UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1 to
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For quarterly period ending September 30, 1998
---------------------------------------------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ___________________ to ___________________
Commission file number: 1-7945
--------------------------
DELUXE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-021-6800
- --------------------------------------- -------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3680 Victoria St. N., St. Paul, Minnesota 55126-2966
- --------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
(651) 483-7111
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
The number of shares outstanding of registrant's common stock, par value $1.00
per share, at November 2, 1998 was 80,443,689.
<PAGE>
SIGNIFICANT FINANCIAL AND ACCOUNTING DEVELOPMENTS
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 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 reduced the Company's after-tax reported earnings by $2.9 million, or
$.04 per share, for the quarter and nine months ended September 30, 1998. The
restatement also resulted in a decrease in total assets of $26.3 million and a
decrease in total liabilities of $23.3 million as of September 30, 1998. Net
property, plant and equipment decreased from $400.7 million to $395.7 million.
Net intangible assets decreased from $198.7 million to $177.4. Other accrued
liabilities decreased from $197.6 million to $175.9 million. The effects of the
revised methodology are presented in the restated financial statements included
in this Amendment No. 1 of Form 10-Q for the quarter ended September 30, 1998.
See Notes to the Consolidated Financial Statements.
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
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 Form 10-Q/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 Quarterly Report on Form 10-Q 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-Q/A does not otherwise modify
the disclosures in that report which were not affected by the restatement.
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
PART I. FINANCIAL INFORMATION
DELUXE CORPORATION AND SUBSIDIARIES
***CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, 1998
(Unaudited) December 31,
(As restated, See Note 2) 1997
------------------------- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 150,218 $ 171,438
Marketable securities 17,451 8,021
Trade accounts receivable 157,931 151,201
Inventories:
Raw material 19,851 22,950
Semi-finished goods 8,538 9,132
Finished goods 22,052 23,768
Supplies 9,007 11,146
Deferred advertising 17,105 15,763
Deferred income taxes 50,206 50,345
Prepaid expenses and other current assets 46,573 48,849
----------- -----------
Total current assets 498,932 512,613
----------- -----------
LONG-TERM INVESTMENTS 46,225 52,910
PROPERTY, PLANT, AND EQUIPMENT
Land 37,166 38,832
Buildings and improvements 268,047 288,270
Machinery and equipment 554,705 562,637
Construction in progress 5,753 346
----------- -----------
Total 865,671 890,085
Less accumulated depreciation 469,985 475,077
----------- -----------
Property, plant and equipment - net 395,686 415,008
INTANGIBLES
Cost in excess of net assets acquired - net 52,323 54,435
Internal use software - net 109,848 74,584
Other intangible assets - net 15,278 38,814
----------- -----------
Total intangibles 177,449 167,833
----------- -----------
TOTAL ASSETS $ 1,118,292 $ 1,148,364
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 70,291 $ 73,516
Accrued liabilities:
Wages, including vacation pay 71,512 62,513
Employee profit sharing and pension 24,089 40,517
Accrued income taxes 12,682 31,960
Accrued rebates 35,631 36,708
Other 175,934 129,263
Long term debt due within one year 5,027 7,078
----------- -----------
Total current liabilities 395,166 381,555
----------- -----------
LONG-TERM DEBT 109,774 109,986
DEFERRED INCOME TAXES 6,009 6,040
OTHER LONG-TERM LIABILITIES 35,176 40,535
SHAREHOLDERS' EQUITY
Common shares - $1 par value (authorized 500,000,000 shares;
issued: 1998 - 80,263,821 shares; 1997 - 81,325,925 shares) 80,264 81,326
Additional paid-in capital 4,758
Retained earnings 492,133 525,302
Unearned compensation (290) (649)
Net unrealized gain - marketable securities 253
Cumulative translation adjustment (193) (489)
----------- -----------
Total shareholders' equity 572,167 610,248
----------- -----------
TOTAL LIABILITIES AND SHARHOLDERS' EQUITY $ 1,118,292 $ 1,148,364
=========== ===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements***
3
<PAGE>
DELUXE CORPORATION AND SUBSIDIARIES
***CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Dollars in Thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
QUARTERS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
-------------------------------- ---------------------------------
1998 1998
---- ----
(As restated, See (As restated, See
Note 2) 1997 Note 2) 1997
------- ---- ------- ----
<S> <C> <C> <C> <C>
NET SALES $ 469,770 $ 466,908 $ 1,433,531 $ 1,420,762
OPERATING EXPENSES
Cost of sales 259,188 222,516 697,762 664,565
Selling, general and administrative 210,898 219,338 596,542 602,933
Goodwill impairment charge 82,893 82,893
----------- ----------- ----------- -----------
Total 470,086 524,747 1,294,304 1,350,391
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (316) (57,839) 139,227 70,371
OTHER INCOME (EXPENSE)
Other income (expense) 5,433 (44,399) 13,626 (35,294)
Interest expense (2,135) (2,152) (6,293) (7,023)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME
TAXES 2,982 (104,390) 146,560 28,054
PROVISION (BENEFIT) FOR INCOME
TAXES 3,097 (36,875) 60,849 16,687
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (115) $ (67,515) $ 85,711 $ 11,367
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON
SHARE
- Basic and Diluted $ 0.00 $ (0.82) $ 1.06 $ 0.14
CASH DIVIDENDS PER COMMON
SHARE $ 0.37 $ 0.37 $ 1.11 $ 1.11
</TABLE>
See Notes to Unaudited Consolidated Financial Statements***
4
<PAGE>
DELUXE CORPORATION AND SUBSIDIARIES
***CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPT. 30,
-------------------------------
1998
(As restated, See
Note 2) 1997
------- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 85,711 $ 11,367
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 43,263 41,769
Asset impairment charge 26,252 99,019
Amortization of intangibles 18,385 20,010
Stock purchase discount 4,514 5,049
Net gain on sales of businesses (3,383) (535)
Changes in assets and liabilities, net of effects from
discontinued operations and sales of businesses:
Trade accounts receivable (9,958) (11,907)
Inventories 240 (1,363)
Accounts payable (2,901) 6,298
Other assets and liabilities 15,936 28,694
----------- -----------
Net cash provided by continuing operations 178,059 198,401
Net cash used by discontinued operations (174)
----------- -----------
Net cash provided by operating activities 178,059 198,227
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of marketable securities with maturities of more
than 3 months 15,890
Purchases of marketable securities with maturities of more than 3
months (25,066) (8,000)
Net change in marketable securities with maturities of three months or
less (3,500)
Purchases of capital assets (88,496) (68,578)
Acquisitions, net of cash acquired (10,600)
Net proceeds from sales of businesses and discontinued operations 12,319 2,198
Other 20,849 6,157
----------- -----------
Net cash used in investing activities (64,504) (82,323)
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on short-term debt (16,783)
Proceeds from long-term debt 292
Payments on long-term debt (5,502) (5,380)
Payments to retire common stock (60,260) (53,589)
Proceeds from issuing stock under employee plans 20,634 17,757
Cash dividends paid to shareholders (89,939) (91,253)
----------- -----------
Net cash used in financing activities (134,775) (149,248)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (21,220) (33,344)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 171,438 142,571
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 150,218 $ 109,227
=========== ===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements***
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated balance sheet as of September 30, 1998 and the consolidated
statements of income and cash flows for the quarters and the nine month periods
ended September 30, 1998 and 1997 are unaudited. In the opinion of management,
all adjustments necessary for a fair presentation of such financial statements
are included. Other than those discussed in the notes below, such adjustments
consist only of normal recurring items. Interim results are not necessarily
indicative of results for a full year.
The consolidated financial statements and notes are presented in accordance
with instructions for Form 10-Q and do not contain certain information included
in the Company's consolidated annual financial statements and notes.
***2. Subsequent to the filing of the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 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 quarter and nine
months ended September 30, 1998 consisted of asset impairment charges of $26.3
million on long-lived assets offset by a reduction of $21.7 million in accrued
contract/relationship losses, for a net charge to cost of sales of $4.6 million
and a reduction in net income of $2.9 million, net of a tax benefit of $1.7
million. As a result of these adjustments, basic and diluted net income per
share for the quarter and nine months ended September 30, 1998 decreased to $.00
per share from $.04 per share and to $1.06 per share from $1.10 per share,
respectively. The accompanying consolidated financial statements for the quarter
and nine months ended September 30, 1998 have been restated to give effect to
these revised calculations.***
***3. 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.
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.***
***4. 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
6
<PAGE>
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 13 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.***
5. As of September 30, 1998, the Company had uncommitted bank lines of credit of
$170 million available at variable interest rates. As of that date, there were
no amounts drawn on those lines. The Company also had a $150 million committed
line of credit available for borrowing and as support for commercial paper. As
of September 30, 1998, the Company had no commercial paper outstanding and no
indebtedness outstanding under its committed line of credit. Additionally, the
Company had a shelf registration in place for the issuance of up to $300 million
in medium-term notes. Such notes could be used for general corporate purposes,
including working capital, capital expenditures, possible acquisitions and
repayment or repurchase of outstanding indebtedness and other securities of the
Company. As of September 30, 1998, no such notes were issued or outstanding.
6. The following table reflects the calculation of basic and diluted earnings
per share (unaudited dollars and shares outstanding in thousands, except per
share amounts).
<TABLE>
<CAPTION>
*** Quarter Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------- ---------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) per share-basic:
Net income (loss) $ (115) $ (67,515) $ 85,711 $ 11,367
Weighted average shares outstanding 80,498 81,901 80,721 82,031
Net income (loss) per share-basic $ .00 $ (.82) $ 1.06 $ .14
========= ========= ========= =========
Net income (loss) per share-diluted:
Net income (loss) $ (115) $ (67,515) $ 85,711 $ 11,367
Weighted average shares outstanding 80,498 81,901 80,721 82,031
Dilutive impact of options 176 116
Shares contingently issuable 10 13
--------- --------- --------- ---------
Weighted average shares and potential
dilutive shares outstanding 80,498 81,901 80,907 82,160
--------- --------- --------- ---------
Net income (loss) per share-diluted $ .00 $ (.82) $ 1.06 $ .14
========= ========= ========= =========
***
</TABLE>
***7. Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which requires
disclosure of comprehensive income and its components in the Company's financial
statements. The Company's total comprehensive income for the quarter and nine
months ended September 30, 1998 was $.1 million and $86.2 million, respectively.
The Company had a comprehensive loss of $67.9 million for the quarter ended
September 30, 1997, and had comprehensive income of $10.7 million for the nine
months ended September 30, 1997. The Company's comprehensive income consists of
net income, unrealized holding gains and losses on securities and foreign
currency translation adjustments.***
8. During 1998, the Company will adopt Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," which revises employers' disclosures about pensions
and other postretirement benefit plans. The Company does not anticipate that the
effect of this pronouncement will have a material impact on reported operating
results.
9. During the third quarter of 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires the disclosure of financial
and
7
<PAGE>
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 SFAS No. 131
did not affect the Company's results of operations or financial position. The
Company has organized its business units into six reportable operating segments
based on the nature of the products and services offered by each: Paper Payment
Systems; Payment Protection Systems; Electronic Payment Systems; Direct
Response; Government Services; and Deluxe Direct. Paper Payment Systems provides
check printing services to financial services companies and markets checks and
business forms directly to households and small businesses. Payment Protection
Systems provides payment protection, collection and risk management services to
financial institutions and retailers. Electronic Payment Systems provides
electronic funds transfer and other software services to the financial and
retail industries. The remaining businesses within Direct Response, which are
currently held for sale, provide direct marketing, customer database management
and related services to the financial industry and other businesses. Government
Services provides electronic benefits transfer services to state governments.
Deluxe Direct, which is currently held for sale, primarily sells greeting cards,
stationery and specialty paper products through direct mail. All segments, with
the exception of the Electronic Payment Systems segment, operate primarily in
the United States. The Electronic Payment Systems segment operates both
domestically and internationally. No single customer of the Company accounted
for more than 10% of net sales in 1998 or 1997.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies as presented in the Company's
notes to its consolidated annual financial statements. In evaluating segment
performance, management focuses on income from operations. This measurement
excludes special charges (e.g., restructuring charges, asset impairment charges,
charges to legal reserves, 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. The
corresponding corporate asset balances are not allocated to the segments. Most
intersegment sales are based on current market pricing. Segment information for
the nine months ended September 30, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
*** Paper Payment Electronic
NINE MONTHS ENDED Payment Protection Payment Direct Government Deluxe Total
SEPTEMBER 30, 1998 Systems Systems Systems Response Services Direct Segments
- ------------------ ------- ------- ------- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales from external
customers $ 959,199 $ 161,451 $ 95,127 $ 35,065 $ 30,939 $ 151,750 $1,433,531
Intersegment sales 2,053 1,121 4,942 557 3,903 12,576
Operating income (loss)
excluding special charges 231,957 23,110 (1,418) (15,353) (7,475) (1,672) 229,149
Special charges 11,099 623 1,381 2,513 41,180 56,796
Operating income (loss)
including special charges 220,858 22,487 (2,799) (17,866) (48,655) (1,672) 172,353
Segment assets 407,810 104,992 119,467 39,172 21,140 114,734 807,315
Depreciation and
amortization expense 27,451 6,996 9,795 1,238 4,225 49,705
Capital purchases 37,335 9,361 11,284 829 299 1,130 60,238
<CAPTION>
Paper Payment Electronic
NINE MONTHS ENDED Payment Protection Payment Direct Government Deluxe Total
SEPTEMBER 30, 1997 Systems Systems Systems Response Services Direct Segments
- ------------------ ------- ------- ------- -------- -------- ------ --------
Net sales from external
customers $ 967,156 $ 143,171 $ 85,701 $ 36,033 $ 19,019 $ 169,682 $1,420,762
Intersegment sales 3,856 1,530 4,135 2,182 2,349 14,052
Operating income (loss)
excluding special charges 213,354 27,196 (1,235) (15,379) (8,305) (8,995) 206,636
Goodwill impairment charge 9,361 3,000 70,532 82,893
Other special charges 17,696 3,270 2,000 13,480 36,446
Operating income (loss)
including special charges 195,658 27,196 (13,866) (20,379) (8,305) (93,007) 87,297
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Segment assets 370,615 80,744 101,636 41,298 30,338 138,739 763,370
Depreciation and
amortization expense 25,617 6,594 12,081 4,867 3,043 697 52,899
Capital purchases 28,913 5,897 6,674 2,296 470 730 44,980
***
</TABLE>
Segment information reconciles to consolidated amounts as follows (in
thousands):
OPERATING INCOME INCLUDING SPECIAL CHARGES
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
*** September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Total segment operating income including special charges $ 172,353 $ 87,297
Elimination of intersegment profits (84) 48
Unallocated corporate expenses (33,042) (16,974)
- ------------------------------------------------------------------------------------------------------
Total consolidated operating income including special
charges $ 139,227 $ 70,371
- ------------------------------------------------------------------------------------------------------
***
</TABLE>
1998 unallocated corporate expenses consist of corporate special charges (see
note 10), as well as charges for certain corporate liabilities which are not
allocated to the segments. 1997 unallocated corporate expenses consist primarily
of corporate special charges (see note 10).
TOTAL ASSETS
<TABLE>
<CAPTION>
*** September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Total segment assets $ 807,315 $ 763,370
Unallocated corporate assets 310,977 341,470
- ------------------------------------------------------------------------------------------------------
Total consolidated assets $1,118,292 $1,104,840
- ------------------------------------------------------------------------------------------------------
***
</TABLE>
Unallocated corporate assets consist primarily of cash, marketable securities,
long-term investments, deferred tax assets and long-term assets employed by the
corporate support groups.
DEPRECIATION AND AMORTIZATION EXPENSE
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
*** September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Total segment depreciation and amortization expense $ 49,705 $ 52,899
Depreciation and amortization of unallocated corporate assets 11,943 8,880
- ------------------------------------------------------------------------------------------------------
Total consolidated depreciation and amortization expense $ 61,648 $ 61,779
- ------------------------------------------------------------------------------------------------------
***
</TABLE>
Segment depreciation and amortization expense includes only the expense
attributable to segment assets.
CAPITAL PURCHASES
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Total segment capital purchases $ 60,238 $ 44,980
Corporate capital purchases 28,258 23,598
- ------------------------------------------------------------------------------------------------------
Total consolidated capital purchases $ 88,496 $ 68,578
- ------------------------------------------------------------------------------------------------------
</TABLE>
Corporate capital purchases consist primarily of a new financial information
system (SAP) 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):
9
<PAGE>
<TABLE>
<CAPTION>
NET SALES FROM EXTERNAL CUSTOMERS LONG-LIVED ASSETS
---------------------------------------- ----------------------------------------
Nine Months Ended
----------------------------------------
*** September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
United States $1,411,765 $1,391,920 $615,528 $623,546
Foreign countries 21,766 28,842 3,832 6,098
- -------------------------------------------------------------------------------------------------------------
Total consolidated $1,433,531 $1,420,762 $619,360 $629,644
- -------------------------------------------------------------------------------------------------------------
***
</TABLE>
10. During the third quarter of 1998, the Company recorded pretax restructuring
charges of $39.5 million. The restructuring charges included costs associated
with the Company's initiative to reduce its selling, general and administrative
expenses (SG&A), the outsourcing of production of the Direct Response segment's
direct mail products, as well as the closing of additional check printing
plants. The Company anticipates eliminating approximately 800 SG&A positions
within sales and marketing, finance and accounting, human resources and
information services. Approximately 60 positions will be eliminated due to the
outsourcing of direct mail products production. The Company also plans to close
additional check printing plants over the next 18 months, affecting
approximately 800 to 900 employees. The restructuring charges consisted of
employee severance costs of $31.2 million and $8.3 million for expected losses
on the disposition of assets. Expenses of $10.9 million were included in cost of
sales; $21.1 million was included in selling, general, and administrative and
$7.5 million was included in other expense in the consolidated statements of
income (loss) for the quarter and nine months ended September 30, 1998.
During the third quarter of 1997, the Company recorded pretax restructuring
charges of $24.5 million. The restructuring charges included additional costs
for the closing of 21 check printing plants, as announced in 1996, as well as
costs associated with the continued consolidation of the Company's core
businesses. The additional charge for plant closing costs represented amounts
which could not be recorded in 1996 because they did not meet the requirements
for accrual in that year due to the timeframe over which the plant closing plan
was expected to be completed. The restructuring charges consisted of employee
severance costs of $21.6 million and $2.9 million for expected losses on the
disposition of assets. Expenses of $7.7 million were included in cost of sales;
$13.9 million was included in selling, general, and administrative and $2.9
million was included in other expense in the consolidated statements of income
(loss) for the quarter and nine months ended September 30, 1997.
The Company's consolidated balance sheets reflect restructuring accruals of
$50.4 million and $39.5 million as of September 30, 1998 and December 31, 1997,
respectively, for employee severance costs and $10.9 million and $3.7 million as
of September 30, 1998 and December 31, 1997, respectively, for estimated losses
on asset dispositions. The majority of the severance costs are expected to be
paid out by early 2000 with cash generated from the Company's operations.
***11. An impairment charge of $26.3 million was recorded in the third quarter
of 1998 to write-down the carrying value of long-lived assets of the 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
consolidated statements of income (loss) for the quarter and nine months ended
September 30, 1998.***
In October 1998 the Company announced that it had reached agreements in
principle to sell PaperDirect, Inc. ("PaperDirect"), the Social Expressions
component ("Social Expressions") of Current, Inc. and the remaining businesses
within the Company's Direct Response segment. The sales are currently expected
to close in the fourth quarter of 1998. These businesses, along with the
international component of the Electronic Payment Systems segment, are accounted
for in accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." These businesses contributed revenue of $52.6 million and $55.2
million in the third quarters of 1998 and 1997, respectively, and revenue of
$177.7 million and $171.9 million during the first nine months of 1998 and 1997,
respectively. They contributed operating losses of $1.6 million and $2.1 million
in the third quarters of 1998 and 1997, respectively, and losses of $3.5 million
and $6.2 million during the first nine months of 1998 and 1997, respectively.
The direct mail check printing business of Current, Inc. will remain with the
Company and its results of operations are included in the Paper Payment Systems
operating segment.
During the third quarter of 1997, the Company recorded a pretax impairment
charge of $99 million to write-down the carrying value of PaperDirect, Social
Expressions and the international operations of the Electronic Payment Systems
segment to their estimated fair values less costs to sell. This charge is
reflected in the goodwill impairment charge ($82.9 million) and in selling,
general and administrative expense ($16.1 million) in the consolidated
statements of income (loss) for the quarter and nine months ended September 30,
1997.
10
<PAGE>
12. In August 1998, the Company completed the sale of its Card Services business
and the Company is currently in the process of outsourcing the production of its
direct mail products. These initiatives will not have a material impact on the
Company's reported operating results. The results of operations of these
businesses were included in the Direct Response operating segment.
***13. 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 Government Services segment. This charge is reflected
in cost of sales in the consolidated statements of income (loss) for the quarter
and nine months ended September 30, 1998. 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 4).***
14. During the third quarter of 1997, the Company recorded a $40 million pretax
charge to reserve for an adverse judgement against one of the Company's
subsidiaries. The charge also reserves for potential legal and other related
costs. The Company has appealed from this judgment and has thus classified this
obligation as other long-term liabilities in the consolidated balance sheet.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Company Profile
During the third quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires the disclosure of financial
and descriptive information about the reportable operating segments of the
Company. The Company has organized its business units into six operating
segments based on the nature of the products and services offered by each: Paper
Payment Systems; Payment Protection Systems; Electronic Payment Systems; Direct
Response; Government Services; and Deluxe Direct. Paper Payment Systems provides
check printing services to financial services companies and markets checks and
business forms directly to households and small businesses. Payment Protection
Systems provides payment protection, collection and risk management services to
financial institutions and retailers. Electronic Payment Systems provides
electronic funds transfer and other software services to the financial and
retail industries. The remaining businesses within Direct Response, which are
currently held for sale, provide direct marketing, customer database management
and related services to the financial industry and other businesses. Government
Services provides electronic benefits transfer services to state governments.
Deluxe Direct, which is currently held for sale, primarily sells greeting cards,
stationery and specialty paper products through direct mail. All segments, with
the exception of the Electronic Payment Systems segment, operate primarily in
the United States. The Electronic Payment System segment operates both
domestically and internationally.
Results of Operations - Quarter and Nine Months Ended September 30, 1998
Compared to the Quarter and Nine Months Ended September 30, 1997
Net sales were $470 million for the third quarter of 1998, up .6% from the third
quarter of 1997 when sales were $467 million. Net sales were $1,434 million for
the first nine months of 1998, up .9% from the comparable period in 1997 when
sales for the first nine months were $1,421 million. Paper Payment Systems
revenue was flat in the third quarter of 1998 versus the third quarter of 1997.
Revenues for the first nine months of 1998 were down 1.0% from the first nine
months of 1997 due to lower volume for the financial institution check printing
business. This decrease was partially offset by increased volume for direct mail
checks and small business products. Payment Protection Systems revenue was up
11.4% over the third quarter of 1997 and 12.4% over the first nine months of
1997 due to increased volume for all product lines. Electronic Payment Systems
revenue was up 7.0% for the quarter and 11.4% for the first nine months of 1998
versus the same periods in 1997. The increase was due to higher volume arising
from an increased customer base and increased transaction volume. Direct
Response revenue was down 8.1% from the third quarter of 1997 and 6.8% from the
first nine months of 1997 due to lower volume and the sale of the Card Services
business in the third quarter of 1998. Government Services revenue was up 53.7%
over the third quarter of 1997 and 62.7% over the first nine months of 1997 due
to increased volume from existing contracts, as well as the addition of new
contracts in 1998. Deluxe Direct revenue was down 17.7% for the quarter and 9.5%
for the first nine months of 1998 due primarily to divestitures.
***Cost of sales increased $36.7 million, or 16.5%, from the third quarter of
1997, and increased $33.2 million, or 5.0%, from the first nine months of 1997.
Included in the 1998 third quarter results was a charge of $51.6 million for
check printing plant closings, and an asset impairment charge and contract loss
accrual related to the Government Services segment. Included in the 1997 third
quarter results was a charge of $7.7 million related to the continued
consolidation of check printing plants. With these charges removed, cost of
sales decreased $7.2 million, or 3.4%, from the third quarter of 1997, and
decreased $10.7
11
<PAGE>
million, or 1.6%, from the first nine months of 1997. Paper Payment Systems cost
of sales decreased 10.2% for the quarter and 8.6% for the first nine months of
1998 versus 1997, excluding the impact of restructuring charges in both years.
This decrease is due primarily to savings realized from plant consolidation and
productivity improvements within the financial institution check printing
business. Payment Protection Systems cost of sales increased 20.3% over the
third quarter of 1997 and 17.5% over the first nine months of 1997 due to the
increased sales volume and increased depreciation, rent and salaries expense due
to the growth of the segment. Electronic Payment Systems cost of sales increased
10.7% for the quarter and 10.0% for the first nine months of 1998 versus 1997
due to the increased sales volume. Additionally, information systems cost
increased due to the year 2000 issues, the need to pay higher wages to retain
technical personnel, and increased equipment costs related to a new data center.
Direct Response cost of sales was down 20.2% for the quarter and 5.7% for the
first nine months of 1998 versus 1997, excluding the impact of restructuring
charges in 1998. These decreases are due to the lower sales volume, the sale of
the Card Services business and the outsourcing of production of direct mail
products. Government Services cost of sales increased 40.6% over the third
quarter of 1997 and 45.7% over the first nine months of 1997, excluding special
charges in 1998. The increase was due to the increased sales volume. Because
many of the costs of this business are fixed, cost of sales increased at a lower
rate than did revenue. Deluxe Direct cost of sales decreased 12.7% for the
quarter and 6.0% for the first nine months of 1998 versus 1997 due primarily to
divestitures, which decrease was partially offset by increased information
systems costs in 1998.***
Selling, general and administrative (SG&A) expenses decreased $8.4 million, or
3.8%, from the third quarter of 1997, and decreased $6.4 million, or 1.1%, from
the first nine months of 1997. Included in 1998 third quarter results was a
$22.0 million charge primarily for severance related to the Company's initiative
to reduce SG&A expenses. Included in 1997 third quarter results was a charge
totaling $39.6 million related to check printing plant consolidation, job
reductions and the write-down of impaired assets. With these charges removed,
SG&A expenses increased $9.1 million, or 5.1%, from the third quarter of 1997,
and increased $11.1 million, or 2.0%, from the first nine months of 1997. Paper
Payment Systems SG&A expenses increased 9.7% from the third quarter of 1997 and
1.5% from the first nine months of 1997 due to increased amortization expense
for the segment's new customer service system. Payment Protection Systems SG&A
expense increased 16.4% for the quarter and 20.8% for the first nine months of
1998 versus 1997, excluding special charges in 1998. These increases were due
primarily to increased information systems and marketing costs reflecting the
Company's investment in this segment. Electronic Payment Systems SG&A expenses
increased 14.3% over the third quarter of 1997 and 15.1% over the first nine
months of 1997, excluding special charges in both years, due primarily to
increased sales and marketing costs. Direct Response SG&A expenses decreased
11.0% for the quarter and 4.1% for the first nine months of 1998 versus 1997,
with special charges excluded in both years, due to lower amortization expense
due to asset write-offs in the third quarter of 1997. Government Services SG&A
expenses increased 17.8% for the quarter and 14.6% for the first nine months of
1998 versus 1997 due to costs associated with additional contracts in 1998.
Deluxe Direct SG&A expenses decreased 23.5% from the third quarter of 1997 and
18.8% from the first nine months of 1997, excluding special charges in 1997, due
to divestitures and reduced marketing expenses.
Other income increased $49.8 million from the third quarter of 1997 and $48.9
million from the first nine months of 1997. 1997 third quarter results include
charges of $49.8 million relating to legal proceedings and asset impairments.
During 1997, a judgement was entered against one of the Company's subsidiaries
in conjunction with a potential bid to provide electronic benefit transfer
services for the Southern Alliance of States. The majority of this amount is
expected to be paid in 1999 if the Company is unsuccessful in its attempt to
obtain a reversal of this judgment on appeal.
***The Company's effective tax rate decreased to 41.5% for the first nine months
of 1998 versus 59.5% for the first nine months of 1997. The decrease is due to
higher pretax income in 1998 combined with a higher base of non-deductible
expenses in 1997 consisting primarily of the goodwill impairment charge. With
the effect of the special charges removed in both years, the Company's effective
tax rate was 40.2% for the first nine months of 1998 and 40.6% for the first
nine months of 1997.***
***The Company's net loss was $.1 million for the third quarter of 1998 compared
to a net loss of $67.5 million for the third quarter of 1997. Net income for the
first nine months of 1998 was $85.7 million compared to $11.4 million for the
first nine months of 1997. 1998 third quarter results include after-tax charges
of $46.6 million for severance related to the Company's initiative to reduce its
SG&A expenses, the outsourcing of production of its direct mail products, the
closing of additional check printing plants and accrued contract losses and
asset impairments within its Government Services segment. The 1997 third quarter
results include after-tax charges of $112.3 million for asset impairments
related to its businesses held for sale, an unfavorable legal decision and
severance reserves related to continued consolidation of check printing plants
and consolidation of the Company's core businesses. With these charges removed,
net income was $46.5 million for the third quarter of 1998, or 9.9% of sales,
compared to $44.8 million, or 9.6% of sales, for the third quarter of 1997. Net
income, excluding special charges, was $132.4 million, or 9.2% of sales, for the
first nine months of 1998, compared to $123.7 million, or 8.7% of sales, for the
first nine months of 1997. The increase for both periods is attributable to the
changes discussed above.***
12
<PAGE>
Financial Condition - Liquidity
***Cash provided by operations was $178.1 million for the first nine months of
1998 compared with $198.2 million for the first nine months of 1997. Cash from
operations represents the Company's primary source of working capital for
financing capital expenditures and paying cash dividends. The Company's working
capital on September 30, 1998 was $103.8 million compared to $131.1 million on
December 31, 1997. The Company's current ratio was 1.3 to 1 on September 30,
1998 and December 31, 1997.***
Financial Condition - Capital Resources
Purchases of capital assets totaled $88.5 million for the first nine months of
1998 compared to $68.6 million during the comparable period one year ago. The
increase represents investments in a new financial information system, a new
customer interface system, as well as other strategic initiatives designed to
improve productivity and profitability. As of September 30, 1998, the Company
had uncommitted bank lines of credit of $170 million available at variable
interest rates. As of that date, there were no amounts drawn on those lines. The
Company also had a $150 million committed line of credit available for borrowing
and as support for commercial paper. As of September 30, 1998, the Company had
no commercial paper outstanding and no indebtedness outstanding under its
committed line of credit. Additionally, the Company had a shelf registration in
place for the issuance of up to $300 million in medium-term notes. Such notes
could be used for general corporate purposes, including working capital, capital
expenditures, possible acquisitions and repayment or repurchase of outstanding
indebtedness and other securities of the Company. As of September 30, 1998, no
such notes were issued or outstanding. Cash dividends totaled $89.9 million for
the first nine months of 1998 compared to $91.3 million for the first nine
months of 1997.
Year 2000 Readiness Disclosure
General Approach and State of Readiness. In 1996, the Company initiated a
company wide 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 may cause them to, among other things, generate
erroneous data, lose data elements and possibly fail.
The Company is using a multi-phase 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 other assets. The
project is organized around nine types of computerized assets. The asset types
include 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
performed assessment and prioritization of 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 September 1998, the overall project is approximately 75% complete and
approximately 80% complete with respect to areas identified as "mission
critical."
The testing phase is expected to be complete for mission critical components
within all asset types by the end of 1998, at which point, the overall project
is expected to be approximately 90% complete. Certification of critical assets
in all internal categories should be 95% complete by the end of 1998 and
certification is expected to be 95% complete across all internal categories by
June of 1999. Also during 1999, the project focus will shift toward completion
of customer and vendor testing and contingency execution.
As part of its year 2000 review, the Company has also assessed the readiness of
its facilities with respect to embedded chip equipment. Included in this effort
was all plant manufacturing equipment, HVAC systems, building security systems,
PCs and other office equipment such as printers, faxes and copy machines. The
most frequent method of achieving compliance in this area is replacement of
non-compliant systems and equipment. This effort was approximately 75% complete
at September 30, 1998 and is scheduled for completion by September of 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/service provision. These external organizations have been contacted and
have provided responses to year 2000 assessment requests. Site visits and action
plans are being developed as appropriate, based on the importance of the
organizations to the Company's ability to provide products and services.
Overall, this category was approximately 75% complete as of the end of September
1998, and this effort is expected to be complete by March 1999.
13
<PAGE>
Costs. The Company expects to incur project expenses of approximately $26.5
million over the life of its year 2000 project, consisting of both internal
staff costs and consulting expenses, with $12.6 million having been incurred
through September 30, 1998. Funds for the initiative are provided from a
separate budget of $26.5 million for the remediation of all affected systems.
The Company's SAP software implementation costs and other capital expenditures
associated with the replacement or improvement of 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 well as customer information interfaces
and the provision of products/services. The risk is further 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 presently believes that with the planned modifications to existing
systems and the replacement or retirement of other systems, the year 2000
compliance issue will be resolved in a timely manner and will not pose
significant operational problems for the Company. The Company has prioritized
its renovation efforts to focus first on its mission critical internal systems
and the Company believes it is presently 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 created contingency plans in
an effort to limit the inherent risk of the Year 2000 issue. Manual fall-back
processes and procedures have been identified and put in place, particularly in
cases where vendor equipment or services begin to demonstrate the potential to
be unavailable in a timely manner. The Company is also preparing plans to deploy
internal teams to repair problems as they arise when the century rolls over.
Ongoing audit reviews are scheduled during the latter part of 1999 and into 2000
to ensure that compliance control processes continue to be in use. In addition,
the Company is enhancing its existing business resumption plans and believes its
existing liability insurance programs should mitigate its loss exposure in the
event that operational problems do arise.
This discussion should be read in conjunction with the disclosures contained in
"Item 5 -- Risk Factors and Cautionary Statements -- Year 2000 Readiness
Disclosure," which appears in Part II of the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998.
Outlook
Throughout the remainder of 1998 and 1999, the Company will continue its efforts
to reduce costs and improve productivity throughout the organization. At the
same time, the Company will continue to invest in major infrastructure
improvements. The Company also expects to continue its efforts to complete its
divestiture program by selling its remaining non-strategic businesses so it can
focus on its growth opportunities.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
Exhibit No. Description Method of Filing
----------- ----------- ----------------
3.1 Articles of incorporation (incorporated by
reference to Exhibit 3(A) to the Company's Annual
Report on Form 10-K for the year ended December
31, 1990). *
3.2 Bylaws (incorporated by reference to Exhibit 3.2
to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999). *
4.1 Amended and Restated Rights Agreement, dated as
of January 31, 1997, by and between the Company
and Norwest Bank Minnesota, National Association,
as Rights Agent, which includes as Exhibit A
thereto, the form of Rights Certificate
(incorporated by reference to Exhibit 4.1 to the
Company's Amendment No. 1 on Form 8-A/A-1 (File
No. 001-07945) filed with the Securities and
Exchange Commission (the "Commission") on
February 7, 1997). *
14
<PAGE>
4.2 Indenture, relating to up to $150,000,000 of debt
securities (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on
Form S-3 (33-32279) filed with the Commission on
November 24, 1989). *
4.3 Amended and Restated Credit Agreement, dated as
of July 8, 1997, among the Company, Bank of
America National Trust and Savings Association,
as agent, and the other financial institutions
party thereto related to a $150,000,000 committed
line of credit (incorporated by reference to
Exhibit 4.3 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997). *
12.3 Amended Computation of Ratio of Earnings to Fixed
Charges Filed herewith
27.3 Amended Financial Data Schedule Filed herewith
- --------------------------
*Incorporated by reference
(b) The registrant did not, and was not required to, file any reports on
form 8-K during the quarter for which this report is filed.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELUXE CORPORATION
(Registrant)
Date: October 7, 1999 /s/ J. A Blanchard III
----------------------------------------
J.A. Blanchard III, President
and Chief Executive Officer
(Principal Executive Officer)
Date: October 7, 1999 /s/ Thomas W. VanHimbergen
----------------------------------------
Thomas W. VanHimbergen
Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
16
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description Page Number
- ----------- ----------- -----------
12.3 Amended Computation of Ratio of Earnings to Fixed Charges
27.3 Amended Financial Data Schedule
17
EXHIBIT 12.3
DELUXE CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Nine Months
Ended Years Ended December 31,
----- ------------------------
September 30, 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 $ 146,560 $ 115,150 $ 118,765 $ 169,319 $ 246,706 $ 235,913 $ 324,783
Interest expense
(excluding capitalized interest) 6,293 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 10,803 13,621 13,467 14,761 13,554 13,259 12,923
Amortization of debt expense 91 122 121 84 84 84 84
--------- --------- --------- --------- --------- --------- ---------
TOTAL EARNINGS $ 163,747 $ 137,715 $ 143,002 $ 197,262 $ 270,077 $ 259,326 $ 353,161
Fixed charges
- -------------
Interest Expense
(including capitalized interest) 7,378 $ 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 10,803 13,621 13,467 14,761 13,554 13,259 12,923
Amortization of debt expense 91 122 121 84 84 84 84
--------- --------- --------- --------- --------- --------- ---------
TOTAL FIXED CHARGES $ 18,272 $ 23,485 $ 25,566 $ 29,559 $ 24,130 $ 23,898 $ 28,831
RATIO OF EARNINGS
TO FIXED CHARGES: 9.0 5.9 5.6 6.7 11.2 10.9 12.2
</TABLE>
(1) Subsequent to the issuance of the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 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 third quarter of 1998. See Note 2 in the Notes to Consolidated Financial
Statements contained in the Company's Amendment No. 1 to the Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 150,218
<SECURITIES> 17,451
<RECEIVABLES> 157,931
<ALLOWANCES> 0
<INVENTORY> 50,441
<CURRENT-ASSETS> 498,932
<PP&E> 865,671
<DEPRECIATION> 469,985
<TOTAL-ASSETS> 1,118,292
<CURRENT-LIABILITIES> 395,166
<BONDS> 109,774
0
0
<COMMON> 80,264
<OTHER-SE> 491,903
<TOTAL-LIABILITY-AND-EQUITY> 1,118,292
<SALES> 1,433,531
<TOTAL-REVENUES> 1,433,531
<CGS> 697,762
<TOTAL-COSTS> 1,294,304
<OTHER-EXPENSES> (13,626)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,293
<INCOME-PRETAX> 146,560
<INCOME-TAX> 60,849
<INCOME-CONTINUING> 85,711
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85,711
<EPS-BASIC> 1.06
<EPS-DILUTED> 1.06
</TABLE>
