UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1 TO
[ 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, as amended hereby (the "Amended Annual
Report"), are incorporated by reference in Parts I and II.
PART I
ITEM 1. NARRATIVE DESCRIPTION OF BUSINESS
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The information appearing under the caption "Note 14. Business Segment
Information" on pages 32-34 of the Amended Annual Report 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 34 of the Amended Annual Report is incorporated by
reference.
PART II
ITEM 6. SELECTED FINANCIAL DATA
The information appearing under the caption "Five-year Summary" on page 12
of the Amended Annual Report is incorporated by reference.
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 1 through 10 of the Amended Annual Report is incorporated by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, notes and independent auditors' report on pages 13
through 36 of the Amended Annual Report and the information appearing under the
caption "Summarized Quarterly Financial Data" (unaudited) on page 37 of the
Amended Annual Report is incorporated by reference.
On December 31, 1998, the registrant received a number of questions and
comments from the Securities and Exchange Commission's Division of Corporate
Finance (the "Division") with respect to the registrant's Annual Report on Form
10-K for the year ended December 31, 1997 and its quarterly Report on Form 10-Q
for the Quarter ended September 30, 1998. From January through September of
1999, representatives of the registrant and the Division engaged in an extensive
dialog concerning the comments raised by the Division. The principal focus of
these discussions related to the $36.4 million accrual
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recorded by the registrant in the third quarter of 1998 to reserve for expected
future losses on the existing long-term contracts and relationships of its
Deluxe Government Services segment.
In the first quarter of 1999, the registrant determined that one
relationship included in the 1998 loss accrual should no longer be included
because the definitive agreement between the registrant 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. The resulting reclassification between
accrued contract/relationship losses and the write-off of the long-lived assets
dedicated to this relationship was recorded in the first quarter of 1999.
As a result of extended discussions with the Division, the registrant
concluded its method of calculating a contract's costs should exclude the
depreciation and amortization associated with any assets related to that
contract which are determined to be impaired pursuant to the registrant's policy
on impairment of long-lived assets. The principal impact of this revised
methodology is to record an asset impairment charge of $26.3 million at
September 30, 1998. In calculating the impairment charge, the Company determined
that the assets utilized by this business have no fair market value. Thus, the
long-lived assets of this business were reduced to a carrying value of $0. In
addition, the Company revised the amount of the reserve recorded for expected
future losses on long-term service contracts and relationships and reversed
$21.7 million of the original loss reserve at September 30, 1998. In effect,
this revised approach results in the immediate recognition by the registrant of
the impairment of the assets employed on its loss contracts, as opposed to
depreciating those assets over time and including the amount of such
depreciation in the estimated amount of the future losses from these long-term
service contracts.
As a collorary to the revised methodology, however, the assets associated
with the profitable long-term service contracts of the registrant's Deluxe
Government Services segment must also be written-off. Originally, these assets
were not encompassed within the loss contract accrual because the related
contracts were profitable. Incorporating the assets employed on the profitable
contracts into the impairment analysis increases the impaired asset write-down
by an additional $4.6 million as of September 30, 1998 and increases the amount
of the registrant's third quarter charge by an equivalent amount. This
additional write-down, in conjunction with the related reduction in the amount
of depreciation expense in the fourth quarter of 1998, reduced the Company's
after-tax reported earnings by $2.9 million, or $.04 per share, for the quarter
ended September 30, 1998 and by $2.3 million, or $.03 per share for the year
ended December 31, 1998. The other primary effects of the revised methodology
are presented in the revised financial statements included in the Amended Annual
Report.
The registrant has recently been notified that the prime contractor for a
number of states and state coalitions for which the registrant's Deluxe
Government Services business provides switching services does not intend to
renew its switching agreement with the registrant. The registrant's Deluxe
Government Services business is currently negotiating with the contractor
regarding the timing and cost of this transition and the subsequent conversion
of the
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switching services to a third party. The registrant will adjust the charge
described above when the results of these negotiations are reasonably estimable.
It is possible that the loss of this contract and revenue stream will require
the registrant to record an additional accrual.
For purposes of this 10-K/A, and in accordance with Rule 12b-15 under the
Securities Exchange Act of 1934, as amended, the registrant has amended and
restated in its entirety each item of its Annual Report on Form 10-K which has
been affected by the financial statement restatement. In order to preserve the
nature and character of the disclosures set forth in such items as of the
original filing date of such Report, this Form 10-K/A does not otherwise modify
the disclosures in that report which were not affected by the restatement.
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:
<TABLE>
<CAPTION>
Financial Statements Page in
-------------------- Amended Annual Report
---------------------
<S> <C>
Consolidated Balance Sheets for the years ended December 31, 1998
and 1997...........................................................................13
Consolidated Statements of Income for each of the three years in the
period ended December 31, 1998.....................................................14
Consolidated Statements of Comprehensive Income for each of the three
years in the period ended December 31, 1998........................................14
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1998.................................................15
Notes to Consolidated Financial Statements..............................................16 - 35
Independent Auditors' Report ...........................................................36
Supplemental Financial Information (Unaudited):
Summarized Quarterly Financial Data.....................................................37
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
</TABLE>
(c) The following exhibits are filed as part of or are incorporated in this
report by reference:
<TABLE>
<CAPTION>
Exhibit Method of
Number Description Filing
------ ----------- ------
<S> <C> <C>
12.5 Amended Statement re: computation of ratios Filed
herewith
</TABLE>
4
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<TABLE>
<S> <C> <C>
13.1 1998 Annual Report to shareholders (as amended Filed
September 24, 1999). herewith
13.2 Amended Financial Highlights to the 1998 Annual Report Filed
herewith
23.1 Consent of Experts and Counsel (incorporated by reference to
page F-1 of this Amended Annual Report on Form 10-K). *
24.1 Power of attorney (incorporated by reference to Exhibit 24.1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1998). *
27.5 Amended Financial Data Schedule for the year ended Filed
December 31, 1998. herewith
</TABLE>
- ------------------
*Incorporated by reference
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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: October 7, 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 October 7,1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
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 Principal
Thomas W. VanHimbergen Accounting Officer)
/s/ Lawrence J. Mosner
--------------------------------------
Lawrence J. Mosner Vice-Chairman of the
Board of Directors
*
--------------------------------------
James J. Renier Director
*
--------------------------------------
Barbara B. Grogan Director
*
--------------------------------------
Stephen P. Nachtsheim Director
*
--------------------------------------
Calvin W. Aurand, Jr. Director
*
--------------------------------------
Donald R. Hollis Director
*
--------------------------------------
</TABLE>
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<TABLE>
<S> <C>
Robert C. Salipante Director
*
--------------------------------------
Jack Robinson Director
*
--------------------------------------
Hatim A. Tyabji Director
*By:/s/ John A. Blanchard III
--------------------------------------
John A. Blanchard III
Attorney-in-Fact
</TABLE>
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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,
September 24, 1999, as to Note 16 (which expresses an unqualified opinion and
includes explanatory paragraph relating to the restatement described in Note
16), incorporated by reference in this Amendment No. 1 to the 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
October 4, 1999
<PAGE>
F-1
EXHIBIT INDEX
The following exhibits are filed as part of this report:
Exhibit Page
Number Description Number
------ ----------- ------
12.5 Amended Statement re: computation of ratios
13.1 1998 Annual Report to Shareholders (as amended
September 24, 1999)
13.2 Amended Financial Highlights to the 1998 Annual
Report
27.5 Amended Financial Data Schedule for the year
ended December 31, 1998
DELUXE CORPORATION EXHIBIT 12.5
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
(As restated)(1) ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
- --------
Income from Continuing Operations
before Income Taxes $242,915 $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 $266,436 $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: 10.7 5.9 5.6 6.7 11.2 10.9 12.2
</TABLE>
(1)Subsequent to the issuance of the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, and after discussions with the Securities and
Exchange Commission, which concluded in September 1999, the Company revised its
accounting treatment for future losses on long-term contracts and relationships
and its calculation of impairment charges on long-lived assets related to the
Company's Deluxe Government Services segment. As a result, the Company has
restated its financial information for the year ended December 31, 1998. See
Note 16 in the Notes to Consolidated Financial Statements contained in the
Company's Amendment No. 1 to the Annual Report on Form 10-K for the year ended
December 31, 1998.
EXHIBIT 13.1
DELUXE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
This Amendment to the Annual Report on Form 10-K of Deluxe Corporation (the
"Company") for the year ended December 31, 1998, gives effect to certain changes
resulting from discussions with the Staff of the Securities and Exchange
Commission which were concluded in September 1999 concerning the accounting
treatment of the expected future losses on long-term contracts and relationships
of the Company's Deluxe Government Services segment.
As discussed in Note 16 to the Notes to Consolidated Financial Statements,
subsequent to the issuance of the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, and after discussions with the Securities and
Exchange Commission, which concluded in September 1999, the Company revised its
accounting treatment for future losses on long-term contracts and relationships
and its calculation of impairment charges on long-lived assets related to the
Company's Deluxe Government Services segment.
Such revisions for the year ended December 31, 1998 consisted of asset
impairment charges of $26.3 million on long-lived assets, offset by reductions
of $20.7 million in accrued contract/relationship losses and $2.0 million
related to depreciation and amortization expense, for a net charge to cost of
sales of $3.6 million and a reduction in net income of $2.3 million, net of a
tax benefit of $1.3 million. As a result of these adjustments, basic and diluted
net income per share for the year ended December 31, 1998 decreased to $1.77 per
share from $1.80 per share. The accompanying financial information for the year
ended December 31, 1998 has been restated to give effect to these revised
calculations.
This discussion summarizes the significant factors that affected the
consolidated operating results and financial condition of the Company 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
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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 and online medical eligibility verification services to the State of
New York. 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
$143.1 million, compared to $44.7 million in 1997 and $65.5 million in 1996.
Basic earnings per share were $1.77 in 1998, compared to $.55 in 1997 and $.80
in 1996. Return on average assets was 12.3% for 1998, compared to 3.8% in 1997
and 5.3% in 1996. Return on average shareholders' equity was 23.5% in 1998,
compared to 6.8% in 1997 and 8.8% in 1996. These results included pretax
reorganization and other special charges of $74.7 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 $74.7 million. These consisted of restructuring charges
of $39.5 million, losses on existing contracts and relationships of the Deluxe
Government Services segment of $14.7 million, and an asset impairment charge of
$26.3 million on the long-lived assets of the Deluxe Government Services
segment, 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.
***The losses on long-term contracts and relationships of the Deluxe Government
Services segment and the impairment of the long-lived assets of this 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
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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 $51.6 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
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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 $14.7 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.***
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
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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 52.6% 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 .3% in 1998, reflecting increased volume
and lower depreciation and amortization expense due to the asset impairment
charge recorded 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 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
Page 5
<PAGE>
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 41.1% 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
Page 6
<PAGE>
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 $143.1 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 $189.7 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.
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
$181.3 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
Page 7
<PAGE>
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 83.7% 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.
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
Page 8
<PAGE>
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.
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<PAGE>
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.
Page 10
<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 the 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.
SIGNATURE TITLE
- --------- -----
By /s/ John A. Blanchard III Chairman of the Board of Directors,
------------------------- President and Chief Executive Officer
John A. Blanchard III
By /s/ Thomas W. VanHimbergen Senior Vice President and Chief
-------------------------- Financial Officer
Thomas W. VanHimbergen
September 24, 1999
Page 11
<PAGE>
FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
***Years ended December 31 (dollars in 1998 1997 1996 1995 1994
thousands, except per share amounts) (AS RESTATED)(1)
- ---------------------------------------------- ----------------- ------------- ------------- -------------- --------------
<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 99,852 70,478 53,302 74,885 102,453
Income from continuing operations(2) 143,063 44,672 65,463 94,434 144,253
Return on sales 7.41% 2.33% 3.31% 4.88% 7.87%
Per share - basic 1.77 .55 .80 1.15 1.75
Per share - diluted 1.77 .55 .79 1.15 1.75
Return on average shareholders' equity 23.51% 6.75% 8.77% 11.84% 17.86%
Return on average assets 12.33% 3.84% 5.30% 7.40% 11.50%
Net income(2) 143,063 44,672 65,463 87,021 140,866
Per share - basic 1.77 .55 .80 1.06 1.71
Per share - diluted 1.77 .55 .79 1.06 1.71
Cash dividends per common share 1.48 1.48 1.48 1.48 1.46
Shareholders' equity 606,565 610,248 712,916 780,374 814,393
Purchases of capital assets 121,275 109,500 92,038 125,068 126,226
Depreciation and amortization expense 83,816 81,143 106,636 103,303 85,906
Working capital increase (decrease) 50,248 22,911 95,857 (118,116) (94,086)
Total assets 1,171,519 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(3) 15.20% 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)Subsequent to the issuance of the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, and after discussions with the Securities and
Exchange Commission, which concluded in September 1999, the Company revised its
accounting treatment for future losses on long-term contracts and relationships
and its calculation of impairment charges on long-lived assets related to the
Company's Deluxe Government Services segment. As a result, the Company has
restated its financial information for the year ended December 31, 1998. See
Note 16 in the Notes to Consolidated Financial Statements contained in the
Company's Amendment No. 1 to the Annual Report on Form 10-K for the year ended
December 31, 1998.
(2)Income from continuing operations and net income include reorganization and
other special charges each year. See Management's discussion and analysis on
page 2.
(3)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.
Page 12
<PAGE>
***CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
1998 1997
(AS RESTATED,
December 31 (dollars in thousands) SEE NOTE 16)
-
- --------------------------------------------------------------------------------------------------------------------
<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 56,554 50,345
Prepaid expenses and other current assets 62,961 48,849
- --------------------------------------------------------------------------------------------------------------------
Total current assets 612,001 512,613
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 507,680 562,983
- --------------------------------------------------------------------------------------------------------------------
Total 763,922 890,085
Less accumulated depreciation 423,845 475,077
- --------------------------------------------------------------------------------------------------------------------
Property, plant and equipment--net 340,077 415,008
INTANGIBLES
Cost in excess of net assets acquired--net 42,836 54,435
Internal use software--net 116,734 74,584
Other intangible assets--net 14,663 38,814
- --------------------------------------------------------------------------------------------------------------------
Total intangibles 174,233 167,833
- --------------------------------------------------------------------------------------------------------------------
Total assets $1,171,519 $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 33,075 31,960
Accrued rebates 34,712 36,708
Accrued contract/relationship losses 14,697
Other 185,022 129,263
Long-term debt due within one year 7,332 7,078
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 430,695 381,555
LONG-TERM DEBT 106,321 109,986
DEFERRED INCOME TAXES 27,519 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 519,742 525,302
Unearned compensation (238) (649)
Accumulated other comprehensive income (242) (489)
- --------------------------------------------------------------------------------------------------------------------
Shareholders' equity 606,565 610,248
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,171,519 $1,148,364
====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements***
Page 13
<PAGE>
***CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1998 1997 1996
Years ended December 31 (dollars in thousands, except per share (AS RESTATED,
amounts) SEE NOTE 16)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $1,931,796 $1,919,366 $1,979,627
OPERATING EXPENSES
Cost of sales 916,405 883,187 983,444
Selling, general and administrative 772,381 797,566 797,174
Goodwill impairment charge 82,893 111,900
- --------------------------------------------------------------------------------------------------------------------
Total 1,688,786 1,763,646 1,892,518
- --------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 243,010 155,720 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 242,915 115,150 118,765
- -------------------------------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES 99,852 70,478 53,302
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 143,063 $ 44,672 $ 65,463
====================================================================================================================
NET INCOME PER SHARE - BASIC $ 1.77 $ .55 $ .80
====================================================================================================================
NET INCOME PER SHARE - DILUTED $ 1.77 $ .55 $ .79
====================================================================================================================
CASH DIVIDENDS PER COMMON SHARE $ 1.48 $ 1.48 $ .48
====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements***
***CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
1998 1997 1996
(AS RESTATED,
Years Ended December 31 (dollars in thousands) SEE NOTE 16)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME $143,063 $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 adjustments for gains included in net income (46)
- --------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 247 (1,135) 388
- --------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $143,310 $43,537 $65,851
- --------------------------------------------------------------------------------------------------------------------
RELATED TAX (EXPENSE) BENEFIT OF OTHER COMPREHENSIVE INCOME:
- --------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments $ (124) $ 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***
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<PAGE>
***CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
(AS RESTATED,
Years ended December 31 (dollars in thousands) SEE NOTE 16)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $143,063 $ 44,672 $ 65,463
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 58,931 54,690 66,269
Amortization of intangibles 24,885 26,453 40,367
Asset impairment charge 26,252 99,019 111,900
Stock purchase discount 5,905 6,654 7,478
Net loss (gain) on sales of businesses 4,850 (866) (37,007)
Deferred income taxes 12,146 (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 26,457 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***
Page 15
<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
Page 16
<PAGE>
use software and other intangibles. Other intangibles consist primarily of
software to be licensed. 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 146,100 94,826
Other intangible assets 69,622 103,682
- --------------------------------------------- ------------ ------------
Total 278,853 $ 322,294
Less accumulated amortization (104,620) (154,461)
- --------------------------------------------- ------------ ------------
Intangibles - net $ 174,233 $ 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. In evaluating whether
there is any impairment of long-lived assets associated with long-term service
contracts, the amount of any contract loss accrual is excluded from the
undiscounted future cash flows associated with the long-lived assets when
determining whether those assets are impaired. An impairment loss of $26.3
million was recognized in 1998 on the long-lived assets of the Deluxe Government
Services segment (see Note 4). There were no material adjustments in 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 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.
Page 17
<PAGE>
***REVENUE RECOGNITION- The Company records sales and related profits for the
majority of its operations as products are shipped and as services are
performed.***.
***LONG-TERM SERVICE CONTRACTS- On occasion, the Company enters into long-term
service contracts, which are definitive agreements to provide services over a
period of time in excess of one year and with respect to which the Company has
no contractual right to adjust the prices or terms at or on which its services
are supplied during the term of the contract. Revenues are recognized for all
long-term service contracts when the service is performed. Total revenues for
some long-term service contracts may vary based on the demand for services.
Expenses are recognized when incurred, with the exception of installation costs.
Any installation costs are capitalized and recognized ratably over the life of
the contract, which approximates the anticipated revenue recognition. Any
equipment and software purchased to support a long-term service contract is
capitalized and depreciated or amortized over the life of the related contract
or the life of the asset, whichever is shorter.
In determining the profitability of a long-term service contract, only direct
and allocable indirect costs associated with the contract are included in the
calculation. The appropriateness of allocations of indirect costs depends on the
circumstances and involves the judgement of management, but such costs may
include the costs of indirect labor, contract supervision, tools and equipment,
supplies, quality control and inspection, insurance, repairs and maintenance,
depreciation and amortization and, in some circumstances, support costs. The
method of allocating any indirect costs included in the analysis is also
dependent upon the circumstances and the judgement of management, but the
allocation method must be systematic and rational. General and administrative
costs and selling costs are not included in the analysis. Provisions for
estimated losses on long-term service contracts, if any, are made in the period
in which the loss first becomes probable and reasonably estimable. Projected
losses are based on management's best estimates of a contract's revenue and
costs. Actual losses on individual long-term service contracts are compared to
the loss projections periodically, with any changes in the estimated total
contract loss recognized as they become probable and reasonably estimable.
Certain direct costs associated with the electronic benefits transfer contracts
discussed in Note 5 are common to a number of contracts and are attributed to
each contract based on its use of the services associated with these common
direct costs. Revenues or case counts are used to attribute these costs to
individual contracts.
In the event an asset impairment loss is recognized on long-lived assets used to
support a long-term service contract, the original estimation of the contract's
costs is revised to exclude the depreciation and amortization associated with
the impaired assets.***
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
Page 18
<PAGE>
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.
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 $143,063 $44,672 $65,463
Weighted average shares outstanding 80,648 81,854 82,311
Net income per share - basic $ 1.77 $ .55 $ .80
===================================================================================================================
Net income per share - diluted:
Net income $143,063 $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 $ 1.77 $ .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
Page 19
<PAGE>
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. 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
Page 20
<PAGE>
$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.
***An impairment charge of $26.3 million was recorded in 1998 to write-down the
carrying value of long-lived assets of the Deluxe Government Services segment.
The assets consist of point-of-sale equipment, internal-use software and
capitalized installation costs utilized in the electronic benefits transfer
(EBT) activities of this segment. During the third quarter of 1998, management
concluded that the operating losses incurred by this business would continue.
This is primarily due to the fact that the variable costs associated with
supporting benefit recipient activity are higher than originally anticipated and
actual transaction volumes are below original expectations. In calculating the
impairment charge, the Company determined that the assets utilized by this
business have no fair market value. The point-of-sale equipment was purchased
via capital leases. The lease buy-out prices for this equipment plus the
deinstallation costs exceed the amount equipment resellers are willing to pay
for the equipment. The utility of the internal-use software is limited to its
use in supporting the EBT business, and the installation costs could not be
resold. Thus, the long-lived assets of this business were reduced to a carrying
value of $0. This impairment charge is reflected in cost of sales in the 1998
consolidated statement of income.***
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<PAGE>
***NOTE 5: ACCRUED CONTRACT/RELATIONSHIP LOSSES
- --------------------------------------------------------------------------------
During the third quarter of 1998, the Company recorded a charge of $14.7 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 and
online medical eligibility verification services to the State of New York. 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. This charge was calculated in accordance with the Company's policy on
long-term service contracts (see Note 1). ***
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 795,722 751,802
SG&A and goodwill impairment charge 638,428 650,130
Other income (expense) 9,381 (40,862)
Provision for income taxes 104,863 89,928
Net income 152,368 122,090
Net income per share - basic 1.89 1.49
Net income per share - diluted 1.88 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
Page 22
<PAGE>
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.
- --------------------------------------------------------------------------------
NOTE 7: MARKETABLE SECURITIES
On December 31, 1998 and 1997, marketable securities available for sale
consisted of the following (dollars in thousands):
Page 23
<PAGE>
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Unrealized Unrealized Cost, which
holding holding approximates fair
Cost gain loss Fair value value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Debt securities issued by the U.S. Treasury $ 17,084 $ (97) $ 16,987 $ 8,021
and other government agencies
Debt securities issued by states of the 14,677 $ 23 (2) 14,698
U.S. and political subdivisions of states
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 $ 73,776 $ 84,392 $ 67,749
State 22,692 14,062 11,794
- --------------------------------------------- ---------------- ----------------- ----------------
Total 96,468 98,454 79,543
- --------------------------------------------- ---------------- ----------------- ----------------
Deferred tax provision (benefit):
Federal 3,252 (23,876) (29,581)
State 132 (4,100) 3,340
- --------------------------------------------- ---------------- ----------------- ----------------
Total $ 99,852 $ 70,478 $ 53,302
============================================= ================ ================= ================
***
</TABLE>
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 $85,020 $40,303 $41,568
State income taxes net of Federal income tax benefit 14,836 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 2,013 (5,621) (4,339)
- ------------------------------------------------------------------- ----------------- ---------------- -----------------
Provision for income taxes $99,852 $70,478 $53,302
=================================================================== ================= ================ =================
***
</TABLE>
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<PAGE>
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 $20,937 $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 34,656 19,280
Net operating loss carry forwards 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 5,144
Miscellaneous reserves and accruals 13,414 7,213
All other 14,679 7,706 9,861 7,111
- ------------------------------------------------------ ----------------- ---------------- ---------------- -----------------
Subtotal 112,239 65,997 112,690 51,222
Valuation allowance (17,207) (17,163)
- ------------------------------------------------------ ----------------- ---------------- ---------------- -----------------
Total deferred taxes $ 95,032 $65,997 $ 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.
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
Page 25
<PAGE>
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-average
Number of 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:
Page 26
<PAGE>
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------------------------------- ----------------------------------
Weighted- Weighted- Weighted-
Range of exercise Number average average Number average
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-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):
<TABLE>
<CAPTION>
*** 1998 1997 1996
- ------------------------------------------- ----------------- ---------------- -----------------
<S> <C> <C> <C>
Net income:
As reported $143,063 $44,672 $65,463
Pro forma 140,510 44,536 63,353
Basic net income per share:
As reported $ 1.77 $ .55 $ .80
Pro forma 1.74 .54 .77
Diluted net income per share:
As reported $ 1.77 $ .55 $ .79
Pro forma 1.74 .54 .77
=========================================== ================ ================= =================
***
</TABLE>
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
Page 27
<PAGE>
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):
<TABLE>
- ---------------------------------------------------------------------------------------- -------------------------
<S> <C>
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
- ---------------------------------------------------------------------------------------- -------------------------
</TABLE>
Page 28
<PAGE>
The funded status of the plan was as follows at December 31 (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------- --------------------------- ---------------------------
<S> <C> <C>
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)
- ------------------------------------------------------------- --------------------------- ---------------------------
</TABLE>
Net postretirement benefit cost for the years ended December 31 consisted of the
following components (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C>
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
================================================================== =================== ================== ==================
</TABLE>
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.
Page 29
<PAGE>
NOTE 11: LEASE AND DEBT COMMITMENTS
- --------------------------------------------------------------------------------
Long-term debt was as follows at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------ ------------------ ------------------
<S> <C> <C>
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
==================================================================================== ================== ==================
</TABLE>
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 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.
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).
Page 30
<PAGE>
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
- ----------------------------------------------------------------------------------------------------------------------------
Unrealized
Additional 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 143,063 |
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 $ 519,742 $ (238) | $ 70 $ (312)
======================================= ============= ============ ============ ================|============== =============
***
</TABLE>
Page 31
<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 and online medical eligibility
verification services to the State of New York. 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 $1,277,875 $214,407 $128,976 $42,662 $43,970 $223,906 $1,931,796
customers
Intersegment sales 1,956 1,304 1,880 722 5,862
Operating income (loss) 312,782 29,791 1,803 (20,060) (6,498) 5,047 322,865
excluding special charges
Special charges 11,099 623 1,381 2,513 41,180 56,796
Operating income (loss) 301,683 29,168 422 (22,573) (47,678) 5,047 266,069
including special charges
Segment assets 408,005 103,296 123,328 12,330 646,959
Depreciation and amortization 37,731 9,990 13,244 2,213 4,225 67,403
expense
Capital purchases 58,705 13,254 15,508 602 320 1,623 90,012
- ------------------------------- --------------- ------------- ------------- ------------- --------------- ----------- -------------
</TABLE>
Page 32
<PAGE>
<TABLE>
<CAPTION>
Deluxe Deluxe Deluxe
Paper Payment Electronic Deluxe Deluxe
Payment Protection Payment Direct Government Deluxe Total
1997 (dollars in thousands) Systems Systems Systems Response Services Direct segments
- ----------------------------------- ------------- ------------- ------------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales from external $1,287,367 $190,559 $115,012 $49,781 $26,965 $249,682 $1,919,366
customers
Intersegment sales 786 2,280 1,584 3,187 1,137 8,974
Operating income (loss) excluding 291,626 33,984 (709) (19,742) (12,270) (5,231) 287,658
special charges
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 273,930 33,984 (13,340) (24,742) (12,270) (89,243) 168,319
special charges
Segment assets 402,661 92,739 111,486 47,876 32,124 121,824 808,710
Depreciation and amortization 34,267 8,830 14,908 6,902 3,580 697 69,184
expense
Capital purchases 38,623 9,042 12,226 3,026 690 2,191 65,798
- ----------------------------------- ------------- ------------- ------------- ----------- --------------- ----------- -------------
***
<CAPTION>
1996 (dollars in thousands)
- ----------------------------------- ------------- ------------- ------------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales from external $1,274,336 $145,507 $108,845 $46,719 $20,894 $383,326 $1,979,627
customers
Intersegment sales 406 2,248 181 3,288 3,911 10,034
Operating income (loss) excluding 282,165 29,472 (9,317) 369 (8,776) (31,016) 262,897
special charges
Goodwill impairment charge 111,900 111,900
Other special charges 40,705 6,925 14,500 62,130
Operating income (loss) including 241,460 29,472 (16,242) 369 (8,776) (157,416) 88,867
special charges
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 $266,069 $168,319 $88,867
charges
Elimination of intersegment profits 28 99 (1,758)
Unallocated corporate expenses (23,087) (12,698)
- ------------------------------------------------------ ----------------- ---------------- -----------------
Total consolidated operating income including
special charges $243,010 $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.
Page 33
<PAGE>
<TABLE>
<CAPTION>
*** December 31,
- --------------------------------------------------- ----------------- ---------------- ----------------
TOTAL ASSETS 1998 1997 1996
- --------------------------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Total segment assets $ 646,959 $ 808,710 $ 893,569
Unallocated corporate assets 524,560 339,654 282,871
- --------------------------------------------------- ---------------- ----------------- ----------------
Total consolidated assets $1,171,519 $1,148,364 $1,176,440
- --------------------------------------------------- ---------------- ----------------- ----------------
***
</TABLE>
Unallocated corporate assets consist primarily of cash, investments, and fixed
assets and intangibles utilized by the corporate support functions.
<TABLE>
<CAPTION>
***DEPRECIATION AND AMORTIZATION EXPENSE 1998 1997 1996
- ------------------------------------------------------ ----------------- ---------------- -----------------
<S> <C> <C> <C>
Total segment depreciation and amortization $67,403 $69,184 $ 94,885
expense
Depreciation and amortization of unallocated
corporate assets 16,413 11,959 11,751
- ------------------------------------------------------ ----------------- ---------------- -----------------
Total consolidated depreciation and amortization
expense $83,816 $81,143 $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.
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>
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 $337,048 $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 $340,077 $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
Page 34
<PAGE>
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 16: RESTATEMENT
- --------------------------------------------------------------------------------
Subsequent to the filing of the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, the management of the Company and the Securities
and Exchange Commission ("SEC") had discussions regarding the Company's
accounting for expected future losses on long-term service contracts and
relationships of the Deluxe Government Services segment. As a result of these
discussions, which concluded in September 1999, the Company has revised the
amount of the reserve recorded for expected future losses on these contracts and
relationships. Additionally, the Company has recorded an asset impairment charge
relating to the long-lived assets of this segment.
The Company concluded that any contract loss accrual should be excluded from the
undiscounted cash flow analysis used in determining whether or not there is an
impairment of long-lived assets. In the situation where an impairment is
recorded, the original estimation of contract costs used in the calculation of a
contract loss accrual would then require an adjustment to exclude the
depreciation and amortization associated with the impaired assets.
Application of the revised methodology modified the calculations related to the
Deluxe Government Services segment. Such revisions for the year ended December
31, 1998 consisted of asset impairment charges of $26.3 million on long-lived
assets, offset by reductions of $20.7 million in the contract loss accrual and
$2.0 million related to depreciation and amortization expense, for a net charge
to cost of sales of $3.6 million and a reduction in net income of $2.3 million,
net of a tax benefit of $1.3 million. As a result of these adjustments, basic
and diluted net income per share for the year ended December 31, 1998 decreased
to $1.77 per share from $1.80 per share. The accompanying consolidated financial
statements for the year ended December 31, 1998 have been restated to give
effect to these revised calculations.
NOTE 17: 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).
Page 35
<PAGE>
REPORT OF INDEPENDENT AUDITORS
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.
As discussed in Note 16, the accompanying 1998 consolidated financial statements
have been restated.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Minneapolis, Minnesota
January 26, 1999 (September 24, 1999, as to Note 16)
Page 36
<PAGE>
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
***
<TABLE>
<CAPTION>
1998 Quarter Ended 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 223,612 219,571 259,188 214,034
Net income (loss) 43,571 42,255 (115)(1) 57,352(1)
Per share of common stock
Net income - basic .54 .52 .00 .71
Net income - diluted .54 .52 .00 .71
Cash dividends .37 .37 .37 .37
- --------------------------------------------- ----------------- ----------------- ---------------- -----------------
***
<CAPTION>
1997 Quarter Ended March 31 June 30 September 30 December 31
- --------------------------------------------- ----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
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 $74.7 million. See
page 2 of Management's discussion and analysis for further discussion. 1998
third and fourth quarter results were restated, as discussed in Note 16 in the
Notes to Consolidated Financial Statements. Net income (loss) for the third
quarter of 1998 decreased to a net loss of $.1 million from net income of $2.8
million. Net income for the fourth quarter of 1998 increased to $57.4 million
from $56.8 million.***
(2)1997 third quarter results include a pretax charge of $180 million. See page
2 of Management's discussion and analysis for further discussion.
Page 37
EXHIBIT 13.2
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1998 1997
(Dollars in thousands, except per share amounts) (AS RESTATED)(1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $1,931,796 $1,919,366
Net income(2) 143,063 44,672
Return on sales 7.41% 2.33%
Per share - basic 1.77 .55
Per share - diluted 1.77 .55
Return on average shareholders' equity 23.51% 6.75%
Cash dividends per share 1.48 1.48
Shareholders' equity 606,565 610,248
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)Subsequent to the issuance of the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, and after discussions with the Securities and
Exchange Commission, which concluded in September 1999, the Company revised its
accounting treatment for future losses on long-term contracts and relationships
and its calculation of impairment charges on long-lived assets related to the
Company's Deluxe Government Services segment. As a result, the Company has
restated its financial information for the year ended December 31, 1998. See
Note 16 in the Notes to Consolidated Financial Statements contained in the
Company's Amendment No. 1 to the Annual Report on Form 10-K for the year ended
December 31, 1998.
(2)Net income includes reorganization and other special charges in both 1998 and
1997. See page 2 of Management's Discussion and Analysis included in the
Company's Amendment No. 1 to the Annual Report on Form 10-K for the year ended
December 31, 1998.
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
Page 38
<PAGE>
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 1.77 98 143.1
Page 39
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 268,934
<SECURITIES> 41,133
<RECEIVABLES> 145,079
<ALLOWANCES> 0
<INVENTORY> 12,001
<CURRENT-ASSETS> 612,001
<PP&E> 763,922
<DEPRECIATION> 423,845
<TOTAL-ASSETS> 1,171,519
<CURRENT-LIABILITIES> 430,695
<BONDS> 106,321
0
0
<COMMON> 80,481
<OTHER-SE> 526,084
<TOTAL-LIABILITY-AND-EQUITY> 1,171,519
<SALES> 1,931,796
<TOTAL-REVENUES> 1,931,796
<CGS> 916,405
<TOTAL-COSTS> 1,688,786
<OTHER-EXPENSES> (8,178)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,273
<INCOME-PRETAX> 242,915
<INCOME-TAX> 99,852
<INCOME-CONTINUING> 143,063
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 143,063
<EPS-BASIC> 1.77
<EPS-DILUTED> 1.77
</TABLE>
