3,288 3,911 10,034
Operating income (loss) excluding
special charges 282,165 29,472 (9,317) 369 (8,776) (31,016) 262,897
Goodwill impairment charge 111,900 111,900
Other special charges 40,705 6,925 14,500 62,130
Operating income (loss) including
special charges 241,460 29,472 (16,242) 369 (8,776) (157,416) 88,867
Segment assets 419,105 85,698 134,272 17,117 14,358 223,019 893,569
Depreciation and amortization
expense 36,188 5,581 17,546 3,687 3,622 28,261 94,885
Capital purchases 54,870 8,896 2,823 1,624 7,699 75,912
=================================================================================================================================
</TABLE>
Segment information reconciles to consolidated amounts as follows
(dollars in thousands):
<TABLE>
<CAPTION>
OPERATING INCOME INCLUDING SPECIAL CHARGES 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total segment operating income including special charges $ 269,694 $ 168,319 $ 88,867
Elimination of intersegment profits 28 99 (1,758)
Unallocated corporate expenses (23,087) (12,698)
- ----------------------------------------------------------------------------------------------------
Total consolidated operating income including special charges $ 246,635 $ 155,720 $ 87,109
====================================================================================================
</TABLE>
1998 unallocated corporate expenses consist of corporate special charges
and charges for certain corporate liabilities that are not allocated to the
segments. 1997 unallocated corporate expenses consist primarily of corporate
special charges.
<TABLE>
<CAPTION>
December 31,
TOTAL ASSETS 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total segment assets $ 678,474 $ 808,710 $ 893,569
Unallocated corporate assets 524,560 339,654 282,871
- ----------------------------------------------------------------------------------------------------
Total consolidated assets $1,203,034 $1,148,364 $1,176,440
====================================================================================================
</TABLE>
Unallocated corporate assets consist primarily of cash, investments, and
fixed assets and intangibles used by the corporate support functions.
<TABLE>
<CAPTION>
DEPRECIATION AND AMORTIZATION EXPENSE 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total segment depreciation and amortization expense $ 69,371 $ 85,310 $ 94,885
Depreciation and amortization of unallocated corporate assets 16,413 11,959 11,751
- ----------------------------------------------------------------------------------------------------
Total consolidated depreciation and amortization expense $ 85,784 $ 97,269 $ 106,636
====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
CAPITAL PURCHASES 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total segment capital purchases $ 90,012 $ 65,798 $ 75,912
Corporate capital purchases 31,263 43,702 16,126
- ----------------------------------------------------------------------------------------------------
Total consolidated capital purchases $ 121,275 $ 109,500 $ 92,038
====================================================================================================
</TABLE>
Corporate capital purchases consist primarily of a new financial
information system and various other information system enhancements.
Deluxe Corporation 29
<PAGE>
Revenues are attributed to geographic areas based on the location of the
assets producing the revenues. The Company's operations by geographic area are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
Long-lived assets
Net sales from external customers December 31,
- -----------------------------------------------------------------------------------------
1998 1997 1996 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
United States $1,905,294 $1,882,100 $1,935,996 $ 341,531 $ 409,177
Foreign countries 26,502 37,266 43,631 3,029 5,831
Total consolidated $1,931,796 $1,919,366 $1,979,627 $ 344,560 $ 415,008
=========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
NOTE 15 LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
During 1997, a judgment was entered against Deluxe Electronic Payment Systems,
Inc. (DEPS), in the U.S. District Court for the Western District of
Pennsylvania. The case was brought against DEPS by Mellon Bank in connection
with a potential bid to provide electronic benefit transfer services for the
Southern Alliance of States. In September 1997, the Company recorded a pretax
charge of $40 million to reserve for this judgment and other related costs. This
charge was reflected in other expense in the 1997 consolidated income statement.
At December 31, 1997, the remaining liability for this obligation was $40
million and was classified as other long-term liabilities in the consolidated
balance sheet.
In 1998, Mellon's motion for prejudgment interest was denied by the
district court and the Company reversed $4.2 million of the $40 million
liability. This reversal is reflected in other income in the 1998 consolidated
statement of income. In January 1999, the United States Court of Appeals for the
Third Circuit affirmed the judgment of the district court. At December 31, 1998,
the remaining liability of $34.4 million was classified as other accrued
liabilities in the consolidated balance sheet.
- --------------------------------------------------------------------------------
NOTE 15 SUBSEQUENT EVENTS (UNAUDITED)
- --------------------------------------------------------------------------------
In February 1999, the Company acquired all of the outstanding shares of eFunds
Corporation for $13 million. eFunds provides electronic check conversion
solutions for financial services companies and retailers. This acquisition was
accounted for under the purchase method of accounting. Accordingly, the
consolidated financial statements of the Company will include the results of
this business subsequent to its acquisition date. The purchase price was
allocated to the assets acquired and liabilities assumed based on their fair
values on the date of purchase. The estimated total cost in excess of net assets
acquired of $15.7 million will be reflected as goodwill and will be amortized
over 10 years. The effect of this acquisition was not material to the operations
or financial position of the Company.
In January 1999, the Company's appeal of the judgment against its
subsidiary, Deluxe Electronic Payment Systems, Inc., was denied by the Third
Circuit Court of Appeals and the Company paid $32.2 million to Mellon Bank in
February 1999. The Company is reviewing whether a further appeal is warranted
(see Note 15).
30 Deluxe Corporation
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Deluxe Corporation:
We have audited the accompanying consolidated balance sheets of Deluxe
Corporation and its subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income and cash flows
for each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Deluxe Corporation and its
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Minneapolis, Minnesota
January 26, 1999
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1998 Quarter Ended (dollars in thousands,
except per share amounts) March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 488,970 $ 474,791 $ 469,770 $ 498,265
Cost of sales 223,612 219,571 254,638 214,959
Net income 43,571 42,255 2,828(1) 56,754
- ----------------------------------------------------------------------------------------------------------------------------------
Per share of common stock Net income - basic .54 .52 .04 .71
Net income - diluted .54 .52 .04 .70
Cash dividends .37 .37 .37 .37
==================================================================================================================================
<CAPTION>
1997 Quarter Ended (dollars in thousands,
except per share amounts) March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 490,104 $ 463,750 $ 466,908 $ 498,604
Cost of sales 227,195 214,854 222,516 218,622
Net income (loss) 41,425 37,457 (67,515)(2) 33,305
- ----------------------------------------------------------------------------------------------------------------------------------
Per share of common stock Net income (loss) - basic .50 .46 (.82) .41
Net income (loss) - diluted .50 .46 (.82) .41
Cash dividends .37 .37 .37 .37
==================================================================================================================================
</TABLE>
(1) 1998 THIRD QUARTER RESULTS INCLUDE A PRETAX CHARGE OF $70.2 MILLION. SEE
PAGE 6 OF MANAGEMENT'S DISCUSSION AND ANALYSIS FOR FURTHER DISCUSSION.
(2) 1997 THIRD QUARTER RESULTS INCLUDE A PRETAX CHARGE OF $180 MILLION. SEE PAGE
7 OF MANAGEMENT'S DISCUSSION AND ANALYSIS FOR FURTHER DISCUSSION.
Deluxe Corporation 31
<PAGE>
BOARD OF DIRECTORS
<TABLE>
<S> <C>
J.A. BLANCHARD III EXECUTIVE LEADERSHIP TEAM
Chairman of the Board, President and Chief
Executive Officer, Deluxe Corporation J.A. BLANCHARD III
Chairman, President and Chief Executive Officer
CALVIN W. AURAND, JR.
Former Chairman, President and Chief Executive LAWRENCE J. MOSNER
Officer, Banta Corporation Executive Vice President
BARBARA B. GROGAN RONALD E. EILERS
President and Chief Executive Officer, Western Senior Vice President and General Manager, Deluxe
Industrial Contractors, Inc. Paper Payment Systems
DONALD R. HOLLIS JOHN H. LEFEVRE
President of DRH Strategic Consulting, Inc., a Senior Vice President, Secretary and General Counsel
banking industry consulting company and former
Executive Vice President and Chief Technical THOMAS W. VANHIMBERGEN
Officer, First Chicago Corporation Senior Vice President and Chief Financial Officer
STEPHEN P. NACHTSHEIM* SONIA ST. CHARLES
Vice President, Intel Corporation Vice President, Human Resources
JAMES J. RENIER
Former Chairman and Chief Executive Officer,
Honeywell, Inc.
JACK ROBINSON*
Vice President of Finance, Home & Small Business
Group, Dell Computer Corporation
ROBERT C. SALIPANTE*
Senior Vice President, ReliaStar Financial
Corporation
HATIM A. TYABJI
Chairman and Chief Executive Officer, Saraide, Inc.
</TABLE>
*AUDIT COMMITTEE
- --------------------------------------------------------------------------------
[PHOTO] [PHOTO]
WHITNEY MACMILLAN ALLEN F. JACOBSON
MACMILLAN, JACOBSON RETIRE
The Company extends its appreciation to directors Whitney MacMillan and Allen F.
Jacobson for their service to Deluxe shareholders. Mr. MacMillan, former
chairman and CEO of Cargill, Inc., joined the board in 1988 and will retire in
May. Mr. Jacobson, former chairman and CEO of 3M Company, retired in January,
having joined the board in 1991.
32 Deluxe Corporation
<PAGE>
SHAREHOLDER INFORMATION
QUARTERLY STOCK DATA The chart below shows the per-share price range of the
Company's common stock for the past two fiscal years as quoted on the New York
Stock Exchange.
[BAR CHART]
<TABLE>
<CAPTION>
STOCK PRICE RANGE (DOLLARS) - = closing price
- ------------------------------------------------------------------------------------------------------
1997 (Quarters) 1998 (QUARTERS)
======================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 2 3 4 1 2 3 4
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
40
- ------------------------------------------------------------------------------------------------------
35
- ------------------------------------------------------------------------------------------------------
30
- ------------------------------------------------------------------------------------------------------
25
======================================================================================================
HIGH 33 5/8 34 9/16 35 7/8 37 35 11/16 35 3/4 37 15/16 37
- ------------------------------------------------------------------------------------------------------
LOW 29 3/4 29 3/4 32 5/16 31 1/4 32 1/2 31 3/8 28 3/8 26 3/8
- ------------------------------------------------------------------------------------------------------
CLOSE 32 1/4 34 1/8 33 9/16 34 1/2 32 15/16 35 3/4 28 7/16 36 9/16
======================================================================================================
</TABLE>
STOCK EXCHANGE Deluxe Corporation common stock is traded on the New York Stock
Exchange under the symbol DLX.
ANNUAL MEETING The annual meeting of the shareholders of Deluxe Corporation will
be held Tuesday, May 4, 1999, at 5 p.m. in the Nicollet Grand Ballroom, main
level, at the Hyatt Regency Minneapolis, 1300 Nicollet Mall, Minneapolis,
Minnesota.
FORM 10-K AVAILABLE A copy of Form 10-K (Annual Report) filed with the
Securities and Exchange Commission by the Company may be obtained without charge
by calling 1-888-359-6397 (1-888-DLX-NEWS) or by sending a written request to
Stuart Alexander, Deluxe Corporation, P.O. Box 64235, St. Paul, Minnesota
55164-0235.
SHAREHOLDER INQUIRIES Requests for additional information should be sent to
corporate headquarters to the attention of:
Stuart Alexander, Vice President
(651) 483-7358
EXECUTIVE OFFICES
STREET ADDRESS:
3680 Victoria St. N.
Shoreview, Minnesota 55126-2966
MAILING ADDRESS:
P.O. Box 64235
St. Paul, Minnesota 55164-0235
(651) 483-7111
STOCK OWNERSHIP AND RECORD KEEPING
Norwest Bank Minnesota N.A.
Stock Transfer Department
161 N. Concord Exchange
P.O. Box 64854
St. Paul, Minnesota 55164-0854
(800) 468-9716
(651) 450-4064
E-mail: [email protected]
TOLL-FREE SHAREHOLDER INFORMATION LINE You may dial 1-888-359-6397
(1-888-DLX-NEWS) to listen to the latest financial results, dividend news and
other information about Deluxe or to request copies of our annual report, 10-K,
10-Q, proxy statement, news releases and financial presentation information.
PLANNED RELEASE DATES Quarterly results: Thursday, April 22, July 15, October
14; Tuesday, January 25. Dividends are announced the second week of February,
May, August and November.
WEB SITE Visit our home page at www.deluxe.com
FORWARD-LOOKING STATEMENTS We use "forward-looking," as defined in the Private
Securities Reform Act of 1995, in this year's annual report. These statements,
such as the Company's statements regarding earnings growth targets for 1999 and
2000, typically address management's present expectations about future
performance and typically include wording such as "should result," "targeted,"
"expect," "anticipate," "estimate" or similar expressions. Because of the
unavoidable risks and uncertainties of predicting the future, Deluxe's actual
results may vary from management's current expectations. These variations may be
significant and may not always be positive. Additional information about factors
that may affect our current estimates appears in Exhibit 99 to our Form 10-K
filed with the Securities and Exchange Commission on March 31, 1999. To obtain a
copy, we encourage investors to call our shareholder information line
(1-888-359-6397).
Deluxe Corporation 33
Exhibit 21.1
DELUXE CORPORATION SUBSIDIARIES
Chex Systems, Inc. (Minnesota
Deluxe Checks Unlimited, Inc. (Colorado)
Deluxe Canada, Inc. (Canada)
Deluxe Check Printers, Inc. (Minnesota)
Deluxe Check Texas, Inc. (Minnesota)
Deluxe Data International Limited (United Kingdom)
Deluxe Electronic Payment Systems, Inc. (Delaware)
Deluxe Electronic Benefits, Inc.
Deluxe Financial Services, Inc. (Minnesota)
Deluxe Financial Services Texas, L.P. (Texas)
Deluxe-HCL, Inc. (Delaware) (100% owned by HCL-Deluxe N.V.)
Deluxe Holdings (Netherlands) B.V. (Netherlands)
Deluxe Mexicana S.A. de C.V. (Mexico)
Deluxe Overseas, Inc. (Minnesota)
Deluxe Payment Protection Systems, Inc. (Delaware)
DLX Holdings Limited (United Kingdom)
eFunds Corporation (California)
HCL-Deluxe N.V. (Netherlands) (50% owned)
HCL-Deluxe Private Limited (India) (100% owned by HCL-Deluxe N.V.)
NRC Holding Corporation (Delaware)
National Credit Services Corporation (Missouri)
National Receivables Corporation (Ohio)
National Revenue Corporation (Ohio)
United Creditors Alliance Corporation (Ohio)
United Creditors Alliance International Limited (United Kingdom)
Exhibit 24.1
POWER OF ATTORNEY
Each of the undersigned directors and officers of DELUXE CORPORATION, a
Minnesota corporation, hereby constitutes and appoints John A. Blanchard III,
Thomas W. VanHimbergen and John H. LeFevre his true and lawful
attorneys-in-fact, and each of them, with full power to act without the other,
to sign the Company's annual report on Form 10-K for the year ended December 31,
1998, and any and all amendments to such report, and to file the same and any
such amendment, with any exhibits, and any other documents required in
connection with such filing, with the Securities and Exchange Commission under
the provisions of the Securities Exchange Act of 1934. Date
/s/ John A. Blanchard III 1/29/99
- ------------------------------------------------------------------------
John A. Blanchard III, Director and Principal Executive Officer
/s/ Thomas W. VanHimbergen 1/29/99
- ------------------------------------------------------------------------
Thomas W. VanHimbergen, Principal
Financial Officer and Principal Accounting Officer
/s/ Whitney MacMillan 1/29/99
- ------------------------------------------------------------------------
Whitney MacMillan, Director
/s/ James J. Renier 1/29/99
- ------------------------------------------------------------------------
James J. Renier, Director
/s/ Barbara B. Grogan 1/29/99
- ------------------------------------------------------------------------
Barbara B. Grogan, Director
- ------------------------------------------------------------------------
Allen F. Jacobson, Director
/s/ Stephen P. Nachtsheim 1/29/99
- ------------------------------------------------------------------------
Stephen P. Nachtsheim, Director
/s/ Calvin W. Aurand, Jr. 1/29/99
- ------------------------------------------------------------------------
Calvin W. Aurand, Jr., Director
/s/ Donald R. Hollis 1/29/99
- ------------------------------------------------------------------------
Stephen P. Nachtsheim, Director
/s/ Robert C. Salipante 1/29/99
- ------------------------------------------------------------------------
Robert C. Salipante, Director
/s/ Jack Robinson 1/29/99
- ------------------------------------------------------------------------
Jack Robinson, Director
/s/ Hatim A. Tyabji 1/29/99
- ------------------------------------------------------------------------
Hatim A. Tyabji, Director
Exhibit 99.1
RISK FACTORS AND CAUTIONARY STATEMENTS
When used in this Annual Report on Form 10-K and in future filings by the
Company with the Securities and Exchange Commission (the "Commission"), in the
Company's press releases, letters to shareholders and in oral statements made by
the Company's representatives, the words or phrases "should result," "are
expected to," "targeted," "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 the Company's
current Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
Earnings Estimates; Cost Reductions. From time to time, 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 11 to 15
percent annual growth in earnings in1999 and 2000, 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. In addition, it is not expected that the
earnings growth projected for 1999 and 2000 will be representative of results
that may be achieved in subsequent years.
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.
<PAGE>
In addition, 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 the reasonableness of the assumptions on which they are
based.
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 projected annual 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 previously
experienced unanticipated delays in the planned roll-out of its on-line ordering
system. Although the Company began converting customers to this new system in
the fourth quarter of 1998 and believes that the delays it has experienced in
the past 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 the achievement of the expected productivity
improvements 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
throughout the Company's operations. These additional efforts include the
consolidation of the Company's purchasing process and certain administrative and
sales 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
<PAGE>
still being evaluated by the Company. Unexpected delays, complicating factors
and other hindrances are common in the implementation of these types of
endeavors and can arise from a variety of sources, some of which are likely to
have been unanticipated. The Company may also incur additional charges against
its earnings in connection with future 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.
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.
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 or that any such loss can
be counterbalanced through the addition of new customers or by expanded sales to
the Company's remaining customers.
Revised Analytic Approach. The Company has announced that it is applying a new
methodology for evaluating the Company's projected return on various forms of
investment. The use of this methodology represents a revised analytic approach
by the Company and the long-term benefits to be derived therefrom cannot
presently be precisely determined.
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
<PAGE>
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 or delivery 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 similar pressures can
reasonably be expected in the future, although the timing and amount of reduced
profits that may result from such pressure is not ascertainable.
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. The Company believes that
there will continue to be a substantial market for checks for the foreseeable
future, although a reduction in the volume of checks used by consumers is
expected. The rate and the extent to which alternative payment methods will
achieve consumer acceptance and replace checks cannot, however, 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.
Although the Company believes that is recent acquisition of eFunds Corporation
("eFunds") may enable it to prolong the viability of the paper check as a
payment mechanism by accelerating processing times and reducing processing
costs, there can be no assurance that the check conversion technology developed
by eFunds and its competitors will achieve widespread market or consumer
acceptance or have a measurable impact on the market for the Company's principal
product.
Debit Bureau. The Company has announced its intention 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 the first service enhanced with this data Fraud FinderSM, will be
commercially released when scheduled or that it will generate
<PAGE>
revenues in material amounts. Further, there can be no assurance that the
Company's Debit BureauSM initiative will result in the introduction of a
significant number of new products or services or the generation of incremental
revenues or profits in material amounts. In any event, the continued development
of the debit bureau is expected to require a significant level of investment by
the Company.
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. 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 achieve its 1999 revenue target
of $25 million or that it will ever generate significant revenues or profits or
provide an adequate return on the Company's investment.
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.
Year 2000 Readiness Disclosure. In 1996, the Company initiated a company-wide
program to prepare its computer systems, applications and embedded chip
equipment and third-party suppliers/customers for the year 2000. Although the
Company presently believes that with the planned modifications to existing
systems and the replacement or retirement 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, there can be no absolute
assurances in this regard. The Company's business operations, as well as its
ability to provide products and services to its customers without undue delay or
interruption, could be at risk in the event unanticipated year 2000 issues
arise. In addition, there can be no absolute assurances that unanticipated
expenses related to the Company's ongoing year 2000 compliance efforts will not
be incurred. The Company
<PAGE>
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 and there can be no assurance that the
Company's contingency plans will adequately mitigate the effects of any third
party noncompliance. In addition, it is unrealistic to assume that the Company
could remain unaffected if the year 2000 issue results in a widespread economic
downturn. Also, it is possible that the Company's insurance carriers could
assert that its existing liability insurance programs do not cover liabilities
arising out of any operational problems associated with the advent of the year
2000.
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 268,934
<SECURITIES> 41,133
<RECEIVABLES> 145,079
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<INVENTORY> 12,001
<CURRENT-ASSETS> 619,232
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<DEPRECIATION> 424,365
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<CURRENT-LIABILITIES> 451,366
<BONDS> 106,321
0
0
<COMMON> 80,481
<OTHER-SE> 528,429
<TOTAL-LIABILITY-AND-EQUITY> 1,203,034
<SALES> 1,931,796
<TOTAL-REVENUES> 1,931,796
<CGS> 912,780
<TOTAL-COSTS> 1,685,161
<OTHER-EXPENSES> (8,178)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,273
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 145,408
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 1.80
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<PERIOD-END> DEC-31-1997
<CASH> 171,438
<SECURITIES> 8,021
<RECEIVABLES> 151,201
<ALLOWANCES> 0
<INVENTORY> 51,097
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0
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<TOTAL-LIABILITY-AND-EQUITY> 1,148,364
<SALES> 1,919,366
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<INCOME-TAX> 70,478
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