UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarterly period ending March 31, 1999
----------------------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 1-7945
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DELUXE CORPORATION
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(Exact name of registrant as specified in its charter)
MINNESOTA 41-0216800
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3680 Victoria St., N. St. Paul, Minnesota 55126-2966
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(Address of principal executive offices) (Zip Code)
(651) 483-7111
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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The number of shares outstanding of registrant's common stock, par value $1.00
per share, at May 7, 1999 was 78,125,680.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
PART I. FINANCIAL INFORMATION
DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, 1999 December 31,
(Unaudited) 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 177,850 $ 268,934
Marketable securities 36,394 41,133
Trade accounts receivable 136,995 145,079
Inventories:
Raw material 2,488 2,619
Semi-finished goods 6,204 7,401
Finished goods 1,757 1,981
Supplies 16,572 17,400
Deferred advertising 8,508 7,939
Deferred income taxes 63,799 63,785
Prepaid expenses and other current assets 54,509 62,961
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Total current assets 505,076 619,232
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LONG-TERM INVESTMENTS 42,746 45,208
PROPERTY, PLANT, AND EQUIPMENT
Land and land improvements 46,816 46,826
Buildings and building improvements 209,429 209,416
Machinery and equipment 510,867 512,683
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Total 767,112 768,925
Less accumulated depreciation 429,362 424,365
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Property, plant, and equipment - net 337,750 344,560
INTANGIBLES
Cost in excess of net assets acquired - net 57,830 42,836
Internal use software - net 129,450 118,417
Other intangible assets - net 29,275 32,781
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Total intangibles 216,555 194,034
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TOTAL ASSETS $ 1,102,127 $ 1,203,034
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 57,864 $ 53,555
Accrued liabilities:
Wages, including vacation pay 51,330 60,540
Employee profit sharing and pension 10,784 41,762
Accrued income taxes 48,346 33,087
Accrued rebates 31,079 34,712
Accrued contract/relationship losses 29,159 35,356
Other 139,210 185,022
Long-term debt due within one year 4,375 7,332
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Total current liabilities 372,147 451,366
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LONG-TERM DEBT 105,486 106,321
DEFERRED INCOME TAXES 34,755 36,018
OTHER LONG-TERM LIABILITIES 425 419
SHAREHOLDERS' EQUITY
Common shares - $1 par value (authorized 500,000,000 shares;
issued: 1999 - 79,415,162 shares; 1998 - 80,480,526 shares) 79,415 80,481
Additional paid-in capital 485 6,822
Retained earnings 509,995 522,087
Unearned compensation (187) (238)
Accumulated other comprehensive income (394) (242)
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Shareholders' equity 589,314 608,910
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,102,127 $ 1,203,034
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except per Share Amounts)
(Unaudited)
QUARTER ENDED MARCH 31,
-----------------------
1999 1998
---- ----
NET SALES $ 414,077 $ 488,970
OPERATING EXPENSES
Cost of sales 180,485 223,612
Selling, general and administrative 155,945 193,841
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Total 336,430 417,453
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INCOME FROM OPERATIONS 77,647 71,517
OTHER INCOME (EXPENSE)
Other income 1,604 3,312
Interest expense (1,782) (2,223)
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INCOME BEFORE INCOME TAXES 77,469 72,606
PROVISION FOR INCOME TAXES 29,856 29,035
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NET INCOME $ 47,613 $ 43,571
========= =========
NET INCOME PER COMMON SHARE - Basic $ 0.60 $ 0.54
NET INCOME PER COMMON SHARE - Diluted $ 0.59 $ 0.54
CASH DIVIDENDS PER COMMON SHARE $ 0.37 $ 0.37
See Notes to Consolidated Financial Statements
3
<PAGE>
DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
-----------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 47,613 $ 43,571
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 14,445 15,150
Amortization of intangibles 6,512 5,393
Stock purchase discount 1,270 1,620
Net loss on sales of businesses 558
Changes in assets and liabilities, net of effects from acquisitions
and sales of businesses:
Trade accounts receivable 8,116 15,051
Inventories 1,552 6,168
Accounts payable 4,309 3,666
Other assets and liabilities (83,764) (29,339)
--------- ---------
Net cash provided by operating activities 53 61,838
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of marketable securities with maturities of more than 3 months 9,637 8,000
Purchases of marketable securities with maturities of more than 3 months (4,993) (13,674)
Purchases of capital assets (25,597) (24,652)
Payments for acquisitions, net of cash acquired (13,038)
Net proceeds from sales of businesses, net of cash sold 18,020 1,284
Proceeds from sales of capital assets 28 7,305
Other 532 (1,507)
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Net cash used in investing activities (15,411) (23,244)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (5,594) (1,417)
Payments to retire common stock (47,704) (32,087)
Proceeds from issuing stock under employee plans 7,146 7,096
Cash dividends paid to shareholders (29,574) (30,165)
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Net cash used in financing activities (75,726) (56,573)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (91,084) (17,979)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 268,934 171,438
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 177,850 $ 153,459
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated balance sheet as of March 31, 1999 and the consolidated
statements of income and the consolidated statements of cash flows for the
quarters ended March 31, 1999 and 1998 are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of such financial
statements are included. Other than those discussed in the notes below, such
adjustments consist only of normal recurring items. Interim results are not
necessarily indicative of results for a full year. The consolidated financial
statements and notes are presented in accordance with instructions for Form
10-Q, and do not contain certain information included in the Company's
consolidated annual financial statements and notes. The consolidated financial
statements and notes appearing in this Report should be read in conjunction with
the Company's consolidated audited financial statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998 (the "1998 10-K").
2. As of March 31, 1999, the Company had uncommitted bank lines of credit
of $145 million available at variable interest rates. No amounts were drawn on
those lines during 1999 or 1998 and there was no outstanding balance at March
31, 1999 or December 31, 1998 on these lines of credit. The Company also had a
$150 million committed line of credit available for borrowing and as support for
commercial paper. As of March 31, 1999 and December 31, 1998, the Company had no
commercial paper outstanding and no indebtedness outstanding under its committed
line of credit. Additionally, the Company had a shelf registration in place 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 March 31, 1999 and December 31, 1998,
no such notes were issued or outstanding.
3. The Company's total comprehensive income for the quarters ended March
31, 1999 and 1998 was $47.5 million and $43.6 million, respectively. The
Company's comprehensive income consists of net income, unrealized holding gains
and losses on securities and foreign currency translation adjustments.
4. 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>
- --------------------------------------------------------------------------------------------------------------------
Quarter Ended March 31,
1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income per share-basic:
Net income $47,613 $43,571
Weighted average shares outstanding 79,961 80,967
Net income per share-basic $0.60 $.54
====================================================================================================================
Net income per share-diluted:
Net income $47,613 $43,571
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Weighted average shares outstanding 79,961 80,967
Dilutive impact of options 257 191
Shares contingently issuable 9 3
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Weighted average shares and potential dilutive
shares outstanding 80,227 81,161
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Net income per share-diluted $ .59 $ .54
====================================================================================================================
</TABLE>
5. 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 (Mellon) 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. In the third quarter of 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. At December 31, 1998, the remaining liability of $34.4
million was classified as other accrued liabilities in the consolidated balance
sheet.
5
<PAGE>
In January 1999, the Company's appeal of this judgment was denied by the Third
Circuit Court of Appeals and the Company paid $32.2 million to Mellon in
February 1999. The portion of the reserve remaining after the payment of this
judgement ($2.1 million) was reversed in the first quarter of 1999 and is
reflected in other income in the consolidated statement of income for the three
months ended March 31, 1999. The Company is reviewing whether a further appeal
of this judgment is warranted.
6. In February 1999, the Company acquired all of the outstanding shares of
eFunds Corporation for $13 million. eFunds provides electronic check conversion
and electronic funds transfer 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
include the results of this business subsequent to its acquisition date. This
business is included in the Deluxe Payment Protection Systems segment in
footnote 9 below. 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 $15.7 million is reflected as
goodwill and is being amortized over 10 years. The effect of this acquisition
was not material to the operations or financial position of the Company.
7. The Company's consolidated balance sheets reflect restructuring accruals
of $37.4 million and $45.7 million as of March 31, 1999 and December 31, 1998,
respectively, for employee severance costs, and $6.5 million and $6.8 million as
of March 31, 1999 and December 31, 1998, respectively, for estimated losses on
asset dispositions. Through March 31, 1999, severance payments of approximately
$49.7 million have been paid to 3,050 employees for the 1996 and 1997
restructuring plans, as well as for the four additional financial institution
check printing plant closings announced in 1998. These restructuring plans are
outlined in Note 3 to the Company's consolidated annual financial statements
included in the 1998 10-K. Additionally, severance payments of approximately
$2.1 million have been paid to approximately 155 employees in conjunction with
the Company's initiative to reduce its selling, general and administrative
expenses and to discontinue production of direct mail products. The majority of
the remaining severance costs are expected to be paid in 1999 and early 2000
with cash generated from the Company's operations.
8. During the third quarter of 1998, the Company recorded a charge of $36.4
million to reserve for expected future losses, extending through 2006, on
existing long-term contracts and relationships of the Deluxe Government Services
segment. In the first quarter of 1999, the Company determined that one
relationship included in the 1998 loss accrual should no longer be included
because the definitive agreement between the Company and the prime contractor
remains subject to negotiation. By not considering this relationship in the
charge for expected future losses, $4.3 million of assets dedicated to this
relationship were exposed to impairment. In accordance with the Company's policy
on impairment of long-lived assets, as outlined in the notes to the Company's
consolidated annual financial statements included in the 1998 10-K, an
impairment loss of an amount substantially equal to the contract loss originally
recorded with respect to this relationship resulted. In the first quarter of
1999, a reclassification between accrued contract/relationship losses and the
long-lived assets dedicated to this relationship was recorded and $1.9 million
of contract losses were applied against the reserve recorded in 1998.
9. 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 Government Services; Deluxe Direct Response; 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, electronic check conversion, 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 Government Services provides electronic
benefits transfer services to state governments and online medical eligibility
verification services to the State of New York. 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 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.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies as presented in the Company's notes
to the consolidated annual financial statements included in the 1998 10-K. 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-
6
<PAGE>
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. Generally,
intersegment sales are based on current market pricing. Segment information for
the quarters ended March 31, 1999 and 1998 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
Deluxe Deluxe Deluxe
Paper Payment Electronic Deluxe Deluxe
QUARTER ENDED Payment Protection Payment Government Direct Deluxe Total
MARCH MARCH 31, 1999 Systems Systems Systems Services Response Direct Segments
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales from external $312,096 $60,335 $30,336 $11,310 $414,077
customers
Intersegment sales 144 117 261
Operating income (loss) 75,806 7,579 328 (471) 83,242
Segment assets 383,311 131,940 129,277 37,919 682,447
Depreciation and
amortization
expense 9,559 2,912 3,596 480 16,547
Capital purchases 11,912 3,420 2,151 20 17,503
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
QUARTER ENDED
MARCH 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales from external $318,785 $54,093 $29,957 $9,230 $10,161 $66,744 $488,970
customers
Intersegment sales 1,996 455 527 2,978
Operating income (loss) 75,140 8,975 (1,174) (3,533) (7,409) (82) 71,917
Segment assets 386,551 100,438 121,287 37,698 45,080 112,770 803,824
Depreciation and
amortization 8,834 2,148 3,271 1,267 1,489 17,009
expense
Capital purchases 9,571 2,135 2,031 195 362 133 14,427
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Segment information reconciles to consolidated amounts as follows (dollars in
thousands):
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
- -----------------------------------------------------------------------------------------
OPERATING INCOME 1999 1998
- ----------------------------------------------------------------------- -----------------
<S> <C> <C>
Total segment operating income $83,242 $71,917
Elimination of intersegment profits (77)
Unallocated corporate expenses (5,595) (323)
- ----------------------------------------------------------------------- -----------------
Total consolidated operating income $77,647 $71,517
- ----------------------------------------------------------------------- -----------------
</TABLE>
Unallocated corporate expenses consist of charges for certain corporate
liabilities which are not allocated to the segments.
7
<PAGE>
<TABLE>
<CAPTION>
MARCH 31,
- -------------------------------------------------------------------------------
TOTAL ASSETS 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Total segment assets $ 682,447 $ 803,824
Unallocated corporate assets 419,680 310,350
- -------------------------------------------------------------------------------
Total consolidated assets $1,102,127 $1,114,174
- -------------------------------------------------------------------------------
</TABLE>
Unallocated corporate assets consist primarily of cash, investments, and fixed
assets and intangibles utilized by the corporate support functions.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
- ----------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION EXPENSE 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Total segment depreciation and amortization $16,547 $17,009
expense
Depreciation and amortization of unallocated
corporate assets 4,410 3,534
- ----------------------------------------------------------------------------------------------------
Total consolidated depreciation and amortization
expense $20,957 $20,543
- ----------------------------------------------------------------------------------------------------
<CAPTION>
QUARTER ENDED MARCH 31,
- ----------------------------------------------------------------------------------------------------
CAPITAL PURCHASES 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Total segment capital purchases $17,503 $14,427
Corporate capital purchases 8,094 10,225
- ----------------------------------------------------------------------------------------------------
Total consolidated capital purchases $25,597 $24,652
- ----------------------------------------------------------------------------------------------------
</TABLE>
Corporate capital purchases consist primarily of a new human resources
information system and various other information system enhancements.
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 (in thousands):
<TABLE>
<CAPTION>
NET SALES FROM EXTERNAL CUSTOMERS LONG-LIVED ASSETS
QUARTER ENDED MARCH 31, MARCH 31,
- ----------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States $409,036 $479,826 $334,519 $398,325
Foreign countries 5,041 9,144 3,231 5,290
- ----------------------------------------------------------------------------------------------------------------
Total consolidated $414,077 $488,970 $337,750 $403,615
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
10. In April 1999, the Company purchased the remaining 50 percent ownership
interest in its joint venture with HCL Corporation of India. The joint venture
offers software maintenance and support services and business process
outsourcing to financial services companies and the Company's businesses. This
purchase is not expected to have a material impact on the Company's results of
operations or financial position.
8
<PAGE>
11. In April 1999, the Company announced that it will be selling National
Revenue Corporation, its collections business which is included in the Deluxe
Payment Protection Systems segment. This business contributed net sales of $34.3
million and $30.7 million for the quarters ended March 31, 1999 and March 31,
1998, respectively. The sale is expected to be completed in 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Company Profile
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 Government Services; Deluxe Direct Response; 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, electronic check conversion 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 Government Services provides electronic benefits
transfer services to state governments and online medical eligibility
verification services to the State of New York. 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 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.
Results of Operations - Quarter Ended March 31, 1999 Compared to the Quarter
Ended March 31, 1998
NET SALES - Net sales were $414.1 million for the first quarter of 1999, down
15.3% from the first quarter of 1998 when sales were $489 million. This decrease
is primarily due to the sale of the businesses in the Deluxe Direct Response and
Deluxe Direct segments in 1998. These segments contributed net sales of $76.9
million in the first quarter of 1998. Deluxe Paper Payment Systems net sales
decreased 2.7% to $312.1 million in 1999. This decrease was primarily due to
lower volume in the financial institution check printing business due to lost
customers. The loss of business was due to competitive pricing requirements that
fell below the Company's revenue and profitability per unit targets. This volume
decrease was partially offset by increased volume for both the direct check
printing business and the business forms business. The decreases in these
segments were partially offset by increases for all other segments. Net sales
for Deluxe Payment Protection Systems increased 10.9% to $60.5 million in the
first quarter of 1999 due to increased volume across all product lines and price
increases. Deluxe Electronic Payment Systems net sales were flat versus 1998.
Increased volume in processing related revenues was offset by decreased software
sales due to customer reluctance to make significant software changes prior to
the turn of the century. Net sales for the Deluxe Government Services segment
increased 22.5%, or $2.1 million, to $11.3 million in the first quarter of 1999
due to price increases on 1998 contract extensions and rebids that occurred
subsequent to the first quarter of 1998. The charge recorded by the Company in
the third quarter of 1998 (see footnote 8 to the Notes to Consolidated Financial
Statements) reflects these extensions and rebids.
GROSS MARGIN - Gross margin for the Company was 56.4% in the first quarter of
1999 compared to 54.3% in the first quarter of 1998. A portion of the increase
is due to the sale of the businesses within the Deluxe Direct Response and
Deluxe Direct segments which contributed gross margins of 15.7% and 52.8%,
respectively, in the first quarter of 1998. Deluxe Paper Payment Systems gross
margin increased to 63.4% in 1999 from 60.9% in 1998 due to cost reductions
realized from plant closings and process improvements within both the financial
institution check printing and business forms businesses and the loss of lower
margin customers within the financial institution check printing business. Gross
margin for Deluxe Government Services increased to 6.4% in 1999 from a negative
19.9% in 1998 due to the application of loss contract accounting, which began in
the third quarter of 1998. The increases for these segments were partially
offset by decreases for the other segments. Deluxe Payment Protection Systems
gross margin decreased to 45.3% in 1999 from 49.1% in 1998 due to the product
mix within the collections business. Gross margin for Deluxe Electronic Payment
Systems decreased to 25.1% in 1999 from 26.3% in 1998 due to the decreased
software sales, as well as increased telecommunications costs.
SELLING, GENERAL AND ADMINSTRATIVE EXPENSE (SG&A) - SG&A decreased $37.9 million
or 19.6% from the first quarter of 1998 primarily due to the sale of the
businesses within the Deluxe Direct Response and Deluxe Direct
9
<PAGE>
segments in 1998. These businesses had $45.8 million of SG&A in 1998. Deluxe
Electronic Payment Systems' SG&A decreased 18.7% from 1998 due primarily to
reductions in Corporate support SG&A expenses which results in lower expenses
allocated to the segments. The benefit from the reduced Corporate SG&A expenses
was offset by increased SG&A expenses in other segments. Deluxe Paper Payment
Systems SG&A increased 1.5% from 1998 due primarily to increased phone orders
and increased marketing expenses reflecting the emphasis on new customer
acquisition at the direct check printing business. SG&A for Deluxe Payment
Protection Systems increased 11.1% from 1998 due primarily to costs incurred in
conjunction with the Company's development of its Debit BureauSM capabilities.
SG&A for Deluxe Government Services decreased 29.9% from 1998 due to the fact
that Corporate support expenses were not allocated to this segment in 1999.
NET INCOME - Net income for the first quarter of 1999 increased 9.2% to $47.6
million, compared to net income of $43.6 million for the first quarter of 1998.
The increase is due to the improvement in the Company's operating margin from
14.6% in 1998 to 18.8% in 1999. This improvement results from improvements
related to ongoing operations, as well as the sale of the businesses within the
Deluxe Direct Response and Deluxe Direct segments in 1998.
Financial Condition - Liquidity
Cash provided by operations was $53,000 for the first quarter of 1999, compared
with $61.8 million for the first quarter of 1998. The decrease is due to the
legal settlement paid in 1999 to Mellon Bank of $32.2 million, working capital
changes, and a change in the funding methodology of the Company's Voluntary
Employees Beneficiary Association (VEBA) trust used to pay for health care
benefits. Cash from operations represents the Company's primary source of
working capital for financing capital expenditures and paying cash dividends.
The Company's working capital on March 31, 1999 was $132.9 million compared to
$167.9 million on December 31, 1998. The Company's current ratio on both March
31, 1999 and December 31, 1998 was 1.4 to 1.
Financial Condition - Capital Resources
Purchases of capital assets totaled $25.6 million for the first quarter of 1999
compared to $24.7 million during the comparable period one year ago. As of March
31, 1999, the Company had uncommitted bank lines of credit of $145 million
available at variable interest rates. No amounts were drawn on those lines
during 1999 or 1998 and there was no outstanding balance at March 31, 1999 or
December 31, 1998 on these lines of credit. The Company also had a $150 million
committed line of credit available for borrowing and as support for commercial
paper. As of March 31, 1999 and December 31, 1998, the Company had no commercial
paper outstanding and no indebtedness outstanding under its committed line of
credit. Additionally, the Company had a shelf registration in place 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 March 31, 1999 and December 31, 1998, no such
notes were issued or outstanding. Cash dividends totaled $29.6 million in the
first three months of 1999 compared to $30.2 million in the first three months
of 1998.
Year 2000 Readiness Disclosure
GENERAL APPROACH AND STATE OF READINESS - In 1996, the Company initiated a
program to prepare its computer systems, applications and embedded chip
equipment for the year 2000 and to evaluate the readiness of its third-party
suppliers and customers for the millenium date change. 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
10
<PAGE>
interfaces. During 1997, the Company assessed and prioritized all affected
areas, defined appropriate resolution strategies and began execution of those
strategies. The compliance strategies include renovation, replacement and
retirement of systems and equipment.
As of March 31, 1999, the overall project is approximately 93% complete and
approximately 98% complete for mission critical areas. All areas regulated by
the Federal Financial Institution Examination Council have completed
certification and all remaining mission critical components are expected to be
completed prior to June 1999 (the Company's prior expectation that mission
critical areas would be completed by March 1999 has been adjusted to allow for
delivery of some additional required network and data center equipment). Also
during 1999, the project focus has shifted toward completing customer and vendor
testing and contingency execution.
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 98% complete
as of March 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 were contacted and
they have provided responses to year 2000 assessment requests. Site visits and
action plans were developed as appropriate, based on the importance of the
organizations to the Company's ability to provide products and services. This
category was completed in March 1999 and will be monitored going forward through
the year 2000.
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 external consulting expenses, with $19.6 million having been
incurred through March 31, 1999. 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 this 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.
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 and complete the implementation of a new order processing and
customer service system and post-press production process improvements.
Additionally, the Company will continue with it plans to reduce
11
<PAGE>
SG&A expenses. At the same time, the Company will continue with major
infrastructure improvements and expects to complete its year 2000 readiness
project in a timely manner.
In April 1999, the Company announced the creation of a new business unit,
eFunds. This business unit will be comprised of Deluxe Electronic Payment
Systems, Inc., Debit Bureau(SM), Chex Systems, Inc., Deluxe Payment Protection
Systems, Inc. and eFunds Corporation, which was acquired in February 1999, under
a single management group. The Company believes that combining these businesses
into a single integrated unit will provide opportunities for revenue and profit
growth in excess of what would have been generated had they continued to operate
independently. The Company also announced that it plans to reduce its Corporate
support group and will be moving some Corporate resources into the Company's
operating units in order to enable them to operate more independently. The
implementation of this initiative could lead to a restructuring charge in future
periods. In addition, the Company has stated that it will be selling National
Revenue Corporation, the Company's collection business, as it does not fit into
the Company's new business model.
In April 1999, the Company's Board of Directors authorized the repurchase of up
to 10 million shares of the Company's Common Stock. Market conditions
permitting, the Company currently plans to complete this purchase program in
1999.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
As of March 31, 1999, the Company had an investment portfolio of fixed income
securities, excluding those classified as cash and cash equivalents, of $36.4
million. 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 would not expect to recognize an adverse impact on net
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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
During 1997, a $30 million 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
(Mellon) in connection with a potential bid to provide electronic benefit
transfer services for the Southern Alliance of States. In January 1999, the
Company's appeal of this judgment was denied by the Third Circuit Court of
Appeals and the Company paid $32.2 million to Mellon in February 1999. The
Company is reviewing whether a further appeal of this judgment is warranted.
Item 5. Other Information
RISK FACTORS AND CAUTIONARY STATEMENTS.
When used in this Quarterly Report on Form 10-Q and in future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases and in oral statements made 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.
12
<PAGE>
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 Exhibit 99.1
to the Company's Annual Report on Form 10-K for the year ended December 31,
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 statements that it expects to achieve a minimum
of 11 percent annual growth in earnings in 1999 and 2000, report record
operating earnings in 1999 and that it has a target of generating cumulative
EBITDA (earnings before income taxes, depreciation and amortization) in excess
of $2.3 billion over the next five years, 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 or that the variation from such
forecasts will not be material and adverse. Investors are cautioned not to base
their entire analysis of the Company's business and prospects upon isolated
predictions, but instead are encouraged to utilize the entire available mix of
historical and forward-looking information made available by the Company, and
other information affecting the Company and its products, when evaluating the
Company's prospective results of operations.
In addition, 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.
Recent Strategic Initiatives. The Company has recently announced the creation of
eFunds, a new business unit comprised of Deluxe Electronic Payment Systems,
Inc., Debit Bureau(SM), Chex Systems Inc., Deluxe Payment Protection Systems,
Inc. and eFunds Corporation. It is hoped that combining these businesses into a
single business unit will increase their opportunities for revenue and profit
growth. The Company has also announced an intention to transfer certain
resources and responsibilities from its corporate group to its operating units
in an effort to enable them to more efficiently respond to market opportunities
and conditions. In many respects, the precise means by which the Company plans
to implement the foregoing initiatives or achieve its growth targets have not,
however, yet been identified, and so the benefits, if any, that may result
therefrom cannot presently be quantified. Further, accomplishing the goals of
the reorganization is dependent upon identifying and developing new products and
services, some or all of which may be directed at markets not now served by the
Company. The successful execution of this strategy is also dependant upon
identifying and retaining personnel and third parties with the expertise needed
to develop and implement the Company's strategic initiatives. Portions of the
initiative may also involve identifying and reaching agreements with strategic
alliance partners and acquisition targets. Unexpected delays are common in
endeavors of this type and can arise from a variety of sources, many of which
will likely have been unanticipated. The likelihood that the reorganization will
achieve its goal of incrementally increasing the revenues and profits of the
businesses included in the eFunds business unit must be considered in light of
the problems, expenses, complications and delays frequently encountered in
connection with the development and execution of new business
13
<PAGE>
initiatives and the competitive, rapidly changing environment in which eFunds
will operate. As a result, although the Company has set annual revenue growth
targets for its eFunds business unit at 20 percent for the years 2000 and 2001,
and hopes to achieve higher levels of growth in subsequent years, there can be
no assurance that these targets will in fact be achieved. In addition, the
implementation of these initiatives could lead to a restructuring charge in an
amount that, although not yet quantified, may be material.
Share Repurchase Program. In April 1999, the Board of Directors of the Company
authorized the repurchase of up to 10,000,000 shares of the Company's Common
Stock. This repurchase program is currently scheduled to be completed prior to
the end of 1999. The success of this program is, however, dependant upon market
conditions, including, most importantly, the availability of a sufficient number
of shares at prices determined by management of the Company to be reasonable.
Accordingly, if appropriate market conditions do not prevail during the planned
repurchase period, the Company will not purchase the entire allotment of shares
authorized by the Board.
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 SG&A expense 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 again
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, headcount reductions and other efforts. The optimum
means of realizing many of these strategies is still being evaluated by the
Company, and the goodwill amortization associated with the Company's recent
acquisitions of eFunds Corporation and the remaining 50 percent ownership
interest in its joint venture with HCL Corporation of India may offset some of
the benefits sought to be achieved through this program. 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. Acquisitions accounted for as
a purchase transaction could also adversely affect the Company's reported future
earnings due to the amortization of the goodwill and other intangibles
associated with the purchase.
14
<PAGE>
Competition. Although the Company believes it is the leading check printer in
the United States, it faces considerable competition from other smaller
companies in both its traditional marketing channel to financial institutions
and from direct mail marketers of checks. From time to time, one or more of
these competitors reduce the 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 for the Company's check printing business in
the past and similar pressures can reasonably be expected in the future. The
Company has also experienced some loss of business due to its refusal to meet
competitive prices that fell below the Company's revenue and profitability per
unit targets. The timing and amount of reduced revenues and profits that may
result from these competitive pressures 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 payment 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 a material, adverse effect on the demand for the
Company's primary products and its account verification and payment protection
services. Although the Company believes that its recent acquisition of eFunds
Corporation may contribute to the continued 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 this new subsidiary and its competitors will achieve widespread market or
consumer acceptance or have a measurable impact on the market for the Company's
principal products.
The introduction of the alternative payment methodologies described above has
also resulted in an increased interest by third parties in transaction
processing, authorization and verification, as well as other methods of
effecting electronic payments, as a source of revenue, which has led to
increased competition for the Company's transaction processing and authorization
businesses. The payment processing industry is characterized by continuously
evolving technology and intense competition. Many participants in the industry
have substantially greater capital resources and research and development
capabilities than the Company. There can be no assurance that the Company's
competitors and potential competitors will not succeed in developing and
marketing technologies, services or products that are more accepted in the
marketplace than those offered or envisioned by the Company. Such a development
could result in the loss of significant customers by the Company's eFunds
business unit, render the Company's technology and proposed products obsolete or
noncompetitive or otherwise materially hinder the achievement of the growth
targets established for this business unit. Initiatives that may be undertaken
by the Company in connection with Internet commerce-based activities would be
particularly susceptible to these types of competitive risks.
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 industry, 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 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.
15
<PAGE>
Debit Bureau(SM). 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 Company's Debit BureauSM initiative will result in the
introduction of a significant number of new products or services or that any new
products or services introduced by the Company will generate revenues in
material amounts. In any event, the continued development of Debit Bureau(SM) is
expected to require a significant level of investment by the Company.
HCL-Deluxe, N.V. (HDX). There can be no assurance that the software development
and maintenance services proposed to be offered by the Company's subsidiary HDX
will achieve market acceptance in either the United States or India. To date,
the operations of HDX have not been profitable. In addition, the Company has
only limited operational experience in the software services business and India
to date. The successful development of HDX is subject to all of the risks
inherent in the establishment of a new business enterprise, including the
absence of an extended operating history, reliance on key personnel, a
competitive environment characterized by numerous well-established and
well-capitalized competitors and the risk that the reputation of the business
could be more adversely affected by any customer service issues or problems than
would be the case with a more established firm. Further, in developing HDX, the
Company faces additional complexities arising from the maintenance of certain of
HDX's functions in India. In addition to the normal complications that arise in
connection with the management of remote locations, 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 HDX. As a result,
there can be no assurance that this Company will achieve its announced 1999
revenue target of $25 million for this business unit or that this unit 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 for the year 2000 and to evaluate the readiness of its third-party
suppliers/customers for the millenium date change. 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 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 any contingency
plans developed by the Company 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.
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
----------- ----------- ----------------
<S> <C> <C>
3.1 Articles of Incorporation (incorporated by reference to *
Exhibit 3(A) 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 to 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 "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 for
the year ended December 31, 1997).
10.1 Deluxe Corporation 2000 Employee Stock Purchase Plan Filed herewith
12.1 Computation of Ratio of Earnings to Fixed Charges Filed herewith
27.1 Financial Data Schedule Filed herewith
</TABLE>
----------------------
*Incorporated by reference
(b) The Company filed a Current Report on Form 8-K on January 15, 1999 (as
amended by a Form 8-K/A-1, filed March 5, 1999, the "Form 8-K") pursuant
to Item 2 of such Form as a result of the Company's sale of the
outstanding capital stock of PaperDirect, Inc. and all of the assets and
liabilities of the Social Expressions division of Current, Inc. The Form
8-K included pro forma consolidated income statements for the Company and
its subsidiaries for the year ended December 31, 1997 and the nine months
ended September 30, 1998 and a pro forma condensed consolidated balance
sheet for the Company and its subsidiaries as of September 30, 1998.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELUXE CORPORATION
(Registrant)
Date May 14, 1999 /s/ J.A. Blanchard III
----------------------------------
J.A. Blanchard III, President
and Chief Executive Officer
(Principal Executive Officer)
Date May 14, 1999 /s/ Thomas W. VanHimbergen
----------------------------------
Thomas W. VanHimbergen
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
18
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page Number
----------- ----------- -----------
<S> <C> <C>
10.1 Deluxe Corporation 2000 Employee Stock Purchase Plan
12.1 Computation of Ratio of Earnings to Fixed Charges
27.1 Financial Data Schedule
</TABLE>
19
EXHIBIT 10.1
DELUXE CORPORATION
2000
EMPLOYEE STOCK PURCHASE PLAN
SECTION 1. CERTAIN DEFINITIONS.
1.01. PLAN. The term "Plan" shall mean the Employee Stock Purchase Plan, the
terms and provisions of which are set forth herein.
1.02. COMPANY. The term "company" shall mean Deluxe Corporation.
1.03. SHARES. The term "Shares" shall mean the $1 par value Common Shares of the
company.
1.04. PARTICIPANT. The term "Participant" shall mean a Full-Time Employee of the
company or of its subsidiaries, as determined by the board of directors or any
committee appointed by the board of directors of the company pursuant to Section
10, who is eligible to participate in the Plan and who has elected to
participate in the manner set forth in the Plan.
1.05. CURRENT COMPENSATION. The term "Current Compensation" shall mean all
regular wage, salary, and commission payments (including periodic sales
commission bonuses) paid by the company to a Participant in accordance with the
terms of his employment, including payments made to him under the short term
disability or paid time off plan of the company or subsidiary of which the
Participant is an employee in effect at the applicable time, but excluding all
overtime earnings, bonus and other incentive payments and awards, and all other
forms of extra compensation.
1.06. QUARTER DATE. The term "Quarter Date" shall mean the first business day of
each February, May, August, and November, commencing with the effective date of
the Plan and ending with the last such date during the term of this Plan, a
"business" day being, for this purpose, a trading day on the New York Stock
Exchange.
1.07. FULL-TIME EMPLOYEE. The term "Full-Time Employee" means, with respect to
employees of the company, all employees (including officers and directors who
are also employees of the company) who are employed on a full-time basis and
whose regularly scheduled work week consists of at least thirty-two (32) hours,
and, with respect to employees of subsidiaries, employees who are considered
full-time employees under the employment policies of their company.
1.08. STOCK PURCHASE ACCOUNT. The term "Stock Purchase Account" means a current
bookkeeping record maintained by the company of cumulative payroll deductions
made
<PAGE>
from the Current Compensation of each Participant in the Plan as reduced by
amounts applied toward the purchase of Shares under the Plan.
SECTION 2. ELIGIBLE EMPLOYEES AND ELECTION TO PARTICIPATE.
2.01. Each Full-Time Employee of the company shall be eligible to participate in
the Plan commencing with the Quarter Date on which, or next following, the date
on which he completes twelve (12) consecutive months of employment with the
company, provided that an approved leave of absence shall not be deemed to
terminate an employee's continuous employment with the company. Subject to the
provisions of Section 6, a Full-Time Employee shall continue to be eligible to
participate in the Plan so long as he remains a Full-Time Employee as defined in
Section 1.07. Notwithstanding the foregoing, no employee shall be granted any
right to purchase Common Shares hereunder if such employee, immediately after
such a right to purchase is granted, would own, directly or indirectly, within
the meaning of Section 423(b)(3) and Section 424(d) of the Internal Revenue Code
of 1986, as amended, Common Shares possessing five percent (5%) or more of the
total combined voting power or value of all the classes of the capital stock of
the company or of all of its affiliates.
2.02. An eligible employee may elect to participate in the Plan by completing a
form known as "Payroll Deduction Authorization," which authorizes regular
payroll deduction from the employee's Current Compensation, beginning with the
first payroll period ending after a Quarter Date, provided the authorization is
received by the company's Employee Services Department at least fifteen days
prior to each Quarter Date. Payroll deductions shall continue until the employee
withdraws or ceases to be eligible to participate in the Plan.
SECTION 3. PAYROLL DEDUCTIONS AND STOCK PURCHASE ACCOUNT.
3.01. A Participant may elect payroll deductions of any multiple of one percent
not less than three percent nor more than ten percent of his Current
Compensation. A Participant may, at any time, but only once in any twelve-month
period, increase or reduce the percentage of his payroll deduction within the
foregoing limitations by filing a "Notice of Change," such change to become
effective with the first payroll period commencing on or after the receipt of
the Notice of Change by the company's Employee Services Department.
3.02. Payroll deductions shall be credited currently to the Participant's Stock
Purchase Account. A Participant may not make any separate cash payment into his
Stock Purchase Account.
3.03. No interest will be paid upon payroll deductions or upon any amount
credited to, or on deposit in, an employee's Stock Purchase Account.
2
<PAGE>
SECTION 4. PURCHASE OF SHARES.
4.01. On each Quarter Date, each Participant shall automatically have purchased
for him that number of whole Shares, not less than two, as can be purchased with
the amount in his Stock Purchase Account on such Quarter Date.
4.02. The per-Share purchase price of Shares purchased shall be seventy-five
percent (75%) of the fair market value of the Shares on the Quarter Date,
rounded up to the next higher full cent. The fair market value on any day means
the closing price of the Shares on the New York Stock Exchange on such day as
reported by the WALL STREET JOURNAL, MIDWEST EDITION.
SECTION 5. STOCK PURCHASE ACCOUNT BALANCE.
5.01. Any funds remaining in a Participant's Stock Purchase Account after the
purchase of Shares on a Quarter Date shall remain in his Stock Purchase Account
and be applied toward the purchase of Shares on the next Quarter Date, unless
the Participant withdraws from the Plan.
SECTION 6. WITHDRAWAL FROM THE PLAN.
6.01. A Participant may, at any time, by written notice to the Employee Services
Department, withdraw from the Plan and cease making any further payroll
deductions. In such event, the company shall refund, within thirty (30) days,
the entire balance, if any, in the employee's Stock Purchase Account. Once an
employee withdraws from the Plan, or his employment is terminated, he shall not
be eligible to re-enter the Plan for a period of twelve (12) months.
6.02. Participation in the Plan shall cease upon the date of termination of
employment, or death, or transfer to other than full-time status; and the amount
credited to the individual's Stock Purchase Account shall be refunded within
thirty (30) days to him or to his estate; provided that if during his lifetime a
Participant has delivered to the Employee Services Department a notice in
writing, upon a form furnished by the company, to pay such amount in the event
of his death to a specified person or persons, such amount in the event of the
Participant's death, shall be refunded to such person or persons whose
designation as aforesaid has not been revoked by the Participant during his
lifetime. An approved leave of absence shall not be deemed a termination of
employment for purposes of this section.
SECTION 7. TRANSFERABILITY.
7.01. Stock purchase benefits granted hereunder may not be assigned,
transferred, pledged, or hypothecated (whether by operation of law or otherwise)
and shall not be subject to execution, attachment or similar process. Any
attempted assignment, transfer, pledge, hypothecation, or other disposition or
levy of attachment or similar process upon the stock purchase benefits shall be
null and void and without effect.
3
<PAGE>
7.02. The funds accumulated in a Stock Purchase Account may not be assigned,
transferred, pledged or hypothecated in any way, and any attempted assignment,
transfer, pledge, hypothecation or other disposition of the funds accumulated in
the Stock Purchase Account shall be null and void and without effect.
7.03. The administrator of the Plan may, from time to time, establish or modify
minimum required holding periods for Shares purchased by Participants under the
Plan and, in connection therewith, may establish such rules and regulations as
it determines to be necessary or appropriate for the administration of such
minimum holding periods, including, without limiting the generality of the
authority herein, by requiring that the Shares issued under the Plan be
restricted or bear a legend against transfer or by requiring periodic
certifications by Participants concerning compliance with such minimum required
holding periods, provided that the establishment of or any change to any minimum
required holding period shall be made effective on a Quarter Date and that
notice thereof shall be given to Participants on or before the commencement of
the calendar quarter ending on such Quarter Date by such means as the
administrator of the Plan determines to be appropriate in the circumstances. The
failure of a Participant to receive any such notice shall not affect the
establishment of any such minimum holding period or any change thereto with
respect to that or any other Participant.
SECTION 8. SHARE CERTIFICATES.
8.01. Shares purchased under the Plan may be originally issued in certificated
or uncertificated form, as determined by the Board of Directors or any committee
appointed pursuant to Section 10. Shares issued under the Plan may contain
restrictions against transfer 9 (including applicable legends to that effect) as
provided in Section 7.03.
8.02. The company shall not be required to issue or deliver any Shares purchased
prior to registration under the Securities Act of 1933 or registration or
qualification under any state law if such registration is required. The company
will use its best efforts to accomplish such registration, if and to the extent
required or determined desirable, not later than a reasonable time following a
Quarter Date, and issuance of Shares may be deferred until such registration is
accomplished.
8.03. An employee shall have no interest in the Shares purchased until a Share
certificate representing the same is issued or an appropriate book-entry is made
with the transfer agent reflecting such purchase.
8.04. The Share certificates or book-entries representing Shares issued under
the Plan shall be registered in the name of the Participant or jointly in the
name of the Participant and another person, as the Participant may direct.
4
<PAGE>
SECTION 9. EFFECTIVE DATE AND AMENDMENT OR TERMINATION OF PLAN.
9.01. The Plan shall become effective on the date fixed by the board of
directors of the company after approval thereof by the shareholders of the
company; provided, however, that the date fixed by the board of directors as the
effective date of the Plan shall coincide with a Quarter Date.
9.02. The board of directors of the company may at any time terminate or amend
the Plan except that no amendment shall be made without prior approval of the
shareholders which would (i) permit the issuance of Shares before payment
thereof in full, (ii) increase the rate of payroll deductions above ten percent
(10%) of Current Compensation, or (iii) reduce the price per share at which the
Shares may be purchased.
9.03. The Plan shall automatically terminate on the fifth (5th) anniversary date
of the Quarter Date it became effective (or next ensuing business day, as the
case may be).
SECTION 10. STOCK PLAN COMMITTEE.
10.01. The Plan shall be administered by the board of directors or any committee
appointed by the board of directors of the company. In administering the Plan,
it will be necessary to follow various laws and regulations. It may be necessary
from time to time to change or waive requirements of the Plan to conform with
law, to meet special circumstances not anticipated or covered in the Plan, or to
carry on successful operations of the Plan. Therefore, the company reserves the
right, exercisable by the board of directors, or any appointed committee, to
make variations in the provisions of the Plan for such purposes and to determine
any questions which may arise regarding interpretation and application of the
provisions of the Plan. The determination of the board of directors or committee
as to the interpretation and operation of the Plan shall be final and
conclusive, provided that any such determination by a committee shall be subject
to review by the board of directors.
SECTION 11. STOCK DIVIDEND OR RECLASSIFICATION, MERGER, OR CONSOLIDATION.
11.01. Upon the payment of any stock dividend or reclassification by way of
split-up in the number of Shares of the company, the total number of Shares
authorized by Section 12 to be sold under the Plan shall be adjusted
accordingly.
11.02. If the company is merged into or consolidated with one or more
corporations during the Plan, appropriate adjustments shall be made to give
effect thereto on a equitable basis in terms of issuance of Shares of the
corporation surviving the merger or of the consolidated corporation, as the case
may be.
5
<PAGE>
SECTION 12. SHARES TO BE SOLD.
12.01. The company may go into the market and purchase Shares for sale under the
Plan, or it may issue currently unissued Shares. The number of Shares authorized
to be sold under the Plan during the current renewal period, which commences
February 1, 2000, shall not exceed 5 million Shares.
SECTION 13. NOTICES.
13.01. Notices of the company pertaining to the Plan may be addressed as
follows:
Deluxe Corporation
Attention: Employee Benefits Department
Post Office Box 64235
St. Paul, MN 55164-0235
6
Exhibit 12.1
DELUXE CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Three Months
Ended Years Ended December 31,
-------------- ------------------------------------------------------------------
March 31, 1999 1998 1997 1996 1995 1994 1993
-------------- ---- ---- ---- ---- ---- ----
Earnings
- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income from Continuing Operations
before Income Taxes $77,469 $246,540 $115,150 $118,765 $169,319 $246,706 $235,913
Interest expense
(excluding capitalized interest 1,782 8,273 8,822 10,649 13,099 9,733 10,070
Portion of rent expense under
long-term operating leases
representative of an interest factor 3,854 15,126 13,621 13,467 14,761 13,554 13,259
Amortization of debt expense 30 122 122 121 84 84 84
------- -------- -------- -------- -------- -------- --------
TOTAL EARNINGS $83,135 $270,061 $137,715 $143,002 $197,262 $270,077 $259,326
Fixed charges
- -------------
Interest Expense
(including capitalized interest 2,090 9,664 $ 9,742 $ 11,978 $ 14,714 $ 10,492 $ 10,555
Portion of rent expense under
long-term operating leases
representative of an interest factor 3,854 15,126 13,621 13,467 14,761 13,554 13,259
Amortization of debt expense 30 122 122 121 84 84 84
------- -------- -------- -------- -------- -------- --------
TOTAL FIXED CHARGES $ 5,974 $ 24,912 $ 23,485 $ 25,566 $ 29,559 $ 24,130 $ 23,898
RATIO OF EARNINGS
TO FIXED CHARGES: 13.9 10.8 5.9 5.6 6.7 11.2 10.9
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 177,850
<SECURITIES> 36,394
<RECEIVABLES> 136,995
<ALLOWANCES> 0
<INVENTORY> 10,449
<CURRENT-ASSETS> 505,076
<PP&E> 767,112
<DEPRECIATION> 429,362
<TOTAL-ASSETS> 1,102,127
<CURRENT-LIABILITIES> 372,147
<BONDS> 105,486
0
0
<COMMON> 79,415
<OTHER-SE> 509,899
<TOTAL-LIABILITY-AND-EQUITY> 1,102,127
<SALES> 414,077
<TOTAL-REVENUES> 414,077
<CGS> 180,485
<TOTAL-COSTS> 336,430
<OTHER-EXPENSES> (1,604)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,782
<INCOME-PRETAX> 77,469
<INCOME-TAX> 29,856
<INCOME-CONTINUING> 47,613
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,613
<EPS-PRIMARY> .60
<EPS-DILUTED> .59
</TABLE>
