UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999.
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. [x]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is $1,836,947,704 based on the last sales price of the registrant's
common stock on the New York Stock Exchange on March 15, 2000. The number of
outstanding shares of the registrant's common stock as of March 15, 2000 was
72,218,276.
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PART I
ITEM 1. NARRATIVE DESCRIPTION OF BUSINESS
Deluxe Corporation (collectively with its subsidiaries, the "Company") is a
leading provider of integrated risk management, electronic transaction services
and paper payments to the financial services and retail industries. The Company
is headquartered in Shoreview, Minnesota, and has facilities in the United
States, India, Canada and the United Kingdom. The Company's products and
services are sold primarily in the United States.
The Company's operations are conducted by Deluxe Corporation and 25
subsidiaries. During 1999, the Company classified its operations into four
business segments: Paper Payment Systems, Electronic Payment Solutions,
Professional Services and Government Services. During 1997 and 1998, the Company
had two additional segments: Direct Response and Deluxe Direct. These businesses
were divested in 1998.
The Company was incorporated under the laws of the State of Minnesota in
1920. From 1920 until 1988, the Company was named Deluxe Check Printers,
Incorporated. The Company's principal executive offices are located at 3680
Victoria St. N., Shoreview, Minnesota 55126-2966, telephone (651) 483-7111.
Paper Payment Systems
Paper Payment Systems ("PPS") provides check printing services to financial
services companies and markets checks and business forms directly to households
and small businesses. PPS sold checks to more than 10,000 financial institutions
and fulfilled approximately 105 million check order equivalent units in 1999, as
opposed to approximately 111 million equivalent units in 1998. Depositors
commonly submit initial check orders and reorders to their financial
institutions, which forward them to one of PPS' printing plants. Printed checks
are shipped directly by PPS to the depositors and PPS' charges are typically
paid directly from the depositors' accounts. PPS, through a separate subsidiary,
also provides direct mail checks to consumers and small businesses. PPS
endeavors to produce and ship all check orders within two days after receipt of
the order. PPS generated revenues of approximately $1,232.9 million in 1999,
accounting for approximately 74.7% of the Company's total revenues during that
year.
Payment systems and methods have been changing in the United States in recent
years as banking and other industries have introduced alternatives to the
traditional check, including, among others, charge cards, credit cards, debit
cards and electronic payment systems. Sales of checks have also been subject to
increased competition and consequent pressure on prices. In addition, the direct
mail segment of the check market is growing as a lower-priced alternative to
financial institution checks and, in 1999, represented an estimated 21 percent
of the personal check industry. These developments have produced a mature market
for checks and have created pricing pressure on PPS' check sales.
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The Company believes that checks will likely remain an important part of
consumers' payment options for many years. To stabilize its check printing
operations and improve profitability, the Company has focused in recent years on
controlling expenses and increasing efficiency (see "Recent Developments"). The
Company has also focused on higher margin products and services, such as
specially designed checks and licensed check designs. At the same time, the
growing direct mail check segment has been an opportunity for PPS' direct mail
personal check operations.
In addition, Business Forms & Supplies, a business unit of PPS, produces and
markets short-run computer and business forms and checks. Both product lines are
sold primarily through direct mail, telephone marketing and new account
referrals from financial institutions.
Electronic Payment Solutions
The Electronic Payment Solutions segment includes eFunds Corporation (f/k/a
Deluxe Electronic Payment Systems, Inc.), Chex Systems, Inc. ("Chex Systems"),
DebitBureau(SM), Deluxe Payment Protection Systems, Inc. and an electronic check
conversion company that the Company acquired in February 1999 (see "Recent
Developments"). This business is a leading third party processor of electronic
funds transfers in the United States and processed approximately five billion
transactions in 1999. The business offers software for such purposes in the
United States and foreign markets. The Electronic Payment Solutions segment
serves the growing debit payment industry and provides a number of decision
support and risk management products and services to combat identity fraud and
account abuse using the Debit Bureau(SM) database. Chex Systems is the leader in
the account verification business, providing risk management information to
approximately 85,000 financial institution offices. Through its Shared Check
Authorization Network ("SCAN"), Deluxe Payment Protection Systems, Inc. operates
one of the nation's leading check verification services with a network
consisting of thousands of retail locations that share risk-management
information. Electronic Payment Solutions had revenues (including inter-company
sales) of $241.4 million in 1999, or approximately 14.4% of the Company's total
1999 revenues.
Professional Services
In April 1999, the Company acquired the remaining 50% ownership interest in
HCL-Deluxe, N.V., a joint venture which the Company entered into with HCL
Corporation of India in 1996, for $23.4 million. The joint venture commenced
operations in 1997. This business provides information technology development,
maintenance and support services and business process management services to
financial services companies and to all the Company's businesses. Professional
Services had net sales (including inter-company sales) of $19.4 million for all
of 1999.
Government Services
Government Services provides electronic benefit transfer ("EBT") services to
state and local governments. The business manages, supports and controls the
electronic payment of
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government food and cash benefits for the purchase of goods and services in a
retail environment and the distribution of cash in a bank network and retail
environment. Government Services currently supports, alone or in conjunction
with other providers, electronic benefit transfer programs in nine individual
states and local governments and three consortiums comprising 21 states.
Government Services also provides Medicaid verification services. Government
Services produced approximately $48.3 million in revenues in 1999.
Deluxe Direct
Deluxe Direct, which was divested in 1998, marketed specialty papers, and
other products to small businesses and sold direct mail greeting cards, gift
wrap and related products to households. Deluxe Direct had net sales of
approximately $224 million in 1998 and generated approximately 12% of the
Company's total revenues in that year. Deluxe Direct marketed its products
primarily through the Social Expressions division of Current, Inc. ("Current")
and Paper Direct, Inc. ("Paper Direct").
Current is a direct mail supplier of social expression products, including
greeting cards, gift wrap, small gifts and related products. Current's Social
Expressions business is seasonal and holiday-related. Historically, more than
one-third of Current's annual sales have been made in the fourth quarter.
Current's direct mail check business was not included in the divestiture and is
included in "Paper Payment Systems." Paper Direct is a direct mail marketer of
specialty papers, presentation products and pre-designed forms for laser
printing and desktop publishing.
Direct Response
Direct Response, which was divested in 1998, developed targeted direct mail
marketing campaigns for financial institutions and it also sold personalized
plastic ATM cards and credit and debit cards to financial institutions and
retailers and driver's licenses and other identification cards to government
agencies. Direct Response provided database products from the Company's Deluxe
Data Resources, FUSION Marketing(SM) and Deluxe MarketWise(TM) businesses and
fulfillment services that included printing and mailing direct mail marketing
pieces (including letter checks offered to credit card holders) and tracking
customer response rates. The Direct Response business unit contributed
approximately $43 million in revenues in 1998.
RECENT DEVELOPMENTS
eFunds (Tustin) Acquisition
In February 1999, the Company acquired all of the outstanding shares of
eFunds Corporation of Tustin, California for $13 million. This company provides
electronic check conversion and electronic funds transfer solutions for
financial services companies and retailers. This business is included in the
Electronic Payment Solutions segment.
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IPO/Split-off of eFunds
During 1999, the Company announced that it planned to reduce its corporate
support group and move most corporate resources into the Company's operating
units to enable them to operate more independently. These moves were
substantially completed by the end of 1999. In April 1999, the Company announced
that it was changing its business model to a holding company structure with four
independently operated business units: Paper Payment Systems; Electronic Payment
Solutions; Professional Services and Government Services. In January 2000, the
Company announced that its Board of Directors approved a plan to combine its
Electronic Payment Solutions, Professional Services and Government Services
segments into a separate, independent, publicly traded company to be called
eFunds Corporation ("eFunds"). Management believes that the plan to split-off
the Company's higher growth businesses is consistent with its strategy to create
strategically focused enterprises that can independently achieve their business
objectives, raise capital and pursue growth opportunities in their respective
markets. Management also believes that splitting-off its electronic payment and
e-commerce related businesses into a publicly traded company maximizes
shareholder value.
The Company has announced that eFunds plans to issue shares of its common
stock to the public through an initial public offering. After this offering, the
Company will continue to own at least 80.1% of eFunds' outstanding shares. The
Company plans to distribute all of its shares of eFunds' common stock to its
shareholders who tender shares of the Company's common stock in an exchange
offer (the Split-off). The Company intends to request a private letter ruling
from the Internal Revenue Service (IRS) that the Split-off would be a tax-free
transaction to the Company and its shareholders. The Split-off is contingent
upon the Company receiving a favorable tax ruling from the IRS.
As part of the Split-off, the Company and eFunds will enter into various
agreements that address the allocation of assets and liabilities between them
and that define their relationship after the separation. The agreements relate
to matters such as consummation of the public offering and the Split-off,
registration rights for the Company, intercompany loans, software development
and business process management services, indemnification, data sharing, real
estate matters, tax sharing and transition services.
Sale of NRC
In December 1999, the Company sold NRC Holding Corporation and its
subsidiaries (NRC) as these collection businesses did not fit into the Company's
new business model.
Acquisition of Designer Checks
In February 2000, the Company acquired all of the outstanding shares of
Designer Checks for $97.0 million. Designer Checks produces specialty design
checks and related products for direct sale to consumers and will be included in
the Company's Paper Payment Systems segment.
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ATM Provider
In March 2000, the Company paid $20 million for an approximately 24% interest
in a limited liability company that provides automated teller machine (ATM)
management and outsourcing services to retailers and financial institutions. The
Company has previously entered into vault cash agreements with the limited
liability company to supply cash for ATMs in various locations throughout the
United States.
Plant Closings
In the first quarter of 1996, the Company announced a plan to close 21 of its
financial institution check printing plants over a two-year period. Four
additional closings were scheduled to occur in 1999 and 2000. The plant closings
were made possible by advancements in the Company's telecommunications, order
processing and printing technologies. As of December 31, 1999, the production
and front-end functions at all 21 of the plants included in the 1996
announcement were closed. The front-end operations of three of these plants
remained open at the end of 1998 and were closed in 1999. Also, three of the
four plants scheduled to be closed in 1999 and 2000 were closed as of December
31, 1999, with the fourth plant closed in March 2000.
Restructuring Charges
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
(SG&A) expense, discontinuing production of the Direct Response segment's direct
mail products, as well as the closing of four additional financial institution
check printing plants. The Company anticipated eliminating 800 SG&A positions
within sales, marketing, finance, human resources and information services.
Discontinuing production of direct mail products was expected to result in the
elimination of 60 positions. The check printing plant closures were expected to
affect approximately 870 employees. As of the end of 1999, three of the four
check printing plants were closed, with the remaining plant closed in the first
quarter of 2000. Reductions in SG&A positions are expected to continue through
2000.
During 1999, restructuring accruals of $12.2 million were reversed. The
majority of this amount related to the Company's initiatives to reduce its SG&A
expense and to discontinue production of direct mail products. The excess
accrual amount occurred when the Company determined that it was able to use in
its ongoing operations a greater portion of the assets used in the production of
direct mail products than originally anticipated, as well as changes in the SG&A
expense reduction plans due to the plan announced in April 1999 to reorganize
the Company into four independently operated business units. The remainder of
the accrual reversal related to the Company's planned reductions within its
financial institution check printing business and the Company's decision in 1999
to maintain the international operations of Electronic Payment Solutions. Also
during 1999, the Company recorded a restructuring accrual of $.8 million for
employee severance and $.8 million for estimated losses on asset dispositions
related to the
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planned closing of one collections office and planned employee reductions in
another collections office within the Company's collections business that was
sold in 1999.
Government Services Charges
Asset impairment charges of $.5 million and $26.3 million were recorded in
1999 and 1998, respectively, 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. Management
has concluded that the operating losses incurred by this business will 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 charges, the Company determined that the assets utilized by this
business have no fair market value, and so the long-lived assets of this
business were reduced to a carrying value of $0. The charges recorded in 1999
represent the write-down of long-lived assets purchased by the Government
Services segment during 1999.
During 1998, the Company recorded charges of $14.7 million to reserve for
expected future losses on existing long-term contacts of the Government Services
segment. 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. These factors resulted in
expected future losses on the existing electronic benefits transfer contracts
of this business.
During 1999, charges of $8.2 million were recorded to reserve for additional
expected future losses on the contracts of the Government Services segment. A
majority of the charges resulted from the conclusion of settlement negotiations
with a prime contractor regarding the timing and costs of transitioning
switching services to a new processor. Also, lower than projected actual
transaction volumes (primarily related to states fully rolled-out in 1999)
contributed to the changes in the estimates underlying the 1998 charges. These
increases to the reserve for accrued contract losses were partially offset by
the application of $2.3 million of contract losses against the reserve during
1999.
The Company is currently in negotiations with the prime contractor for a
state coalition for which the Company's Government Services business provides
EBT services. To date, the Company and the prime contractor have been operating
without a binding, legally enforceable contract. The Company is continuing to
negotiate towards a final agreement with the prime contractor, and it is likely
that the execution of this definitive agreement will result in additional
charges.
It is anticipated that Government Services will be part of eFunds following
the Split-off and will likely be managed in accordance with the business
strategies of eFunds as an independant company.
EMPLOYEES
The Company had approximately 11,900 full- and part-time employees as of
March 1, 2000. It has a number of employee benefit plans, including a 401(k)
plan, retirement and
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profit sharing plans and medical and hospitalization plans. The Company has
never experienced a work stoppage or strike and considers its employee relations
to be good.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Reference is made to the information appearing under the caption "Note 15.
Business segment information" of the Notes to Consolidated Financial Statements
appearing in Part II of this Annual Report on Form 10-K.
FINANCIAL INFORMATION ABOUT DOMESTIC OPERATIONS AND EXPORT SALES
Reference is made to the information appearing under the caption "Note 15.
Business segment information" of the Notes to Consolidated Financial Statements
appearing in Part II of this Annual Report on Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are elected by the Board of Directors
each year. The term of office of each executive officer will expire at the
annual meeting of the Board of Directors that will be held after the regular
shareholders meeting on August 4, 2000. The principal occupation of each
executive officer is with the Company, and their positions are as follows:
Executive
Officer
Name Position Age Since
---- -------- --- -----
John A. Blanchard III Chairman of the Board, President 57 1995
and Chief Executive Officer
Lawrence J. Mosner Vice Chairman of the Board and 57 1995
Executive Vice President
Thomas W. VanHimbergen Executive Vice President and Chief 51 1997
Financial Officer
Ronald E. Eilers Senior Vice President and 52 1996
General Manager, Paper
Payment Systems
Debra A. Janssen President and Chief Operating 43 1999
Officer, eFunds
John H. LeFevre Senior Vice President, Secretary 56 1994
and General Counsel
MR. BLANCHARD has served as President and Chief Executive Officer of the
Company since May 1, 1995 and as Chairman of the Board of Directors since May 6,
1996. Mr. Blanchard also serves as Chairman of the Board and Chief Executive
Officer of eFunds, and he is expected to continue in that role following the
Split-off. From January 1994 to April 1995, Mr. Blanchard was executive vice
president of General Instrument Corporation, a supplier of systems and equipment
to the cable and satellite television industry. From 1991 to 1993, Mr.
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Blanchard was chairman and chief executive officer of Harbridge Merchant
Services, a national credit card processing company. Previously, Mr. Blanchard
was employed by American Telephone & Telegraph Company for 25 years, most
recently as senior vice president responsible for national business sales. Mr.
Blanchard also serves as a director of Wells Fargo and Company and ADC
Telecommunications, Inc.
MR. MOSNER has served as Executive Vice President of the Company with overall
responsibility for all of its day-to-day operations since July 1997 and he
became Vice-Chairman of the Company's Board of Directors in August 1999.
Following the Split-off, Mr. Mosner is expected to succeed Mr. Blanchard as
Chairman of the Board and Chief Executive Officer of the Company. Mr. Mosner
served as Senior Vice President of the Company from November 1995 until October
1996, when he became President of Deluxe Direct, Inc. ("DDI") a subsidiary of
the Company that provided management services to the companies in its Deluxe
Direct business unit. As a Senior Vice President of the Company and President of
DDI, Mr. Mosner served as the Principal Executive Officer of Deluxe Direct. In
February 1997, Mr. Mosner returned to the office of Senior Vice President of the
Company and he served as President of its Paper Payment Systems business unit
until he became Executive Vice President of the Company. Mr. Mosner was
executive vice president and chief operating officer of Hanover Direct, a direct
marketing company, with responsibility for non-apparel products, from 1993 until
he joined the Company. Previously, he was employed for 28 years by Sears,
Roebuck and Company, where he was Vice President of catalog merchandising from
1991 to 1993.
MR. VANHIMBERGEN served as Senior Vice President and Chief Financial Officer
of the Company from May 1997 through August 1999, when he became Executive Vice
President and Chief Financial Officer. From 1996 until he joined the Company,
Mr. VanHimbergen served as senior vice president and chief financial officer of
Federal-Mogul Corporation ("Federal-Mogul") and from 1994 until 1996, Mr.
VanHimbergen served as vice president and chief financial officer of Allied
Signal Automotive, Inc. ("Allied Signal"). Prior to joining Allied Signal, Mr.
VanHimbergen was employed by Tenneco Corporation ("Tenneco") from 1988 through
1994, where he served in a variety of capacities, including vice president and
chief financial officer for Tenneco Automotive from 1993 to 1994. Tenneco,
Allied Signal and Federal Mogul are global manufacturers and distributors of
automotive parts. From 1971 through 1988, Mr. VanHimbergen served in various
financial, human resource and treasury positions for A.O. Smith Corporation, a
diversified manufacturer and distributor and a provider of electronic payment
systems and information services. Mr. VanHimbergen is expected to leave the
employ of the Company in April 2000.
MR. EILERS joined the Company in 1988 when it purchased Current. From 1990 to
1995, Mr. Eilers served as Vice President and General Manager of Current's
direct mail check business. In 1995, Mr. Eilers became President of PaperDirect,
Inc. and the manager of the Company's business forms division. Mr. Eilers became
a Vice President of DDI in October 1996 and he succeeded Mr. Mosner as the
President of DDI in February 1997. In August 1997, Mr. Eilers became a Senior
Vice President of the Company and he now manages its
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Paper Payment Systems business. Mr. Eilers is expected to serve as President and
Chief Operating Officer of the Company following the Split-off.
MS. JANSSEN has served as President and Chief Operating Officer of eFunds
since March 1, 2000 and she is expected to continue in that capacity following
the Split-off. She joined the Electronic Payment Solutions business unit in
February 1998 as Senior Vice President and was named President and CEO of this
segment in March 1998. Prior to joining the Company, Ms. Janssen worked for 14
years for M&I Data Services in a variety of capacities, most recently as senior
vice president and chief information officer. M&I Data Services is an electronic
transaction processor.
MR. LEFEVRE has served as Senior Vice President, General Counsel and
Secretary of the Company since February 1994. From 1978 to February 1994, Mr.
LeFevre was employed by Wang Laboratories, Inc. From 1988 until February 1994,
he held various positions in Wang Laboratories' law department, including
corporate counsel, vice president, general counsel and secretary. Wang
Laboratories was in the business of manufacturing and selling computer hardware
and software and related services. Mr. LeFevre presently expects to leave the
employ of the Company following the Split-off.
ITEM 2. PROPERTIES
The Company conducts its operations in 47 principal facilities, 46 of which
are used for production and service operations. These facilities are located in
17 states, Canada, India and the United Kingdom and total approximately
3,025,000 square feet. The Company's headquarters occupies a 158,000 square foot
building in Shoreview, Minnesota. Paper Payment Systems has three principal
facilities in Shoreview, Minnesota, totaling approximately 550,000 square feet.
These sites are devoted to sales, administration, marketing, manufacturing
support and call centers. Electronic Payment Solutions' primary administrative
facility occupies a 171,000 square foot building in Glendale, Wisconsin and its
principal data processing centers are located in New Berlin, Wisconsin and
Phoenix, Arizona. Electronic Payment Solutions occupies four additional
principal facilities in Bloomington, Minnesota, Dallas, Texas and Bothell,
Washington totaling approximately 152,000 square feet. Professional Services has
sales offices in New York, New York, San Francisco, California, Charlotte, North
Carolina and Dallas, Texas totaling approximately 20,000 square feet and three
facilities in New Delhi and Chennai, India totaling approximately 111,000 square
feet. The offices in India are used for software development and business
process outsourcing. Government Services shares space with Electronic Payment
Solutions in Glendale, Wisconsin and has two service facilities in Baltimore,
Maryland and Centerville, Utah totaling approximately 2,100 square feet. All but
13 of the Company's facilities are one-story buildings and most were constructed
and equipped in accordance with the Company's plans and specifications.
More than half of the Company's total production area has been constructed
during the past 20 years. The Company owns 20 of its principal facilities and
leases the remainder for terms
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expiring from 2000 to 2009. Depending upon the circumstances, when a lease
expires, the Company either renews the lease or constructs a new facility to
replace the leased facility.
In 1999, the Company entered into a $42.5 million sale-leaseback transaction
whereby the Company sold five existing facilities in Shoreview, Minnesota and
leased back three of these facilities for periods ranging from five to 10 years.
The Company provided short-term financing for $32.5 million of the proceeds of
this sale. This loan was paid in full in January 2000.
In 1996, the Company announced a plan to close 21 of its financial
institution check printing plants. Four additional plant closings scheduled for
1999 and 2000 were announced in 1998. These plant closings were made possible by
advancements in the Company's telecommunications, order processing and printing
technologies. All of these plants were closed by March 2000. The Company's nine
remaining plants are equipped with sufficient capacity to produce at or above
current order volumes. As a result of its consolidation efforts, the Company
currently owns five vacant facilities. These facilities, which total
approximately 301,000 square feet, are or will be held for sale.
ITEM 3. LEGAL PROCEEDINGS
Other than routine litigation incidental to its business, there are no
material pending legal proceedings to which the Company or any of its
subsidiaries is a party or to which any of the Company's property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange under the
symbol DLX. During the years ended December 31, 1999 and 1998 the Company
declared dividends of $0.37 per share during each quarterly period. As of
December 31, 1999 the number of shareholders of record was 13,907. The table
below shows the per-share price ranges of the Company's common stock for the
past two fiscal years as quoted on the New York Stock Exchange.
STOCK PRICE RANGES (DOLLARS) HIGH LOW CLOSE
----------------------------------------------------------------------
1999
Quarter 1 37 3/8 29 1/8 29 1/8
Quarter 2 38 13/16 28 5/16 38 13/16
Quarter 3 40 1/2 33 1/8 34
Quarter 4 34 13/16 24 3/4 27 7/16
----------------------------------------------------------------------
1998
Quarter 1 35 11/16 32 1/2 32 15/16
Quarter 2 35 3/4 31 3/8 35 3/4
Quarter 3 37 15/16 28 3/8 28 7/16
Quarter 4 37 26 3/8 36 9/16
----------------------------------------------------------------------
ITEMS 6, 7, 7A AND 8. SELECTED FINANCIAL DATA, MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
AND FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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DELUXE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
COMPANY PROFILE
In April 1999, the Company announced that it was changing its business model
to a holding company structure with four independently operated business units:
Paper Payments Systems; Electronic Payment Solutions; Professional Services and
Government Services. Paper Payment Systems provides check printing services to
financial services companies and markets checks and business forms directly to
households and small businesses. Government Services provides electronic
benefits transfer services and online medical eligibility verification services
to state and local governments. Electronic Payment Solutions combined under
single management five of the Company's former operating units: Deluxe
Electronic Payment Systems, Inc., DebitBureau(SM), Chex Systems, Inc., Deluxe
Payment Protection Systems, Inc. and an electronic check conversion company
which was acquired in February 1999. These businesses were combined into a
single integrated unit in order to provide opportunities for revenue and profit
growth in excess of what would have been generated had they continued to operate
independently. This segment serves the financial services and retail industries
by providing comprehensive electronic payment management solutions which combine
transaction processing with decision support and risk management tools.
The Company also announced in April 1999 that it acquired the remaining 50%
ownership interest in HCL-Deluxe, N.V., a joint venture which the Company
entered into with HCL Corporation of India in 1996. The joint venture commenced
operations in 1997. This business comprises the Company's Professional Services
segment and provides information technology development, maintenance and support
and business process management to financial services companies and to all of
the Company's businesses. Prior to acquiring the remaining ownership interest,
the Company recorded the results of this business under the equity method of
accounting. As such, the Company's 50% ownership of the joint venture's results
of operations prior to April 1999 were reflected in other expense in the
consolidated statements of income. Subsequent to April 1999, this segment's
entire results of operations and account balances are included in the Company's
consolidated financial statements.
During 1999, the Company also announced that it planned to reduce its
corporate support group and move most corporate resources into the Company's
business units in order to enable them to operate more independently. These
moves were essentially completed by the end of 1999.
In December 1999, the Company sold NRC Holding Corporation and its
subsidiaries (NRC), the Company's collections business, as it did not fit into
the Company's new business model.
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Prior to 1999, the Company also operated two other business segments: Direct
Response and Deluxe Direct. The sales of both of these businesses were completed
in December 1998. Direct Response provided direct marketing, customer database
management and related services to the financial industry and other businesses.
Deluxe Direct primarily sold greeting cards, stationery and specialty paper
products through direct mail.
The Company's segments operate primarily in the United States. The Electronic
Payment Solutions and Professional Services segments also have international
operations.
RESULTS OF OPERATIONS
YEAR ENDED 1999 COMPARED TO YEAR ENDED 1998
NET SALES - Net sales decreased $283.2 million, or 14.6%, to $1,650.5 million in
1999 from $1,933.7 million in 1998. This decrease was primarily due to
discontinuing production of direct mail products and the sale of the remaining
businesses in the Direct Response and Deluxe Direct segments in 1998. These
segments contributed net sales of $266.6 million in 1998. NRC contributed
approximately $120 million in net sales in both 1999 and 1998, but will not be
included in the Company's operations in 2000 as it was sold in December 1999.
Paper Payment Systems' net sales decreased $48.8 million, or 3.8%, to $1,232.9
million in 1999 from $1,281.7 million in 1998. This decrease was primarily due
to lower volume in the financial institution check printing business due to lost
customers. The loss of business was due to competitive pricing requirements
which fell below the Company's revenue and profitability per unit targets. This
volume decrease was partially offset by increased volume for both the direct
checks and business forms businesses and increased revenue per unit for all
businesses. This segment expects to benefit from the volume increases
experienced in 1999 in the direct checks business through increased reorder
revenues in 2000.
Electronic Payment Solutions' net sales increased $17.9 million, or 8.0%, to
$241.4 million in 1999 from $223.5 million in 1998. Increased net sales due to
greater transaction processing and account verification inquiry volumes and
price increases were partially offset by decreased software sales due to
customer reluctance to make significant software changes prior to 2000.
Transaction processing and account verification inquiry volumes increased 27.0%
and 6.0%, respectively, as the result of higher volumes from existing
customers. Net sales in 1999 did not include significant contributions from
several new products which were launched in late 1999. These and other new
products launched in early 2000 provide additional sales opportunities in 2000.
Professional Services' net sales of $14.5 million during 1999 represents an
increase over 1998, as this segment was acquired in the second quarter of 1999.
Sales to external customers were $7.3 million. While the net sales for this
segment are not included in the Company's consolidated statements of income for
1998 or the first quarter of 1999, its net sales did increase to $19.4 million
for all of 1999 from $13.2 million in 1998. This growth was driven by new
clients, increased sales to existing clients and the initiation of business
13
<PAGE>
process management services for the Company. Significant investments in
infrastructure and sales capabilities were made in 1999. As such, management
believes that 2000 revenues will increase over 1999.
Government Services' net sales increased $4.3 million, or 9.8%, to $48.3 million
in 1999 from $44.0 million in 1998. This increase was due to the roll-out of
additional states during the latter half of 1998 and early 1999 and price
increases on contract extensions for online medical eligibility verification
services. Barring further extensions of existing contracts, management believes
that 2000 net sales will be lower than 1999 due to contract expirations.
GROSS MARGIN - Gross margin for the Company was 55.1% in 1999 compared to 51.6%
in 1998. The increase was primarily due to the $32.2 million reduction in loss
contract and asset impairment charges described below. Reduced restructuring
charges also contributed to the increase.
1999 cost of sales included charges of $8.2 million for additional expected
future losses on the contracts of the Government Services segment. A majority of
the charges resulted from the conclusion of settlement negotiations with a prime
contractor regarding the timing and costs of transitioning switching services
from the Company to a new processor. Also, lower than projected actual
transaction volumes (primarily related to states fully rolled-out in 1999)
contributed to the changes in the estimates underlying the 1998 charges. These
charges were partially offset by the net reversal of $2.0 million of
restructuring reserves. Restructuring reserves, relating to the closing of
financial institution check printing plants within the Paper Payment Systems
segment, were reduced by $2.9 million. The closing check printing plants
experienced higher attrition rates than anticipated, resulting in lower
severance payments than originally estimated. Offsetting this reduction was
additional restructuring charges of $0.9 million relating to reductions within
the Company's collection business. By comparison, 1998 cost of sales included
restructuring charges of $10.9 million relating to discontinuing production of
the Direct Response segment's direct mail products and the planned closure of
four financial institution check printing plants within the Paper Payment
Systems segment. Additionally, charges of $40.9 million were recorded in 1998
for asset impairments and accrued contract losses relating to the Government
Services segment. With these items excluded in each year, the Company's gross
margin was 55.5% in 1999 and 54.3% in 1998.
Paper Payment Systems' gross margin increased to 62.9% in 1999 from 60.8% in
1998. This increase was due to cost reductions realized from closing financial
institution check printing plants, process improvements within all businesses
and the loss of lower margin customers within the financial institution check
printing business. Management plans to continue its process improvements and
increase sales of higher margin products in 2000.
Electronic Payment Solutions' gross margin decreased to 42.8% in 1999 from 43.2%
in 1998. This decrease was due primarily to the introduction of certain new
services, such as electronic check conversion services, which in their initial
stages have a higher cost of sales than the Company anticipates will be the case
in future years.
14
<PAGE>
Professional Services, which was acquired in April 1999, contributed a gross
margin of 26.4% in 1999. This compares favorably with the 22.6% gross margin
realized by the business in 1998, prior to the inclusion of its results in the
Company's consolidated financial statements. The increase can be attributed to
sales and execution of more profitable contracts, less reliance on
sub-contractors and an increasing proportion of work being done offshore where
margins are higher despite lower billing rates. Management expects that margins
will continue to improve in 2000 as operations expand and new customers are
added.
Gross margin for Government Services increased to 2.1% in 1999 from a negative
93.9% in 1998. This increase during 1999 was due primarily to the $32.2 million
reduction in loss contract and asset impairment charges, as well as lower
depreciation and amortization expense in 1999 due to the asset impairment
charges recorded in 1998.
SELLING, GENERAL AND ADMINSTRATIVE (SG&A) - SG&A expense decreased $151.1
million, or 20.1%, to $602.2 million in 1999 from $753.3 million in 1998. 1999
SG&A expense includes the net reversal of $6.3 million of restructuring
reserves. Restructuring reserves of $7.0 million relating to the Company's
initiatives to reduce SG&A expense and to discontinue production of direct mail
products, as well as the Company's decision in 1999 to retain the international
operations of its Electronic Payment Solutions segment were reversed. The excess
accrual amount occurred when the Company determined that it was able to use a
greater portion of the direct mail production assets in its ongoing operations
than was originally anticipated, as well as changes in the SG&A expense
reduction initiative due to the plan announced in April 1999 to reorganize the
Company into four independently operated business units. Offsetting these
reversals were additional restructuring charges of $0.7 million relating to
reductions within the Company's collection business. By comparison, 1998 SG&A
expense included $21.1 million of restructuring charges relating to the
Company's initiative to reduce its SG&A expense and the planned closing of four
additional financial institution check printing plants. With these items
excluded in each year, SG&A expense decreased $123.7 million, or 16.9%, from
1998. This decrease was largely due to discontinuing production of the Direct
Response segment's direct mail products and the sale of the remaining businesses
within the Direct Response and Deluxe Direct segments in 1998. These businesses
had $146.7 million of SG&A expense in 1998. NRC had approximately $32.0 million
of SG&A expense in both 1998 and 1999 which will not be included in the
Company's operations in 2000 because the business was sold in December 1999.
Paper Payment Systems' SG&A expense decreased 2.6% from 1998 to 1999. This
reflected a decrease within the financial institution check printing business
resulting from consolidation efforts and reductions in the number of employees.
These decreases were offset by increased marketing expenses for the direct
checks business due to an increased emphasis on new customer acquisition.
Management believes that SG&A expense will increase from current levels as a
percentage of sales during 2000 as the segment continues to grow its direct
checks business and create an e-commerce platform for future growth.
15
<PAGE>
Electronic Payment Solutions' SG&A expense increased 13.0% from 1998 due
primarily to costs incurred in conjunction with the Company's investment in its
DebitBureau(SM) capabilities. This increase was partially offset by initiatives
designed to lower SG&A expense, reductions in corporate support SG&A expense,
which resulted in lower expenses allocated to the segment, and reduced
restructuring charges. 1999 SG&A expense included the reversal of $2.4 million
of restructuring charges, while 1998 SG&A expense included net restructuring
charges of $2.2 million.
SG&A expense for Professional Services was $13.3 million, or 92.0%, of net sales
in 1999. This compares to SG&A expense of $6.4 million, or 48.2%, of net sales
in 1998, when the results of this business were not consolidated within the
Company's financial statements. The increase in 1999 relates to infrastructure
investments and goodwill amortization.
Government Services' SG&A expense increased $1.3 million, or 19.9%, from 1998 to
1999. This was due primarily to an increase in bad debt expense in 1999. This
increase was partially offset by the fact that corporate support expenses were
not allocated to this segment in 1999.
RESEARCH AND DEVELOPMENT (R&D) - R&D expense increased to $5.0 million, or 0.3%
of net sales, in 1999 compared to $1.4 million, or 0.1% of net sales, in 1998.
Substantially all of this increase was incurred in conjunction with the
development of the DebitBureau(SM) capabilities in the Electronic Payment
Solutions segment. The Company expects to maintain R&D expenditures at
approximately the same level in 2000.
OTHER INCOME (EXPENSE) - Other income increased $22.7 million from 1998 to 1999.
1999 included a $19.8 million gain on the sale of NRC, while 1998 included a
combined loss of $4.9 million on sales of businesses. Additionally, the losses
of the Professional Services segment were no longer included in other expense
after April 1999 when the Company acquired the remaining ownership interest in
this business. After this date, the Company began consolidating this business'
results of operations in its consolidated financial statements.
PROVISION FOR INCOME TAXES - The Company's effective tax rate decreased to 37.5%
for 1999 from 41.1% for 1998 due primarily to decreased state tax expense as the
result of various tax reduction initiatives undertaken by the Company.
NET INCOME - Net income for 1999 increased to $203.0 million, compared to $143.1
million in 1998. This increase was due in part to the reduced restructuring
charges, asset impairment charges and accrued losses on long-term service
contracts in 1999. The increase was also due in part to improvement in the
Company's operating margin resulting from better performance from its ongoing
operations as well as from the sales of the businesses within the Direct
Response and Deluxe Direct segments in 1998.
16
<PAGE>
YEAR ENDED 1998 COMPARED TO YEAR ENDED 1997
NET SALES - In 1998, the Company's net sales increased $13.0 million, or 0.7% to
$1,933.7 million in 1998 from $1,920.6 million in 1997. Revenues lost due to
divestitures were more than offset by growth in the Electronic Payment Solutions
and Government Services segments. Excluding businesses divested in both years,
the Company's consolidated net sales increased 2.0% from 1997 to 1998.
Paper Payment Systems' sales decreased $7.7 million, or 0.6% to $1,281.7 million
in 1998 from $1,289.4 million in 1997. The decrease is primarily due to lower
volume in financial institution check printing resulting from lost customers.
The loss of business was due to competitive pricing requirements which fell
below the Company's revenue and profitability per unit targets. This decrease
was partially offset by increased volume for the direct checks business and new
pricing strategies within the financial institution market.
Electronic Payment Solutions' sales increased $21.4 million, or 10.6% to $223.5
million in 1998 from $202.1 million in 1997. Increased transaction processing
and account verification inquiry volumes, higher software licensing and
professional services contributed to this increase. Transaction processing and
account verification inquiry volumes increased 19.0% and 5.9%, respectively,
driven by higher volumes from existing customers. Software licensing and
professional services increased due to customers' concerns over the year 2000
impacts.
Government Services' sales increased $17.0 million, or 63.1%, to $44.0 million
in 1998 from $27.0 million in 1997. This increase was due to additional state
contracts and the roll-out of existing contracts.
Net sales of divested businesses decreased 5.1% from 1997 to $388.7 million.
This decrease was due primarily to lost customers, price decreases for direct
mail products, lower catalog circulation and business divestitures, partially
offset by volume increases in the collections business.
GROSS MARGIN - The Company's consolidated gross margin was 51.6% in 1998,
compared to 53.3% in 1997. 1998 cost of sales included the restructuring
charges, asset impairment charges and long-term service contract losses
discussed above. 1997 cost of sales included restructuring charges of $7.7
million associated with the Company's 1996 plan to close 21 financial
institution check printing plants and severance related to implementing process
improvements in the post-press phase of check production. With these charges
excluded from both years, consolidated gross margin was 54.3% in 1998, compared
to 53.7% in 1997.
Paper Payment Systems' gross margin increased to 60.8% in 1998 from 59.0% in
1997. The segment's slight sales decrease was more than offset by cost savings
realized from closing financial institution check printing plants and other
efficiency improvements.
Electronic Payment Solutions' gross margin was 43.2% in both 1998 and 1997.
Revenue growth was more than offset by increased information services and other
infrastructure costs,
17
<PAGE>
reflecting the Company's investment in this segment. However, these increased
infrastructure costs were substantially offset by reduced incentive compensation
costs.
Government Services' gross margin declined from negative 8.4% in 1997 to
negative 93.9% in 1998, primarily due to loss contract and asset impairment
charges totaling $40.9 million. Excluding these charges, this segment's gross
margin improved to negative 0.7% in 1998, reflecting increased volume and lower
depreciation and amortization expense in 1998 due to the asset impairment
charges recorded in the third quarter of 1998.
Divested businesses' gross margins decreased to 41.9% in 1998 from 45.1% in
1997, due to decreased volume, lower prices for direct mail products and the
divestiture of a higher margin business in late 1997.
SELLING, GENERAL AND ADMINSTRATIVE (SG&A) - In 1998, the Company's SG&A expense
decreased $29.2 million, or 3.7%, from 1997. As discussed above, 1998 SG&A
expense included $21.1 million of restructuring charges relating to the
Company's initiative to reduce SG&A expense and the planned closing of four
additional financial institution check printing plants. 1997 SG&A expense
included restructuring charges of $13.9 million associated with the Company's
1996 plan to close 21 financial institution check printing plants, the
implementation of a new order processing and customer service system and
reductions in support functions at corporate operations and other businesses.
1997 SG&A expense also included asset impairment charges of $16.1 million
related to businesses held for sale. Excluding these charges from both years,
SG&A expense decreased $20.3 million, or 2.7%, from 1997.
Paper Payment Systems' SG&A expense decreased 1.8% from 1997. Increased costs
associated with implementing a new order processing and customer service system
and increased selling expenses to support the volume increases in the direct
checks business were more than offset by lower restructuring charges in 1998
than in 1997.
Electronic Payment Solutions' SG&A expense increased 18.7% from 1997 due to
increased selling and marketing costs associated with the growth of and
investment in this business and $2.7 million of costs incurred in connection
with the development of DebitBureau(SM) capabilities.
Government Services' SG&A expense decreased 36.3% from 1997 primarily because of
lower legal costs.
SG&A expense for divested units decreased 18.3% from 1997, primarily because of
reduced discretionary spending, reduced catalog circulation, and lower costs
resulting from reorganizing a portion of the marketing function at the direct
mail businesses.
GOODWILL IMPAIRMENT CHARGES - During 1996, the Company announced its plans to
divest three businesses within its Deluxe Direct segment. During 1997, the
Company determined that it would divest certain international operations of its
Electronic Payment
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<PAGE>
Solutions segment. In 1997, the Company recorded impairment charges of $99.0
million to write these businesses down to their estimated fair values less costs
to sell. Of this amount, $82.9 million related to the goodwill of these
businesses. The sales of the Deluxe Direct businesses were completed in 1998.
Also during 1998, there was a change in the management of the Electronic Payment
Solutions segment. As a result, in January 1999, the Company determined that the
international operations of this segment maintained a continuing strategic
importance and were no longer considered held for sale.
OTHER INCOME (EXPENSE) - Other income increased $40.5 million from 1997 to 1998.
1997 results included an accrual of $40.0 for legal proceedings related to the
Government Services segment. During 1997, a judgment was entered against the
Company in the U.S. District Court for the Western District of Pennsylvania. The
case was brought against the Company 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
$40.0 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
was reflected in other income in the 1998 consolidated statement of income.
PROVISION FOR INCOME TAXES - In 1998, the Company's effective tax rate decreased
to 41.1% from 61.2% in 1997. This was due to a lower base of non-deductible
expenses resulting primarily from the non-deductible goodwill impairment charges
recognized in 1997.
NET INCOME - 1998 net income increased to $143.1 million from $44.7 million in
1997. The primary reason for this increase was the lower amount of
reorganization and other charges discussed above.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
Cash provided by operations represents the Company's primary source of working
capital and the source for financing capital expenditures and paying cash
dividends.
Cash provided by operations was $220.9 million in 1999 compared to $294.3
million in 1998. A majority of the decrease was due to a payment of $32.2
million in 1999 to settle legal proceedings related to the Government Services
segment and a $25.0 million increase in restricted cash supplied to ATMs in the
Electronic Payment Solutions segment. These decreases were partially offset by
cash inflows from decreases in accounts receivable due to an increase in
Automated Clearing House (ACH) processing of cash receipts within the Paper
Payment Systems segment.
The Company's working capital on December 31, 1999 was $14.1 million compared to
$177.4 million on December 31, 1998. The current ratio on December 31, 1999 was
1.0 to 1, compared to 1.4 to 1 on December 31, 1998. The decrease in working
capital and current ratio is due primarily to the following uses of cash during
1999: $314.9 million to repurchase
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<PAGE>
stock of the Company, $115.0 million to purchase capital assets and $113.5
million to pay dividends to shareholders.
Cash used in investing activities was $0.3 million in 1999 and $36.9 million in
1998. Purchases of capital assets was the most significant use of cash for
investing activities, totaling $115.0 million for 1999 compared to $121.3
million in 1998. Payments for acquisitions, net of cash acquired, totaled $35.7
million in 1999. There were no acquisitions in 1998. In 1999, the Company used
$32.5 million to provide short-term financing on sales of facilities. Sources
of investing cash flows were primarily the sales of businesses and capital
assets. These activities generated investing cash flows of $166.4 million in
1999 and $117.9 million in 1998. As of December 31, 1999, the Company had no
significant fixed asset purchase commitments. The Company anticipates that 2000
capital expenditures will not significantly exceed the 1999 level.
Cash used in financing activities was $348.6 million in 1999 and $160.4 million
in 1998. The primary uses of cash for financing activities were payments to
repurchase the Company's common stock and the payment of dividends to
shareholders. These activities used cash totaling $428.4 million in 1999
compared to $180.0 million in 1998. Sources of cash from financing activities
were the issuance of common stock to employees under the Company's stock
purchase plan and proceeds from borrowings. Common stock issued to employees
generated financing cash flows of $29.2 million in 1999 and $26.2 million in
1998. Proceeds from borrowings were $61.7 million in 1999. There were no
borrowings during 1998. Repayments of debt used cash of $11.1 million in 1999
compared to $6.6 million in 1998.
As of December 31, 1999, the Company had committed lines of credit for $650.0
million available for borrowing and as support for commercial paper. The average
amount drawn on these lines during 1999 was $39.8 million at a weighted-average
interest rate of 6.39%. As of December 31, 1999, $60.0 million was outstanding
under these lines of credit at an interest rate of 6.39%. No amounts were drawn
on these lines during 1998 and there was no outstanding balance at December 31,
1998. The Company issued no commercial paper during 1999 or 1998.
The Company also had a $5.0 million line of credit, which is denominated in
Indian rupees, available to its international operations at an interest rate of
15.81%. The average amount drawn on this line during 1999 was $2.7 million. As
of December 31, 1999, $3.1 million was outstanding. This line of credit was not
available in 1998.
The Company had uncommitted bank lines of credit for $115.0 million available at
variable interest rates. The average amount drawn on these lines during 1999 was
$1.5 million at a weighted-average interest rate of 5.12%. No amounts were drawn
on these lines during 1998 and there was no outstanding balance at December 31,
1999 and 1998 on these lines of credit.
The Company has a shelf registration in place for the issuance of up to $300.0
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
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outstanding indebtedness and other securities of the Company. As of December 31,
1999 and 1998, no such notes were issued or outstanding.
Cash provided by operations in 1998 of $294.3 million was down slightly from
$295.8 million in 1997. Improved operating results in 1998 were offset by an
increase in severance payments from 1997. The Company's working capital on
December 31, 1998 was $177.4 million compared to $131.1 million on December 31,
1997. The Company's current ratio on December 31, 1998 was 1.4 to 1 compared to
1.3 to 1 on December 31, 1997.
Cash used in investing activities was $36.9 million in 1998 compared to $89.4
million in 1997. Purchases of capital assets was the most significant use of
cash for investing activities, totaling $121.3 million in 1998 and $109.5
million in 1997. Sources of investing cash flows were primarily the sales of
businesses and capital assets. These activities generated investing cash flows
of $117.9 million in 1998 and $41.7 million in 1997.
Cash used in financing activities was $160.4 million in 1998 and $177.5 million
in 1997. The primary uses of cash for financing activities were the payment of
dividends to shareholders and payments to repurchase the Company's common stock.
These activities used cash totaling $180.0 million in 1998 compared to $177.6
million in 1997. Sources of cash from financing activities were the issuance of
common stock to employees under the Company's stock purchase plan and proceeds
from borrowings. Common stock issued to employees generated financing cash flows
of $26.2 million in 1998 and $23.7 million in 1997. Repayments of debt used cash
of $6.6 million in 1998 compared to $23.6 million in 1997.
YEAR 2000 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 affected 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 year 2000 issue did not cause significant operational problems for the
Company. Ongoing reviews are scheduled into 2000 to ensure that compliance
control processes continue to be used.
The Company incurred expenses of approximately $26.0 million over the life of
its year 2000 project, consisting of both internal staff costs and consulting
expenses. SAP software implementation costs and other capital expenditures
associated with replacing or improving affected systems are not included in
these costs. No material information technology project was deferred as a result
of this initiative.
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MARKET RISK DISCLOSURE
As of December 31, 1999, the Company had an investment portfolio of fixed
income securities, excluding those classified as cash and cash equivalents, of
$25.7 million. These securities, like all fixed income instruments, are subject
to interest rate risk and will decline in value if market interest rates
increase. However, the Company has the ability to hold its fixed income
investments until maturity and therefore the Company would not expect to
recognize an adverse impact on income or cash flows.
The Company operates internationally, and thus 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 been
immaterial to the consolidated operating results of the Company.
OUTLOOK/RECENT EVENTS
In January 2000, the Company announced that its board of directors approved a
plan to combine its Electronic Payment Solutions, Professional Services and
Government Services segments into a separate, independent publicly traded
company to be called eFunds Corporation (eFunds). Management believes that the
plan to split-off the Company's higher growth businesses is consistent with its
strategy to create strategically focused enterprises that can independently
achieve their business objectives, raise capital and pursue growth opportunities
in their respective markets. Management also believes that splitting-off its
electronic payment and e-commerce related businesses into a publicly traded
company maximizes shareholder value.
The Company has announced that eFunds plans to issue shares of its common stock
to the public through an initial public offering. After this offering, the
Company will continue to own at least 80.1% of eFunds' outstanding shares. The
Company plans to distribute all of its shares of eFunds' common stock to its
shareholders who tender shares of the Company's common stock in an exchange
offer (the Split-off). The Company intends to request a private letter ruling
from the Internal Revenue Service (IRS) that the Split-off would be a tax-free
transaction to the Company and its shareholders. The Split-off is contingent
upon the Company receiving a favorable tax ruling from the IRS.
As part of the Split-off, the Company and eFunds will enter into various
agreements that address the allocation of assets and liabilities between them
and that define their relationship after the separation. The agreements relate
to matters such as consummation of the public offering and the Split-off,
registration rights for the Company, intercompany loans, software development
and business process management services, indemnification, data sharing, real
estate matters, tax sharing and transition services.
In February 2000, the Company acquired all of the outstanding shares of Designer
Checks for $97.0 million. Designer Checks produces specialty design checks and
related products for direct sale to consumers and will be included in the
Company's Paper Payment Systems segment. This acquisition was accounted for
under the purchase method of accounting.
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<PAGE>
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. Estimated total cost in excess of net
assets acquired in the amount of $88.8 million will be reflected as goodwill and
will be amortized over 15 years.
In March 2000, the Company paid $20 million for an approximately 24% interest in
a limited liability company that provides automated teller machine (ATM)
management and outsourcing services to retailers and financial institutions.
This investment will be accounted for under the equity method of accounting.
Accordingly, the Company's consolidated statements of income will reflect the
results of this business in other income (expense) within the Company's
Electronic Payment Solutions segment. The Company has also entered into vault
cash agreements with the limited liability company to supply cash for ATMs in
various locations throughout the United States.
The Company is currently in negotiations with the prime contractor for a state
coalition for which the Company's Government Services segment provides
electronic benefits transfer services. To date, the Company and the prime
contractor have been operating without a binding, legally enforceable contract.
The Company is continuing to negotiate towards a final agreement with the prime
contractor. The Company will adjust its provision for expected future losses on
long-term contracts when a definitive agreement, not subject to negotiation, is
finalized; but it is likely that the execution of this definitive agreement will
result in additional charges.
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.
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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 Executive Vice President and Chief
---------------------- Financial Officer
Thomas W. VanHimbergen
January 26, 2000
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DELUXE CORPORATION
FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended December 31 (dollars in
thousands, except per share amounts) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $1,650,500 $1,933,659 $1,920,629 $1,980,577 $1,937,605
Salaries and wages 473,961 532,305 572,035 586,949 551,788
Provision for income taxes 121,633 99,852 70,478 53,302 74,885
Income from continuing operations 203,022 143,063 44,672 65,463 94,434
Return on sales 12.30% 7.40% 2.33% 3.31% 4.87%
Per share - basic 2.65 1.77 .55 .80 1.15
Per share - diluted 2.64 1.77 .55 .79 1.15
Return on average shareholders' equity 39.66% 23.51% 6.75% 8.77% 11.84%
Return on average assets 18.76% 12.33% 3.84% 5.30% 7.40%
Net income 203,022 143,063 44,672 65,463 87,021
Per share - basic 2.65 1.77 .55 .80 1.06
Per share - diluted 2.64 1.77 .55 .79 1.06
Cash dividends per share 1.48 1.48 1.48 1.48 1.48
Shareholders' equity 417,308 606,565 610,248 712,916 780,374
Purchases of capital assets 115,020 121,275 109,500 92,038 125,068
Depreciation and amortization expense 83,910 83,816 81,143 106,636 103,303
Working capital (decrease) increase (163,302) 46,327 22,911 95,857 (118,116)
Total assets 992,643 1,171,519 1,148,364 1,176,440 1,295,095
Long-term debt 115,542 106,321 109,986 108,622 110,997
Debt to capital ratio 28.30% 15.20% 15.96% 15.41% 17.14%
Average common shares outstanding
(thousands) 76,710 80,648 81,854 82,311 82,420
Number of employees 11,691 15,296 18,937 19,643 19,286
Number of production and service facilities 46 58 68 81 81
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Deluxe Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31 (dollars in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 140,465 $ 268,389
Restricted custodial cash 3,429 545
Marketable securities 25,713 41,133
Trade accounts receivable, net of allowance for doubtful accounts of $5,814 and
$3,487, respectively 115,775 145,079
Inventories:
Raw material 3,110 2,619
Semi-finished goods 7,245 7,401
Finished goods 1,261 1,981
Supplies 15,007 17,400
Deferred advertising 17,189 7,939
Deferred income taxes 14,206 56,554
Prepaid expenses and other current assets 75,349 59,040
- ---------------------------------------------------------------------------------------------------------------
Total current assets 418,749 608,080
LONG-TERM INVESTMENTS 40,846 45,208
RESTRICTED CASH 28,939 3,921
PROPERTY, PLANT, AND EQUIPMENT
Land and land improvements 41,157 46,826
Buildings and building improvements 165,028 209,416
Machinery and equipment 448,445 507,680
- ---------------------------------------------------------------------------------------------------------------
Total 654,630 763,922
Less accumulated depreciation 359,845 423,845
- ---------------------------------------------------------------------------------------------------------------
Property, plant and equipment-net 294,785 340,077
INTANGIBLES
Cost in excess of net assets acquired-net 51,705 42,836
Internal use software-net 142,465 116,734
Other intangible assets-net 15,154 14,663
- ---------------------------------------------------------------------------------------------------------------
Total intangibles 209,324 174,233
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 992,643 $1,171,519
===============================================================================================================
</TABLE>
26
<PAGE>
Deluxe Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31 (DOLLARS IN THOUSANDS) 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 60,876 $ 53,555
Accrued liabilities:
Wages, including vacation pay 54,228 60,540
Employee profit sharing and pension 33,490 41,762
Accrued income taxes 28,405 33,075
Accrued rebates 28,281 34,712
Accrued contract losses 20,599 14,697
Other 111,330 185,022
Borrowings on lines of credit 63,100
Long-term debt due within one year 4,357 7,332
- --------------------------------------------------------------------------------------------
Total current liabilities 404,666 430,695
LONG-TERM DEBT 115,542 106,321
DEFERRED INCOME TAXES 46,322 27,519
OTHER LONG-TERM LIABILITIES 8,805 419
COMMITMENTS AND CONTINGENCIES (NOTES 12 AND 16)
SHAREHOLDERS' EQUITY
Common shares $1 par value (authorized: 500,000,000 shares;
issued: 1999-72,019,898 shares 1998-80,480,526 shares) 72,020 80,481
Additional paid-in capital 6,822
Retained earnings 346,617 519,742
Unearned compensation (47) (238)
Accumulated other comprehensive income (1,282) (242)
- --------------------------------------------------------------------------------------------
Shareholders' equity 417,308 606,565
- --------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 992,643 $1,171,519
============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
27
<PAGE>
Deluxe Corporation
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years ended December 31 (dollars in thousands, except per share amounts) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $1,650,500 $1,933,659 $1,920,629
Cost of sales 741,241 935,999 897,313
- -----------------------------------------------------------------------------------------------------------------------
GROSS MARGIN 909,259 997,660 1,023,316
OPERATING EXPENSES
Selling, general and administrative 602,157 753,290 782,529
Research and development 5,008 1,361 2,175
Goodwill impairment charges 82,893
- -----------------------------------------------------------------------------------------------------------------------
Total operating expenses 607,165 754,651 867,597
- -----------------------------------------------------------------------------------------------------------------------
302,094 243,009 155,719
- -----------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Other income (expense) 31,067 8,179 (31,747)
Interest expense (8,506) (8,273) (8,822)
- -----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 324,655 242,915 115,150
- -----------------------------------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES 121,633 99,852 70,478
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 203,022 $ 143,063 $ 44,672
=======================================================================================================================
NET INCOME PER SHARE - BASIC $ 2.65 $ 1.77 $ .55
=======================================================================================================================
NET INCOME PER SHARE - DILUTED $ 2.64 $ 1.77 $ .55
=======================================================================================================================
CASH DIVIDENDS PER COMMON SHARE $ 1.48 $ 1.48 $ 1.48
=======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
Years Ended December 31 (dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME $ 203,022 $ 143,063 $ 44,672
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:
Foreign currency translation adjustments (555) 177 (1,135)
Unrealized gains on securities:
Unrealized holding gains arising during the year 4 116
Less reclassification adjustments for gains included in net income (489) (46)
- -----------------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income (1,040) 247 (1,135)
- -----------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 201,982 $ 143,310 $ 43,537
- -----------------------------------------------------------------------------------------------------------------------
RELATED TAX BENEFIT (EXPENSE) OF OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments $ 333 $ (124) $ 1,790
Unrealized gains on securities:
Unrealized holding gains arising during the year (2) (61)
Less reclassification adjustments for gains included in net income 263 24
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
28
<PAGE>
Deluxe Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31 (dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 203,022 $ 143,063 $ 44,672
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 54,305 58,931 54,690
Amortization of intangibles 29,605 24,885 26,453
Asset impairment charges 492 26,252 99,019
Stock purchase discount 4,764 5,905 6,654
Net (gain) loss on sales of businesses (19,770) 4,850 (866)
Deferred income taxes 63,875 12,146 (25,733)
Changes in assets and liabilities, net of effects from acquisitions
and sales of businesses:
Restricted cash (27,902) (4,466)
Trade accounts receivable 20,578 (5,241) (5,806)
Inventories 385 3,568 5,019
Accounts payable 7,306 (6,008) 9,678
Other assets and liabilities (115,714) 30,378 81,998
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 220,946 294,263 295,778
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of marketable securities with maturities of more than
3 months 32,775 19,199
Purchases of marketable securities with maturities of more than 3 months (17,915) (52,411) (8,000)
Purchases of capital assets (115,020) (121,275) (109,500)
Payments for acquisitions, net of cash acquired (35,667) (10,600)
Net proceeds from sales of businesses, net of cash sold 99,475 89,416 21,627
Proceeds from sales of capital assets 66,892 28,518 20,036
Loans to others (32,500)
Other 1,663 (395) (2,925)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (297) (36,948) (89,362)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on lines of credit 61,720 (16,783)
Payments on long-term debt (11,113) (6,589) (6,818)
Payments to retire common stock (314,853) (60,323) (56,281)
Proceeds from issuing stock under employee plans 29,208 26,230 23,654
Cash dividends paid to shareholders (113,535) (119,682) (121,321)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (348,573) (160,364) (177,549)
- --------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (127,924) 96,951 28,867
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 268,389 171,438 142,571
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 140,465 $ 268,389 $ 171,438
====================================================================================================================
Supplementary cash flow disclosure:
Interest paid $ 9,420 $ 8,018 $ 9,620
Income taxes paid 62,793 82,276 63,612
====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
29
<PAGE>
Deluxe Corporation
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, outstanding transfers of cash for authorized settlement of automated
teller machines (ATMs) with financial institutions 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.
RESTRICTED CASH-The Company has entered into agreements with a third party to
supply cash for ATMs maintained by the third party in various locations
throughout the United States. The agreements provide that the Company retains
control over and ownership of this cash. Subject to the approval of the Company,
the other party to the agreements determines the level of cash required to be
maintained within the ATMs up to an authorized level. The Company currently has
an aggregated outstanding authorized cash level of $35 million. The agreements
are effective through August 31, 2004. The cash in the ATMs is not available for
general operating use and is reflected in the Company's consolidated balance
sheets as a non-current asset.
In connection with the Company's electronic payment transactions, the Company
also has cash belonging to customers that temporarily resides in custodial
accounts maintained by the Company. The Company records these amounts as current
restricted custodial cash with a corresponding liability within other accrued
liabilities in the consolidated balance sheets.
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 (expense) in the consolidated statements of 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 were approximately $6.3 million and $5.0 million less than
replacement cost at December 31, 1999 and 1998, respectively.
DEFERRED ADVERTISING-These costs consist of materials, production, postage and
design expenditures required to produce catalogs for the Company's direct checks
and business forms businesses. Such costs are amortized over periods (up to 18
months) that correspond to the estimated revenue streams of the individual
catalogs. The actual timing of these
30
<PAGE>
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
advertising expense recognized in 1999, 1998 and 1997 was $50.1 million, $100.0
million and $101.3 million, respectively.
LONG-TERM INVESTMENTS-Long-term investments consist principally of cash
surrender values of insurance contracts, notes receivable and other investments.
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 three 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 one to 10 years for internal use software and
other intangibles. Other intangibles consist primarily of licensed software and
software held for sale. Total intangibles at December 31 were as follows
(dollars in thousands):
1999 1998
- --------------------------------------------------------------------------------
Cost in excess of net assets acquired $69,577 $ 63,131
Internal use software 194,685 146,100
Other intangible assets 69,845 69,622
- --------------------------------------------------------------------------------
Total 334,107 278,853
Less accumulated amortization (124,783) (104,620)
- --------------------------------------------------------------------------------
Intangibles - net $209,324 $ 174,233
- --------------------------------------------------------------------------------
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.
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
31
<PAGE>
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.
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.
CUSTOMER 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 records a liability 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 are translated
at the exchange rate in effect at the balance sheet date. Income statement
accounts are translated at the average exchange rate during the year.
Translation adjustments arising from the use of differing exchange rates from
period to period are included in other comprehensive income in the shareholders'
equity section of the consolidated balance sheets. Gains and losses that result
from foreign currency transactions are included in earnings.
REVENUE RECOGNITION-The Company records revenues and related profits for the
majority of its operations as products are shipped or as services are performed.
Revenues are recorded net of any applicable discounts. Transaction processing
and service revenues and decision support revenues are generally recognized as
the services are performed. Revenues from software license fees for standard
software products are recognized when delivery has occurred, the license fee is
fixed and determinable, collectibility is probable and evidence of the
arrangement exists. Software maintenance and support revenues are recognized
ratably over the term of the contract and/or as services are provided.
Professional services revenues for software development, custom applications and
business process management are generally recognized as the services are
performed or proportionately based on the percentage of completion.
LONG-TERM SERVICE CONTRACTS-Long-term service contracts 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.
32
<PAGE>
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 judgment 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 judgment 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 (EBT)
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, case counts or other applicable statistics
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 reduce the depreciation and amortization associated with
the impaired assets accordingly.
RESEARCH AND DEVELOPMENT EXPENSE-Research and development costs, which are
expensed as incurred, relate to investigating new or improved processes and
techniques and developing such research findings into potential new products or
services.
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 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 discloses pro forma net income and net income per share as if
the fair value method of SFAS No. 123 had been used (see Note 10).
RECLASSIFICATIONS-In 1999, the Company elected to reclassify certain expenses in
its consolidated statements of income. As a result, net sales, cost of sales and
selling, general and administrative (SG&A) expense have been restated for all
prior periods to reflect these new classifications. The Company now reflects the
royalty and manufacturing support expenses of its check printing operations in
cost of sales. Previously these expenses were included in SG&A expense. These
reclassifications resulted in an increase to cost of sales and a decrease to
SG&A expense of $20.3 million in both 1999 and 1998 and $15.0 million in 1997.
Additionally, the Company now reflects research and development expense as a
33
<PAGE>
separate category in the consolidated statements of income. Previously, these
expenses were classified as either cost of sales or SG&A expense. Finally,
certain other amounts reported in 1998 and 1997 have been reclassified to
conform with the 1999 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 April 1998, the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, "Reporting the Costs of Start-up Activities,"
which provides guidance on the appropriate accounting for start-up activities
beginning in 1999. Application of the SOP did not have a material impact on the
Company's reported operating results or financial position.
In June 1998, the Financial Accounting Standards Board 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, 2001. The Company anticipates that the
effect of this pronouncement 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>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income per share - basic:
Net income $203,022 $143,063 $ 44,672
Weighted average shares outstanding 76,710 80,648 81,854
- --------------------------------------------------------------------------------------------------------------
Net income per share - basic $ 2.65 $ 1.77 $ .55
==============================================================================================================
Net income per share - diluted:
Net income $203,022 $143,063 $ 44,672
- --------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 76,710 80,648 81,854
Dilutive impact of options 273 179 92
Shares contingently issuable 26 28 11
- --------------------------------------------------------------------------------------------------------------
Weighted average shares and potential dilutive shares outstanding 77,009 80,855 81,957
- --------------------------------------------------------------------------------------------------------------
Net income per share - diluted $ 2.64 $ 1.77 $ .55
==============================================================================================================
</TABLE>
34
<PAGE>
During 1999, 1998 and 1997, options to purchase a weighted average of 2.0
million, 0.7 million and 0.7 million shares, respectively, were outstanding but
were not included in the computation of diluted earnings per share. The exercise
prices of the excluded options were greater than the average market price of the
Company's common shares during the respective periods.
In January 1998, the Company awarded options to substantially all employees
(excluding foreign employees and employees of businesses held for sale),
allowing them, subject to certain conditions, to purchase 100 shares of common
stock at an exercise price of $33 per share. Options for the purchase of 1.7
million shares of common stock were issued under this program. Had these options
been issued in previous years, the dilutive impact of options presented above
for 1997 may have differed.
NOTE 3: RESTRUCTURING CHARGES
- --------------------------------------------------------------------------------
During 1997, the Company recorded restructuring charges of $24.5 million. The
charges included costs associated with a 1996 plan to close 21 financial
institution check printing plants. These costs could not be recorded in 1996
because they did not meet the requirements for accrual in that year.
Additionally, costs associated with the continued consolidation of the Company's
core businesses were included in the charges. 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 selling, general and administrative (SG&A) expense and
$2.9 million in other expense in the 1997 consolidated statement of income. As
of the end of 1999, both the production and front-end functions of all 21 plants
were closed. Improvements to the post-press production process were also
completed during 1999. Implementation of the new order processing and customer
service system is expected to be delayed to early 2001 due to the fact that
financial institutions did not want to implement the system in late 1999 or
early 2000 due to the efforts they were expending on year 2000 issues.
During 1998, the Company recorded restructuring charges of $39.5 million. The
charges included costs associated with the Company's initiative to reduce its
SG&A expense, discontinuing production of the Direct Response segment's direct
mail products and closing four additional financial institution check printing
plants. The Company anticipated eliminating 800 SG&A positions within sales,
marketing, finance, human resources and information services. Discontinuing
production of direct mail products was expected to result in the elimination of
60 positions. The Company also planned to close four additional financial
institution check printing plants, affecting approximately 870 employees. The
restructuring charges consisted of employee severance costs of $31.2 million and
$8.3 million for expected losses on the disposition of assets. Expenses of $10.9
million were included in cost of sales, $21.1 million in SG&A expense and $7.5
million in other expense in the 1998 consolidated statement of income. As of the
end of 1999, three of the four check printing plants were closed, with the
remaining plant closed in the first quarter of 2000. Reductions in
35
<PAGE>
SG&A positions are expected to continue through 2000. Also during 1998, the
Company reversed $1.0 million of a 1996 restructuring charge. The 1996 charge
related to planned reductions in various support functions at the international
operations of the Electronic Payment Solutions segment. Due to higher than
anticipated attrition, it was necessary to reduce this reserve. This reversal
was included in SG&A expense in the 1998 consolidated statement of income.
During 1999, restructuring accruals of $12.2 million were reversed. The
majority of this amount related to the Company's initiatives to reduce SG&A
expense and to discontinue production of direct mail products. The excess
accrual amount occurred when the Company determined that it was able to use a
greater portion of the direct mail production assets in its ongoing operations
than was originally anticipated, as well as changes in the SG&A expense
reduction initiative due to the plan announced in April 1999 to reorganize the
Company into four independently operated business units. The remainder of the
accrual reversal related to the Company's planned reductions within its
financial institution check printing business and the Company's decision in 1999
to retain the international operations of its Electronic Payment Solutions
segment (see Note 4). The closing check printing plants experienced higher
attrition rates than anticipated, resulting in lower severance payments than
originally estimated. Also during 1999, the Company recorded a restructuring
accrual of $0.8 million for employee severance and $0.8 million for estimated
losses on asset dispositions related to the planned closing of one collections
office and planned employee reductions in another collections office within the
Company's collection business which was sold in 1999 (see Note 6). These accrual
reversals and the new restructuring accrual are reflected in the 1999
consolidated statement of income as a reduction in cost of sales of $2.0
million, a reduction in SG&A expense of $6.3 million and other income of $2.3
million.
The Company's consolidated balance sheets reflect restructuring accruals of
$15.1 million and $45.7 million, respectively, for employee severance costs, and
$1.1 million and $6.8 million for estimated losses on asset dispositions,
respectively, as of December 31, 1999 and 1998.
The status of the severance portion of the Company's restructuring accruals
as of December 31, 1999 is as follows (dollars in millions):
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
SG&A Reductions
Check Printing Plant & Direct Mail Collection Center
Closings/Other(1) Production Closing/Reductions Total
----------------------------------------------------------------------------------------
No. of No. of No. of No. of
employees employees employees employees
affected Amount affected Amount affected Amount affected Amount
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Original accrual 4,970 $68.0 860 $21.2 70 $ 0.8 5,900 $90.0
Severance paid (3,985) (55.6) (305) (7.1) (70) (0.7) (4,360) (63.4)
Adjustments to
accrual (545) (5.9) (270) (5.5) (0.1) (815) (11.5)
----------------------------------------------------------------------------------------
Balance,
December 31,
1999 440 $ 6.5 285 $ 8.6 0 $ 0.0 725 $15.1
----------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
(1) Includes charges recorded in 1996 for the plan to close 21 financial
institution check printing plants and charges recorded in 1996 and 1997 for
reductions in support functions at corporate operations and other businesses.
The majority of the remaining severance costs are expected to be paid in 2000
with cash generated from the Company's operations.
The status of the estimated loss on asset dispositions portion of the
Company's restructuring accruals as of December 31, 1999 is as follows (dollars
in millions):
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Check Printing Plant SG&A Reductions & Collection Center
Closings(1) Direct Mail Production Closing/Reductions Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Original accrual $15.0 $ 5.2 $ 0.8 $ 21.0
Losses realized (13.9) (3.4) (0.6) (17.9)
Adjustments to
accrual (1.8) (0.2) (2.0)
------------------------------------------------------------------------------------
Balance, December
31, 1999 $ 1.1 $ 0.0 $ 0.0 $ 1.1
------------------------------------------------------------------------------------
</TABLE>
(1) Includes charges recorded in 1996 for the plan to close 21 financial
institution check printing plants.
NOTE 4: IMPAIRMENT LOSSES
- --------------------------------------------------------------------------------
During 1997, the Company recorded impairment charges of $99.0 million to
write-down the carrying amounts of businesses held for sale in the Deluxe
Direct, Direct Response and Electronic Payment Solutions segments. The Company
had announced in 1996 plans to divest three businesses in the Deluxe Direct
segment. During 1997, the Company determined that it would dispose of certain
international operations of its Electronic Payment Solutions segment. The
Company determined that it would dispose of the businesses in its Direct
Response segment in 1998. Based on fair market value estimates, the Company
determined that the long-lived assets of these businesses were impaired. The
charges are included in the 1997 consolidated statement of income in goodwill
impairment charge ($82.9 million) and SG&A expense ($16.1 million). The
disposals of the businesses in the Deluxe Direct and Direct Response segments
were completed in 1998 (see Note 6). Also during 1998, there was a change in the
management of the Electronic Payment Solutions segment. As a result, in January
1999, the Company determined that the international operations of this segment
maintained a continuing strategic importance and were no longer considered held
for sale. The decision to retain these operations did not have a material impact
on the Company's results of operations or financial position.
During 1998, the Company recorded impairment charges of $26.3 million to
write-down the carrying value of long-lived assets of the Government Services
segment. The assets consisted of point-of-sale equipment, internal-use software
and capitalized installation costs utilized in the EBT activities of this
segment. The Company 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
37
<PAGE>
anticipated and actual transaction volumes are below original expectations. In
calculating the impairment charges, 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 exceeded the amount equipment resellers were
willing to pay for the equipment. The utility of the internal-use software was
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 zero. These impairment charges are reflected in cost of
sales in the 1998 consolidated statement of income.
During 1999, due to the continued operating losses of the Government Services
segment, additional impairment charges of $0.5 million were recorded. These
charges represent the write-down of long-lived assets purchased by this segment
during 1999. These assets consisted primarily of software and installation costs
associated with the continued roll-out of additional states. All assets
purchased were reduced to a carrying value of zero, as they were in 1998. These
impairment charges are reflected in cost of sales in the 1999 consolidated
statement of income.
NOTE 5: CONTRACT LOSSES
- --------------------------------------------------------------------------------
During 1998, the Company recorded charges of $14.7 million to provide for
expected future losses on existing long-term contracts of the Government
Services segment. These charges are reflected in cost of sales in the 1998
consolidated statement of income. 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. These
factors resulted in expected future losses on the existing EBT contracts of this
business.
During 1999, charges of $8.2 million were recorded to provide for additional
expected future losses on the contracts of the Government Services segment.
These charges are reflected in cost of sales in the 1999 consolidated statement
of income. A majority of the charges resulted from the conclusion of settlement
negotiations with a prime contractor regarding the timing and costs of
transitioning switching services from the Company to a new processor. Also,
lower than projected actual transaction volumes (primarily related to states
fully rolled-out in 1999) contributed to the changes in the estimates underlying
the 1998 charge. These increases to the reserve for accrued contract losses were
partially offset by the applications of $2.3 million of contract losses against
the reserve during 1999.
38
<PAGE>
NOTE 6: BUSINESS COMBINATIONS AND DIVESTITURES
- --------------------------------------------------------------------------------
1999 ACQUISITIONS-During February 1999, the Company acquired all of the
outstanding shares of an electronic check conversion company for $13 million.
This company provides electronic check conversion and electronic funds transfer
solutions for financial services companies and retailers. The acquisition was
accounted for under the purchase method of accounting. Accordingly, the
consolidated financial statements of the Company include the results of this
business subsequent to its acquisition date. This business is included in the
Electronic Payment Solutions segment in Note 15. The purchase price was
allocated to the assets acquired and liabilities assumed based on their fair
values on the date of purchase. Total cost in excess of net assets acquired in
the amount of $15.7 million is reflected as goodwill and is being amortized over
10 years. The effect of this acquisition was not material to the operations or
financial position of the Company.
During April 1999, the Company acquired the remaining 50% ownership interest in
HCL-Deluxe, N.V. (HCL) for $23.4 million. The joint venture, which the Company
entered into with HCL Corporation of India in 1996, commenced operations in
September 1997. The company provides information technology development and
support services and business process management services to financial services
companies and to all the Company's businesses. The acquisition was accounted for
under the purchase method of accounting. Accordingly, the consolidated financial
statements of the Company include the entire results of this business from the
date the Company acquired 100% ownership. Prior to this, the Company recorded
its 50% ownership of the joint venture's results under the equity method of
accounting. As such, their results of operations prior to the acquisition are
included in other expense in the consolidated statements of income. This
business comprises the Professional Services segment in Note 15. The purchase
price was allocated to the assets acquired and liabilities assumed based on
their fair values on the date of purchase. Total cost in excess of net assets
acquired in the amount of $24.9 million is reflected as goodwill and is being
amortized over 15 years. The effect of this acquisition was not material to the
operations or financial position of the Company.
1999 DIVESTITURES-During 1999, the Company sold substantially all of the assets
of NRC Holding Corporation and all of the outstanding stock of United Creditors
Alliance International Limited, the Company's collection businesses. The cash
proceeds, net of cash sold, from the sales of these businesses was $74.4
million. The 1999 consolidated statement of income reflects a net gain of $19.8
million on these sales. The consolidated financial statements of the Company
include the results of these businesses through their sale dates. These
businesses contributed revenues of $124.1 million, $121.3 million and $105.8
million, in 1999, 1998 and 1997, respectively.
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 remaining businesses within the Direct Response segment.
The Company also sold
39
<PAGE>
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 notes receivable from the sales of
these businesses were collected in full by the end of 1999.
The following summarized, unaudited pro forma results of operations for 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.
<TABLE>
<CAPTION>
(dollars in thousands, except per share amounts) 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $1,683,863 $1,656,075
Cost of sales 815,316 765,928
SG&A, research and development, and goodwill impairment charges 620,698 637,268
Other income (expense) 9,382 (40,861)
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
- ---------------------------------------------------------------------------------------------
</TABLE>
1997 ACQUISITIONS-During 1997, the Company acquired substantially all of the
assets of Fusion Marketing Group, Inc. for $10.6 million plus amounts contingent
on the future earnings of the business. Fusion provides customized database
marketing services to financial institutions and is included in the Direct
Response segment in Note 15. 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. Total cost in excess of net assets acquired in the amount 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 did not have a material pro forma impact on the Company's
operations.
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 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.
40
<PAGE>
NOTE 7: SALE-LEASEBACK TRANSACTION
- --------------------------------------------------------------------------------
In 1999, the Company entered into a $42.5 million sale-leaseback transaction
whereby the Company sold five existing facilities in Shoreview, Minnesota and
leased back three of these facilities for periods ranging from five to 10 years.
Of the related leases, two are being accounted for as operating leases and one
is a capital lease. An asset of $11.6 million was recorded for the capital lease
and is reflected as buildings and building improvements in the December 31, 1999
consolidated balance sheet. The result of this sale was a $17.1 million gain, of
which $10.6 million was deferred and is being amortized over the lease terms.
$8.7 million of the deferred gain is reflected in other long-term liabilities in
the December 31, 1999 consolidated balance sheet. The Company provided
short-term financing for $32.5 million of the proceeds from this sale. This
amount is reflected in prepaid expenses and other current assets in the December
31, 1999 consolidated balance sheet and is reflected as loans to others in the
1999 consolidated statement of cash flows. The loan was paid in full in January
2000.
NOTE 8: MARKETABLE SECURITIES
- --------------------------------------------------------------------------------
On December 31, 1999 and 1998, marketable securities classified as available
for sale consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
1999
- --------------------------------------------------------------------------------------
Unrealized
holding
Cost loss Fair value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities issued by the U.S. Treasury and
other government agencies $ 24,352 $ (636) $ 23,716
Debt securities issued by states of the U.S. and
political subdivisions of states 2,000 (3) 1,997
- --------------------------------------------------------------------------------------
Total marketable securities 26,352 (639) 25,713
Other debt securities (cash equivalents) 126,457 126,457
- --------------------------------------------------------------------------------------
Total $152,809 $ (639) $152,170
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998
- ---------------------------------------------------------------------------------------------------
Unrealized Unrealized
holding holding
Cost gain loss Fair value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities issued by the U.S. Treasury and
other government agencies $ 17,084 $ (97) $ 16,987
Debt securities issued by states of the U.S. and
political subdivisions of states 14,677 $ 23 (2) 14,698
Corporate debt securities 9,450 (2) 9,448
- ---------------------------------------------------------------------------------------------------
Total marketable securities 41,211 23 (101) 41,133
Other debt securities (cash equivalents) 256,186 185 256,371
- ---------------------------------------------------------------------------------------------------
Total $297,397 $ 208 $ (101) $297,504
- ---------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
At December 31, 1999, debt securities maturing in 2000 have a cost basis of
$138.8 million and a fair value of $138.6 million. Debt securities maturing in
2001 have a cost basis of $8.0 million and a fair value of $7.8 million.
Securities maturing in 2002 have a cost basis of $6.0 million and a fair value
of $5.8 million.
Proceeds from sales of marketable securities available for sale were $32.8
million and $19.2 million in 1999 and 1998, respectively. The Company realized
net gains of $0.8 million and $70,000 on the sales of marketable securities in
1999 and 1998, respectively. There were no sales of marketable securities in
1997.
NOTE 9: PROVISION FOR INCOME TAXES
- --------------------------------------------------------------------------------
Income (loss) before income taxes consists of (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ 325,619 $ 242,676 $ 137,677
Foreign (964) 239 (22,527)
- ------------------------------------------------------------------------------------------------------------
Total $ 324,655 $ 242,915 $ 115,150
============================================================================================================
</TABLE>
The components of the provision for income taxes are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax provision:
Federal $ 55,587 $ 73,776 $ 84,392
State 13,550 22,692 14,062
- ------------------------------------------------------------------------------------------------------------
Total 69,137 96,468 98,454
Deferred tax provision (benefit):
Federal 51,754 3,252 (23,876)
State 742 132 (4,100)
- ------------------------------------------------------------------------------------------------------------
Total $ 121,633 $ 99,852 $ 70,478
============================================================================================================
</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>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax at Federal statutory rate $ 113,629 $ 85,020 $ 40,303
State income taxes net of Federal income tax benefit 9,290 14,836 6,442
Amortization and write-down of non-deductible intangibles 1,602 745 32,116
Recognition of difference in tax and book investments in
subsidiaries sold 401 (2,220) (3,786)
Change in valuation allowance 2,212 (542) 1,024
Other (5,501) 2,013 (5,621)
- ------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 121,633 $ 99,852 $ 70,478
============================================================================================================
</TABLE>
Tax effected temporary differences which give rise to a significant portion of
deferred tax assets and liabilities at December 31, 1999 and 1998, are as
follows (dollars in thousands):
42
<PAGE>
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------
Deferred tax Deferred tax Deferred tax Deferred tax
assets liabilities assets liabilities
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Property, plant, and equipment $ 15,774 $ 20,937
Capital loss carryforwards $ 7,400 $ 25,294
Deferred advertising 4,747 2,698
Employee benefit plans 11,264 7,490
Inventory 1,062 708
Intangibles 38,033 34,656
Net operating loss carry forwards 17,291 13,919
Restructuring accruals 6,115 19,218
Reserve for legal proceedings 12,373
Accrued contract losses 7,210 5,144
Miscellaneous reserves and accruals 10,969 13,414
Prepaid services 16,389
All other 12,994 10,971 14,679 7,706
- -------------------------------------------------------------------------------------------------
Subtotal 74,305 85,914 112,239 65,997
Valuation allowance (20,507) (17,207)
- -------------------------------------------------------------------------------------------------
Total deferred taxes $ 53,798 $ 85,914 $ 95,032 $ 65,997
=================================================================================================
</TABLE>
The valuation allowance at both dates relates primarily to the uncertainty of
realizing foreign and state deferred tax assets.
At December 31, 1999, net operating loss carryforwards relating to both foreign
and state jurisdictions totaled $103.6 million. Of these carryforwards, $86.6
million expire in various years between 2001 and 2014 and $17.0 million may be
carried forward indefinitely. At December 31, 1999, the Company also had capital
loss carryforwards of $20.0 million which expire in 2003.
NOTE 10: EMPLOYEE BENEFIT AND STOCK-BASED COMPENSATION PLANS
- --------------------------------------------------------------------------------
STOCK PURCHASE PLAN-The Company has an employee stock purchase plan that enables
eligible employees to purchase the Company's common stock at 75% of its fair
market value on the first business day following each three-month purchase
period. Compensation expense recognized for the difference between the
employees' purchase price and the fair value of the stock was $4.8 million, $5.9
million and $6.7 million in 1999, 1998 and 1997, respectively. Under the plan,
568,107, 698,830 and 840,143 shares were issued at prices ranging from $20.95 to
$27.57, $24.38 to $26.16 and $22.88 to $24.75 in 1999, 1998 and 1997,
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
43
<PAGE>
reserve an aggregate of 7 million shares of common stock for issuance under the
plan. At December 31, 1999, 2.6 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 of the Company (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, 1997 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
Granted 1,231,053 35.72
Exercised (481,340) 30.62
Canceled (835,418) 35.41
- -----------------------------------------------------------------------------------------
Outstanding at December 31, 1999 4,536,557 $33.65
=========================================================================================
</TABLE>
For options outstanding and exercisable at December 31, 1999, the exercise
price ranges and average remaining lives were as follows:
<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>
$27.13 to $32.99 1,050,664 6.30 years $30.45 899,672 $30.37
$33.00 to $35.13 1,943,982 4.61 years 33.07 593,792 33.21
$35.14 to $45.88 1,541,911 8.07 years 36.55 411,596 38.62
- -------------------------------------------------------------------------------------------------------------
4,536,557 6.18 years $33.65 1,905,060 $33.04
=============================================================================================================
</TABLE>
44
<PAGE>
The Company issued 106,815, 60,912 and 72,581 restricted shares and restricted
stock units at weighted-average fair values of $34.78, $33.22, and $31.52 during
1999, 1998 and 1997, respectively. These awards generally vest over periods
ranging from one to five years.
Pro forma information regarding net income and net income per share has been
determined as if the Company had accounted for its employee stock-based
compensation under the fair value method. The fair value of 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
1999, 1998 and 1997, respectively: risk-free interest rate of 6.7%, 5.9% and
6.0%; dividend yield of 4.6%, 4.5% and 4.0%; and expected volatility of 24.0%,
21.8% and 23.0%. The weighted-average expected option life was 9.0 years, 5.9
years and 7.2 years for 1999, 1998 and 1997, respectively. The weighted-average
fair value of options granted in 1999, 1998 and 1997 was $8.24, $5.99 and $7.49
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 net income per share were as
follows (dollars in thousands, except per share amounts):
1999 1998 1997
- --------------------------------------------------------------------------------
Net income:
As reported $203,022 $143,063 $44,672
Pro forma 197,555 140,510 44,536
Basic net income per share:
As reported $2.65 $1.77 $.55
Pro forma 2.58 1.74 .54
Diluted net income per share:
As reported $2.64 $1.77 $.55
Pro forma 2.57 1.74 .54
================================================================================
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 pro forma effects on reported net income of future years.
PROFIT SHARING, DEFINED CONTRIBUTION AND 401(k) PLANS-The Company maintains
profit sharing plans, a defined contribution pension plan and plans established
under section 401(k) of the Internal Revenue Code to provide retirement benefits
for certain employees. The plans cover substantially all full-time employees
with approximately 15 months of service. Contributions to the profit sharing and
defined contribution plans are made solely by the Company. Employees may
contribute up to the lessor of $10,000 or 10% of their wages to the 401(k) plan.
The Company will match the first 1% of wages contributed and 50% of the next 4%
of wages contributed. All contributions are remitted to the plans' respective
trustees, and benefits provided by the plans are paid from accumulated funds of
the trusts.
Contributions to the defined contribution pension plan equaled 4% of eligible
compensation in 1999 and 1998, and 6% in 1997. Related expense for these years
was $15.5 million, $13.7 million and $18.6 million, respectively. Contributions
to the profit sharing plans vary based on the Company's performance. Expense for
these plans was $17.6 million, $27.5 million
45
<PAGE>
and $25.6 million in 1999, 1998 and 1997, respectively. Company contributions to
the 401(k) plan were $7.9 million, $7.8 million and $7.0 million in 1999, 1998
and 1997, respectively.
NOTE 11: POST-RETIREMENT 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 1999 and 1998 (dollars in thousands):
- --------------------------------------------------------------------------------
Benefit obligation, January 1, 1998 $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
Service cost 1,694
Interest cost 5,286
Actuarial (gains) and losses 3,383
Effect of curtailment (3,200)
Benefits paid from plan assets and general funds of the Company (6,947)
- --------------------------------------------------------------------------------
Benefit obligation, December 31, 1999 $80,855
- --------------------------------------------------------------------------------
Fair value of plan assets, January 1, 1998 $60,203
Actual return on plan assets 4,283
- --------------------------------------------------------------------------------
Fair value of plan assets, December 31, 1998 64,486
Actual return on plan assets 11,678
Benefits paid (3,900)
- --------------------------------------------------------------------------------
Fair value of plan assets, December 31, 1999 $72,264
- --------------------------------------------------------------------------------
46
<PAGE>
The funded status of the plan was as follows at December 31 (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated post-retirement benefit obligation $80,855 $80,639
Less:
Fair value of plan assets (debt and equity securities) 72,264 64,486
Unrecognized prior service cost 743 1,285
Unrecognized net loss 10,908 13,367
Unrecognized transition obligation 5,949 8,209
- --------------------------------------------------------------------------------------------------
Prepaid post-retirement asset recognized in the
consolidated balance sheets $(9,009) $(6,708)
- --------------------------------------------------------------------------------------------------
</TABLE>
Net post-retirement benefit cost for the years ended December 31 consisted of
the following components (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the year $1,694 $1,218 $877
Interest cost on the accumulated post-retirement benefit
obligation 5,286 4,651 4,163
Expected return on plan assets (6,126) (5,719) (4,979)
Amortization of transition obligation 586 680 680
Amortization of prior service cost 257 269 269
Recognized net amortization of (gains) and losses 290 (63) (78)
- --------------------------------------------------------------------------------------------------
Net post-retirement benefit cost 1,987 1,036 932
Curtailment (gain) loss (1,242) 315
- --------------------------------------------------------------------------------------------------
Total post-retirement benefit cost $745 $1,351 $932
==================================================================================================
</TABLE>
As a result of the sale of businesses (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 post-retirement benefit curtailment gain of $1.2 million in
1999 and a net curtailment loss of $0.3 million in 1998.
In measuring the accumulated post-retirement benefit obligation as of December
31, 1999, the Company's health care inflation rate for 2000 and beyond was
assumed to be 5%. A one percentage point increase in the health care inflation
rate for each year would increase the accumulated post-retirement benefit
obligation by approximately $12.0 million and the service and interest cost
components of the net post-retirement benefit cost by approximately $1.0
million. A one percentage point decrease in the health care inflation rate for
each year would decrease the accumulated post-retirement benefit obligation by
approximately $10.4 million and the service and interest cost components of the
net post-retirement benefit cost by approximately $1.0 million. The discount
rate used in determining the accumulated post-retirement benefit obligation as
of December 31, 1999 and 1998, was 7.50% and 6.75%, respectively. The expected
long-term rate of return on plan assets used to determine the net periodic
post-retirement benefit cost was 9.5% in 1999, 1998 and 1997.
47
<PAGE>
NOTE 12: LEASE AND DEBT COMMITMENTS
- --------------------------------------------------------------------------------
Long-term debt was as follows at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
8.55% unsecured and unsubordinated notes due February 15, 2001 $100,000 $100,000
Other 19,899 13,653
- ------------------------------------------------------------------------------------------
Total long-term debt 119,899 113,653
Less amount due within one year 4,357 7,332
- ------------------------------------------------------------------------------------------
Total $115,542 $106,321
==========================================================================================
</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 $101.8 million
and $106.4 million at December 31, 1999 and 1998, 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 6.7% to 15.7% and are due
through the year 2009. Carrying value materially approximates fair value for
these obligations.
Maturities of long-term debt for the five years ending December 31, 2004, are
$4.4 million, $103.7 million, $2.3 million, $1.1 million and $1.1 million, and
$7.3 million thereafter.
The Company has entered into operating leases on certain facilities and
equipment. Future minimum lease payments for all noncancelable operating leases
for the five years ending December 31, 2004, are $20.2 million, $12.8 million,
$6.4 million, $4.3 million and $3.1 million, and $2.9 million thereafter. Rental
expense was $43.9 million, $45.4 million and $40.9 million, for 1999, 1998 and
1997, respectively.
As of December 31, 1999, the Company had committed lines of credit for $650.0
million available for borrowing and as support for commercial paper. The average
amount drawn on these lines during 1999 was $39.8 million at a weighted-average
interest rate of 6.39%. As of December 31, 1999, $60.0 million was outstanding
under these lines of credit at an interest rate of 6.39%. No amounts were drawn
on these lines during 1998 and there was no outstanding balance at December 31,
1998. The Company issued no commercial paper during 1999 or 1998.
The Company also had a $5.0 million line of credit, which is denominated in
Indian rupees, available to its international operations at an interest rate of
15.81%. The average amount drawn on this line during 1999 was $2.7 million. As
of December 31, 1999, $3.1 million was outstanding. This line of credit was not
available in 1998.
The Company had uncommitted bank lines of credit for $115.0 million available at
variable interest rates. The average amount drawn on these lines during 1999 was
$1.5 million at a weighted-average interest rate of 5.12%. No amounts were drawn
on these lines during 1998 and there was no outstanding balance at December 31,
1999 and 1998 on these lines of credit.
48
<PAGE>
The Company has a shelf registration in place for the issuance of up to $300.0
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, 1999 and 1998, no such notes were issued or
outstanding.
Absent certain defined events of default under a $150 million committed credit
facility and 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 13: COMMON STOCK PURCHASE RIGHTS
- --------------------------------------------------------------------------------
On February 5, 1988, the Company declared a distribution to shareholders of
record on February 22, 1988, of one common stock purchase right for each
outstanding share of common stock. These rights were governed by the terms and
conditions of a rights agreement entered into by the Company as of February 12,
1988. That agreement was amended and restated as of January 31, 1997 (Restated
Agreement).
Pursuant to the Restated Agreement, upon the occurrence of certain events, each
right will entitle the holder to purchase one share of common stock at an
exercise price of $150. In certain circumstances described in the Restated
Agreement, if (i) any person becomes the beneficial owner of 15% or more of the
Company's common stock, (ii) the Company is acquired in a merger or other
business combination or (iii) upon the occurrence of other events, each right
will entitle its holder to purchase a number of shares of common stock of the
Company, or the acquirer or the surviving entity if the Company is not the
surviving corporation in such a transaction. The number of shares purchasable
will be equal to the exercise price of the right divided by 50% of the
then-current market price of one share of common stock of the Company, or other
surviving entity (i.e., at a 50% discount), subject to adjustments provided in
the Restated Agreement. The rights expire January 31, 2007, and may be redeemed
by the Company at a price of $.01 per right at any time prior to the occurrence
of the circumstances described above.
49
<PAGE>
NOTE 14: SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated Other
(Dollars in thousands) Comprehensive Income
- ------------------------------------------------------------------------------------- ----------------------------
Unrealized
Additional gain (loss) on Cumulative
Common paid-in Retained Unearned marketable translation
shares capital earnings compensation securities adjustment
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 82,056 $ 631,151 $ (937) $ 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) (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)
Net income 203,022
Cash dividends (113,535)
Common stock issued 1,112 35,846
Common stock retired (9,573) (42,668) (262,612)
Unearned compensation 191
Unrealized fair value
adjustments (485)
Translation adjustment (555)
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 72,020 $ -- $ 346,617 $ (47) $ (415) $ (867)
==================================================================================================================
</TABLE>
NOTE 15: BUSINESS SEGMENT INFORMATION
- --------------------------------------------------------------------------------
During 1999, the Company announced a plan to reorganize its operations into four
independently operated business units. This reorganization was completed by the
end of 1999. Accordingly, the segment information for prior years has been
restated to conform to the current operating structure.
The Company has organized its business units into four operating segments based
on the nature of the products and services offered by each: Paper Payment
Systems, Electronic Payment Solutions, Professional Services and Government
Services. Paper Payment Systems provides check printing services to financial
service companies and markets checks and business forms directly to households
and small businesses. Electronic Payment Solutions provides comprehensive
electronic payment management solutions that combine transaction
50
<PAGE>
processing with decision support and risk management tools to the financial
services and retail industries. Professional Services provides information
technology development, maintenance and support and business process management
to financial services companies and to all of the Company's businesses.
Government Services provides EBT services and online medical eligibility
verification services to state and local governments. During 1999, the Company
sold its collections business (see Note 6). The results of this business are not
included in the Company's segment information, but are included in the Company's
reconciliations to consolidated amounts.
In 1997 and 1998, the Company operated two additional segments: Direct Response
and Deluxe Direct. Direct Response, which was sold in 1998, provided direct
marketing, customer database management and related services to the financial
industry and other businesses. Deluxe Direct, which was also sold in 1998,
primarily sold greeting cards, stationery and specialty paper products through
direct mail.
The Company's segments operate primarily in the United States. The Electronic
Payment Solutions and Professional Services segments also have international
operations. No single customer of the Company accounted for more than 10% of net
sales in 1999, 1998 or 1997.
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, net income and earnings before interest, taxes, depreciation and
amortization (EBITDA). The income from operations measurement utilized by
management excludes special charges (e.g., restructuring charges, asset
impairment charges, certain one-time charges that management believes are not
reflective of on-going operations, etc.). Holding company expenses were
allocated to the segments as a fixed percentage of segment revenues. This
allocation included expenses for various support functions such as human
resources, information services and finance and included depreciation and
amortization expense related to holding company assets. The corresponding
holding company asset balances have been allocated to the segments. Most
inter-segment sales are based on current market pricing.
Prior to the acquisition of the remaining 50% interest in HCL-Deluxe, N.V. in
1999 (see Note 6), the results of this business were recorded under the equity
method of accounting. As such, the Company recorded its 50% ownership of the
joint venture's results of operations prior to the acquisition in other expense
in the consolidated statements of income. To be consistent with management
reporting, the entire results of the joint venture for the pre-acquisition
periods are reflected in the business segment information as if the business had
been a consolidated entity.
51
<PAGE>
<TABLE>
<CAPTION>
Paper Electronic
Payment Payment Professional Government Total
1999 (dollars in thousands) Systems Solutions Services Services Segments
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales to external
customers $ 1,232,924 $ 237,885 $ 10,745 $ 48,277 $ 1,529,831
Intersegment sales 3,500 8,630 12,130
Operating income (loss)
excluding special charges 307,458 14,842 (7,809) 3,454 317,945
Special charges (recoveries) (2,782) (225) 2,938 10,096 10,027
Operating income (loss)
including special charges 310,240 15,067 (10,747) (6,642) 307,918
Net income (loss) 286,041 9,125 (12,566) (5,033) 277,567
EBITDA 368,608 32,312 (8,767) (4,540) 387,613
Depreciation and amortization
expense 59,257 20,681 1,963 81,901
Segment assets 474,044 210,661 36,200 34,410 755,315
Capital purchases 73,037 34,068 3,373 929 111,407
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Paper Electronic
1998 (dollars in Payment Payment Professional Government Direct Deluxe Total
thousands) Systems Solutions Services Services Response Direct Segments
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales to external
customers $1,279,738 $221,964 $ 7,994 $ 43,970 $ 42,662 $ 223,906 $1,820,234
Intersegment sales 1,956 1,586 5,234 722 9,498
Operating income (loss)
excluding special
charges 312,782 23,459 (3,406) (6,496) (20,060) 5,047 311,326
Asset impairment charges 26,252 26,252
Other special charges 11,099 2,375 14,928 2,513 30,915
Operating income (loss)
including special
charges 301,683 21,084 (3,406) (47,676) (22,573) 5,047 254,159
Net income (loss) 245,814 18,843 (5,495) (31,680) (12,461) (6,839) 208,182
EBITDA 360,730 37,009 (3,146) (39,666) (16,781) (3,147) 334,999
Depreciation and
amortization expense 54,022 17,294 260 4,225 2,213 78,014
Segment assets 540,871 145,572 5,410 37,286 729,139
Capital purchases 80,416 30,148 1,934 320 602 1,623 115,043
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Paper Electronic
1997 (dollars in Payment Payment Professional Government Direct Deluxe Total
thousands) Systems Solutions Services Services Response Direct Segments
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales to external
customers $1,288,630 $ 199,662 $ 1,589 $ 26,965 $ 49,781 $ 249,682 $1,816,309
Intersegment sales 786 2,438 1,691 3,187 1,137 9,239
Operating income
(loss) excluding
special charges 291,626 27,744 (1,590) (12,269) (19,742) (5,231) 280,538
Asset impairment
charges 11,831 5,000 82,188 99,019
Other special charges 17,696 2,316 1,824 21,836
Operating income (loss)
including special charges 273,930 13,597 (1,590) (12,269) (24,742) (89,243) 159,683
Net income (loss) 222,336 (2,743) (1,739) (30,659) (16,053) (92,969) 78,173
EBITDA 315,405 32,513 (1,578) (48,739) (14,389) (89,118) 194,094
Depreciation and
amortization expense 45,228 19,168 12 3,580 6,902 697 75,587
Segment assets 525,795 141,360 3,704 46,115 47,876 121,824 886,674
Capital purchases 81,183 17,295 151 690 3,026 2,191 104,536
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Segment information reconciles to consolidated amounts as follows (dollars in
thousands):
<TABLE>
<CAPTION>
NET SALES TO EXTERNAL CUSTOMERS 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total segment net sales to external customers $ 1,529,831 $ 1,820,234 $ 1,816,309
Divested businesses not included in segments 124,074 121,419 105,909
Professional Services pre-acquisition elimination (3,405) (7,994) (1,589)
- -------------------------------------------------------------------------------------------------------------------
Total consolidated net sales to external customers $ 1,650,500 $ 1,933,659 $ 1,920,629
- -------------------------------------------------------------------------------------------------------------------
OPERATING INCOME INCLUDING SPECIAL CHARGES 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Total segment operating income $ 307,918 $ 254,159 $ 159,683
Divested businesses not included in segments (2,409) 3,612 6,730
Professional Services pre-acquisition elimination 1,234 3,387 1,590
Elimination of intersegment profits 28 99
Unallocated holding company expenses (4,649) (18,177) (12,383)
- -------------------------------------------------------------------------------------------------------------------
Total consolidated operating income $ 302,094 $ 243,009 $ 155,719
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
1999 and 1998 unallocated holding company expenses consist of holding company
restructuring charges and charges for certain liabilities that are not allocated
to the segments. 1997 unallocated holding company expenses consist primarily of
holding company restructuring charges.
53
<PAGE>
<TABLE>
<CAPTION>
NET INCOME INCLUDING SPECIAL CHARGES 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total segment net income $ 277,567 $ 208,182 $ 78,173
Divested businesses not included in segments (4,229) (445) 1,767
Professional Services pre-acquisition elimination 248 3,741 1,074
Elimination of intersegment profits 165 49
Unallocated holding company expenses (70,564) (68,580) (36,391)
- ---------------------------------------------------------------------------------------------------------
Total consolidated net income $ 203,022 $ 143,063 $ 44,672
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Unallocated holding company expenses affecting net income consist of holding
company restructuring charges and charges for certain liabilities that are not
allocated to the segments, gains and losses on sales of businesses, interest
expense, investment income and related income tax expense.
<TABLE>
<CAPTION>
DEPRECIATION AND AMORTIZATION EXPENSE 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total segment depreciation and amortization
expense $ 81,901 $ 78,014 $ 75,587
Divested businesses not included in segments 2,050 5,957 5,460
Professional Services pre-acquisition elimination (143) (260) (12)
Unallocated holding company expense 102 105 108
- ---------------------------------------------------------------------------------------------------------
Total consolidated depreciation and amortization
expense $ 83,910 $ 83,816 $ 81,143
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------------------
TOTAL ASSETS 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
Total segment assets $ 755,315 $ 729,139 $ 886,674
Assets of divested businesses not included in
segments 68,734 63,317
Professional Services pre-acquisition elimination (4,732) (3,369)
Unallocated holding company assets 237,328 378,378 201,742
- ---------------------------------------------------------------------------------------------------------
Total consolidated assets $ 992,643 $1,171,519 $1,148,364
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Unallocated holding company assets consist primarily of cash, investments and
deferred tax assets relating to holding company activities.
<TABLE>
<CAPTION>
CAPITAL PURCHASES 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total segment capital purchases $ 111,407 $ 115,043 $ 104,536
Divested businesses not included in segments 3,337 8,156 5,115
Professional Services pre-acquisition elimination (145) (1,934) (151)
Holding company capital purchases 421 10
- ---------------------------------------------------------------------------------------------------------
Total consolidated capital purchases $ 115,020 $ 121,275 $ 109,500
- ---------------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE>
Revenues are attributed to geographic areas based on the location of the
assets producing the revenues. The Company's operations by geographic area are
as follows (in thousands):
<TABLE>
<CAPTION>
Long-Lived Assets
Net Sales to External Customers December 31,
- ---------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998
<S> <C> <C> <C> <C> <C>
United States $1,629,853 $1,907,157 $1,883,363 $289,827 $337,048
Foreign countries 20,147 26,502 37,266 4,958 3,029
- ---------------------------------------------------------------------------------------------------------
Total consolidated $1,650,500 $1,933,659 $1,920,629 $294,785 $340,077
- ---------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 16: LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
During 1997, a judgment was entered against the Company in the U.S. District
Court for the Western District of Pennsylvania. The case was brought against the
Company by Mellon Bank (Mellon) in connection with a potential bid to provide
electronic benefit transfer services for the Southern Alliance of States. In
September 1997, the Company recorded a pretax charge of $40 million to reserve
for this judgment and other related costs. This charge is reflected in other
expense in the 1997 consolidated income statement.
In 1998, Mellon's motion for prejudgment interest was denied by the district
court. 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. At December 31, 1998, the remaining liability of $34.4 million was
included in other accrued liabilities in the consolidated balance sheet.
In January 1999, the United States Court of Appeals for the Third Circuit
affirmed the judgment of the district court and the Company paid $32.2 million
to Mellon in February 1999. The portion of the reserve remaining after the
payment of this judgment ($2.1 million) was reversed and is reflected in other
income in the 1999 consolidated statement of income. The United States Supreme
Court denied the Company's petition for a further review of this judgment in
June 1999.
NOTE 17: SUBSEQUENT EVENTS (UNAUDITED)
- --------------------------------------------------------------------------------
In January 2000, the Company announced that its board of directors approved a
plan to combine its Electronic Payment Solutions, Professional Services and
Government Services businesses into a separate, independent, publicly traded
company to be called eFunds Corporation (eFunds).
The Company has announced that eFunds plans to issue shares of its common stock
to the public through an initial public offering. After this offering, the
Company will own at least 80.1% of eFunds' outstanding shares. The Company plans
to distribute all of its shares of eFunds' common stock to its shareholders who
tender shares of the Company's common stock in an exchange offer (the
Split-off). The Company intends to request a private letter ruling from the
Internal Revenue Service (IRS) that the Split-off would be a tax-free
55
<PAGE>
transaction to the Company and its shareholders. The Split-off is contingent
upon the Company receiving a favorable tax ruling from the IRS.
As part of the Split-off, the Company and eFunds will enter into various
agreements that address the allocation of assets and liabilities between them
and that define their relationship after the separation. The agreements relate
to matters such as consummation of the public offering and the Split-off,
registration rights for the Company, intercompany loans, software development
and business process management services, indemnification, data sharing, real
estate matters, tax sharing and transition services.
In February 2000, the Company acquired all of the outstanding shares of Designer
Checks for $97.0 million. Designer Checks produces specialty design checks and
related products for direct sale to consumers and will be included in the
Company's Paper Payment Systems segment. 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.
Estimated total cost in excess of net assets acquired in the amount of $88.8
million will be reflected as goodwill and will be amortized over 15 years.
In March 2000, the Company paid $20 million for an approximately 24% interest in
a limited liability company that provides ATM management and outsourcing
services to retailers and financial institutions. This investment will be
accounted for under the equity method of accounting. Accordingly, the Company's
consolidated statements of income will reflect the results of this business in
other income (expense) within the Company's Electronic Payment Solutions
segment. The Company has also entered into vault cash agreements with the
limited liability company to supply cash for ATMs in various locations
throughout the United States (see Note 1).
56
<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, 1999 and 1998, and the
related consolidated statements of income, comprehensive income, and cash flows
for each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States of America. 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Deloitte and Touche LLP
Deloitte and Touche LLP
Minneapolis, Minnesota
January 26, 2000
57
<PAGE>
Deluxe Corporation
Summarized Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
1999 Quarter Ended March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $414,077 $407,841 $417,114 $411,468
Cost of sales 186,078(1) 184,260(1) 187,453(1) 183,450
Net income 48,033 47,779 49,057 58,153(2)
Per share of common stock
Net income - basic .60 .61 .65 .79
Net income - diluted .60 .61 .65 .79
Cash dividends .37 .37 .37 .37
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
1998 Quarter Ended March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------------
Net Sales $489,451(1) $475,216(1) $470,258(1) $498,734(1)
Cost of sales 228,4981(1) 224,582(1) 265,220(1) 217,699(1)
Net income (loss) 43,571 42,255 (115)(3) 57,352(4)
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
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) These figures differ from those previously reported in the Company's
Quarterly Reports on Form 10-Q and the Company's Annual Report on Form 10-K/A
for the year ended December 31, 1998 due to the financial statement
reclassifications outlined in Note 1 in the Notes to the Consolidated Financial
Statements.
(2) 1999 fourth quarter results include a gain of $19.8 million on the sale of
its collections businesses, the reversal of $6.0 million of restructuring
reserves, as well as charges of $8.2 million to reserve for additional expected
future losses on existing contracts of the Government Services segment.
(3) 1998 third quarter results include reorganization and other charges of $74.7
million, including restructuring charges of $39.5 million, losses on existing
contracts of the Government Services segment of $14.7 million, and asset
impairment charges of $26.3 million on the long-lived assets of the Government
Services segment offset by a gain on the sale of a business within the Company's
Direct Response segment.
(4) 1998 fourth quarter results include a loss of $10.5 million on the sale of
the Company's Social Expressions and PaperDirect, Inc. businesses.
58
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT, AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
To be filed by Amendment.
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 this report:
Financial Statements
--------------------
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Income for each of the three years in
the period ended December 31, 1999
Consolidated Statements of Comprehensive Income for each of the
three years in the period ended December 31, 1999
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1999
Notes to Consolidated Financial Statements
Independent Auditors' Report
Supplemental Financial Information (Unaudited):
Summarized Quarterly Financial Data
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, 33-48967 and 333-95739
Schedules other than those listed above are not required or are not
applicable, or the required information is shown in the consolidated financial
statements or notes.
(b) The following exhibits are filed as part of or are incorporated in this
report by reference:
59
<PAGE>
Exhibit Method of
Number Description Filing
- ------ ----------- ---------
3.1 Articles of Incorporation (incorporated by reference to *
the Company's Annual Report on Form 10-K for the year
ended December 31, 1990).
3.2 Bylaws, (incorporated by reference to Exhibit 3.2 of the *
Company's Quarterly Report on Form 10-Q (the "September
1999 10-Q") for the quarter ended September 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).
4.2 Indenture, relating to up to $150,000,000 of debt *
securities (incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-3
(33-32279) filed with the Commission on November 24,
1989).
4.3 Amended and Restated Credit Agreement, dated as of July 8, *
1997, among the Company, Bank of America National Trust
and Savings Association, as agent, and the other financial
institutions party thereto, related to a $150,000,000
committed line of credit (incorporated by reference to
Exhibit 4.3 to the Company's Annual Report on Form 10-K
(the "1997 10-K") for the year ended December 31, 1997).
4.4 Credit Agreement, dated as of August 30, 1999, among the *
Company, Bank of America, N.A. as the sole and exclusive
administrative agent, and the other financial institutions
party thereto related to a $500,000,000 revolving credit
agreement (incorporated by reference to Exhibit 4.4 to the
September 1999 10-Q).
10.1 Deluxe Corporation 1996 Annual Incentive Plan (as amended *
August 9, 1996) (incorporated by reference to Exhibit 10.4
to the Company's report on Form 10-Q for the Quarter ended
September 30, 1996 (the "September 1996 10-Q"), filed with
the Commission on November 14, 1996).
10.2 Deluxe Corporation Stock Incentive Plan (as amended *
October 31, 1997), including the Deluxe Corporation
Non-Employee
60
<PAGE>
Director Stock and Deferral Plan attached as Annex 1
thereto (incorporated by reference to Exhibit 10.2 to the
1997 10-K).
10.3 Deluxe Corporation Performance Share Plan (incorporated by *
reference to Exhibit 10.6 to the September 1996 10-Q).
10.4 Deluxe Corporation Employee Stock Purchase Plan *
(incorporated by reference to Exhibit 10.7 to the
September 1996 10-Q).
10.5 Deluxe Corporation Deferred Compensation Plan *
(incorporated by reference to Exhibit (10)(A) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995 (the "1995 10-K")).
10.6 Deluxe Corporation Supplemental Benefit Plan (incorporated *
by reference to Exhibit (10)(B) to the 1995 10-K).
10.7 Description of Deluxe Corporation Non-employee Director *
Retirement and Deferred Compensation Plan (incorporated by
reference to Exhibit 10.14 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996 (the
"1996 10-K").
10.8 Description of Initial Compensation and Employment *
Arrangement with John A. Blanchard III (incorporated by
reference to Exhibit 10(G) to the 1995 10-K).
10.9 Deluxe Corporation 1998 DeluxeSHARES Plan (incorporated by *
reference to Exhibit 10.9 to the 1997 10-K).
10.10 Description of modification to the Deluxe Corporation *
Non-Employee Director Retirement and Deferred Compensation
Plan (incorporated by reference to Exhibit 10.10 to the
1997 10-K).
10.11 Description of John A. Blanchard III Supplemental Pension *
Plan (incorporated by reference to Exhibit 10(H) in the
1995 10-K).
10.12 Description of Severance Arrangement with Thomas W. *
VanHimbergen. (incorporated by reference to Exhibit 10.15
to the 1997 10-K).
61
<PAGE>
10.13 Description of Severance Arrangement with Lawrence J. *
Mosner (incorporated by reference to Exhibit 10.19 to the
1997 10-K).
10.14 Description of non-employee Director Compensation Filed
Arrangements. herewith
10.15 Stock and Asset Purchase Agreement made as of December 31, *
1998 among Deluxe Corporation, Current, Inc., Se/PDI
Acquisition Corporation and Taylor Corporation
(incorporated by reference to Exhibit 10.21 to the
Company's Current Report on Form 8-K dated January 15,
1999).
10.16 Executive Retention Agreement, dated as of January 9, *
1998, between John A. Blanchard and Deluxe Corporation
(incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 (the "May 1998 10-Q").
10.17 Executive Retention Agreement, dated as of January 9, *
1998, between Ronald E. Eilers and Deluxe Corporation
(incorporated by reference to Exhibit 10.5 of the May 1998
10-Q).
10.18 Executive Retention Agreement, dated as of January 9, *
1998, between Deluxe Corporation and John H. LeFevre
(incorporated by reference to Exhibit 10.6 of the May 1998
10-Q).
10.19 Executive Retention Agreement, dated as of January 9, *
1998, between Deluxe Corporation and Lawrence J. Mosner
(incorporated by reference to Exhibit 10.7 of the May 1998
10-Q).
10.20 Schedule identifying other Executive Retention Agreements *
omitted for this Report on Form 10-K and the differences
between such Agreements and those filed herewith
(incorporated by reference to Exhibit 10.23 to the
Company's Annual Report Form 10-k for the year ended
December 31, 1998).
10.21 Amendment, dated November 1, 1999, to Executive Retention Filed
Agreement, dated as of January 9, 1998, between John A. herewith
Blanchard and Deluxe Corporation.
62
<PAGE>
10.22 Schedule identifying other Amendments to Executive Filed
Retention Agreements omitted for this Annual Report on herewith
Form 10-K and the differences between such Agreements and
those filed herewith.
10.23 Deluxe Corporation 2000 Employee Stock Purchase Plan (as Filed
amended March 29, 2000). herewith
12.4 Statement re: computation of ratios. Filed
herewith
21.1 Subsidiaries of the Registrant. Filed
herewith
23 Consent of Experts and Counsel (incorporated by reference *
to page F-1 of this Annual Report on Form 10-K).
24.1 Power of attorney. Filed
herewith
27.1 Financial Data Schedule for the year ended December 31, Filed
1999. herewith
27.2 Financial Data Schedule for the year ended December 31, Filed
1998. herewith
27.3 Financial Data Schedule for the year ended December 31, Filed
1997 herewith
99.1 Risk Factors and Cautionary Statements. Filed
herewith
- ------------------
*Incorporated by reference
63
<PAGE>
Note to recipients of Form 10-K: Copies of exhibits will be furnished upon
written request and payment of the Company's reasonable expenses ($.25 per page)
in furnishing such copies.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of St.
Paul, State of Minnesota.
DELUXE CORPORATION
Date: March 28, 2000 By: /s/ John A. Blanchard III
-------------------------------------
John A. Blanchard III
Chairman of the Board of Directors,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities
indicated on March 28,2000.
SIGNATURE TITLE
- --------- -----
By /s/ John A. Blanchard III Chairman of the Board of Directors,
------------------------------- President and Chief Executive Officer
John A. Blanchard III (Principal Executive Officer)
By /s/ Thomas W. VanHimbergen Executive Vice President and Chief
------------------------------- Financial Officer (Principal Financial
Thomas W. VanHimbergen Officer and Principal Accounting Officer)
By /s/ Lawrence J. Mosner Vice Chairman
-------------------------------
Lawrence J. Mosner
*
-------------------------------
James J. Renier Director
*
-------------------------------
Barbara B. Grogan. Director
*
-------------------------------
Stephen P. Nachtsheim Director
*
-------------------------------
Calvin W. Aurand, Jr. Director
*
-------------------------------
Donald R. Hollis Director
64
<PAGE>
*
-------------------------------
Robert C. Salipante Director
*
-------------------------------
Jack Robinson Director
*
-------------------------------
Hatim A. Tyabji Director
*By: /s/ John A. Blanchard III
--------------------------
John A. Blanchard III
Attorney-in-Fact
65
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
2-96963, 33-53585, 33-57261, 333-03625, 33-48967 and 333-95739 on Form S-8 and
33-32279, 33-58510 and 33-62041 on Form S-3 of our report dated January 26,
2000, incorporated by reference in this Annual Report on Form 10-K of Deluxe
Corporation for the year ended December 31, 2000.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Minneapolis, Minnesota
March 28, 2000
F-1
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this report:
Exhibit Page
Number Description Number
------ ----------- ------
10.17 Description of non-employee Director Compensation
Arrangements.
10.21 Amendment, dated November 1, 1999, to Executive Retention
Agreement, dated as of January 9, 1998, between John A.
Blanchard and Deluxe Corporation.
10.22 Schedule Identifying other Amendments to Executive
Retention Agreement Omitted from this Report on Form
10-K.
10.23 Deluxe Corporation 2000 Employee Stock Purchase Plan (as
amended March 29, 2000).
12.4 Statement re: computation of ratios.
21.1 Subsidiaries of the Registrant.
24.1 Power of attorney.
27.1 Financial Data Schedule for the year ended December 31,
1999.
27.2 Financial Data Schedule for the year ended December 31,
1998.
27.3 Financial Data Schedule for the year ended December 31,
1997
99.1 Risk Factors and Cautionary Statements
Exhibit 10.17
DESCRIPTION OF NON-EMPLOYEE DIRECTORS
COMPENSATION ARRANGEMENTS
Directors who are employees of the Company do not receive compensation for their
service on the Board other than their compensation as employees. During 1998,
Directors who were not employees of the Company ("Independent Directors") each
received a $50,000 annual board retainer, payable quarterly. An additional
$12,500 annual committee retainer was paid to the chair of each committee and a
$7,500 annual committee retainer was paid to each other member of a committee.
Fees are not paid for attendance at meetings. In addition to the foregoing,
Independent Directors may receive compensation for the performance of duties
assigned by the Board or its Committees that are considered beyond the scope of
the ordinary responsibilities of Directors or Committee members.
In November 1997, the Company adopted the Deluxe Corporation Non-Employee Stock
and Deferral Plan (the "Director Plan"). The purpose of the Director Plan is to
provide an opportunity for Independent Directors to increase their ownership of
Common Stock and thereby align their interest in the long-term success of the
Company with that of the Company's other shareholders. Under the Director Plan,
each Independent Director may irrevocably elect to receive, in lieu of cash,
shares of Common Stock having a fair market value equal to at least 50% of his
or her annual board and committee retainer (collectively, the "Retainer"). The
shares of Common Stock receivable pursuant to the Director Plan are issued
quarterly or, at the option of the Independent Director, credited to the
Director in the form of deferred restricted stock units. These units vest and
are converted into shares of Common Stock on the earlier of the tenth
anniversary of the February 1st of the year following the year in which the
Independent Director ceases to serve on the Company's Board of Directors or such
other date as is elected by the Independent Director in his or her deferral
election.
Each restricted stock unit receives dividend equivalent payments equal to the
dividend payment on one share of Common Stock. Any restricted stock units issued
pursuant to the Director Plan will vest and be converted into shares of Common
Stock in connection with certain defined changes in control of the Company. All
shares of Common Stock issued pursuant to the Director Plan are issued under the
Stock Incentive Plan and must be held by the Independent Director receiving them
for a minimum period of six months from the date of issuance.
Each new Independent Director receives a one-time grant of 1,000 shares of
restricted stock under the Stock Incentive Plan as of the date of his or her
initial election to the Board of Directors. The restricted stock vests in equal
installments on the dates of the Company's regular shareholders' meetings in
each of the three years following the date of grant, provided that the Director
remains in office immediately following the regular meeting. Restricted stock
awards also vest immediately upon an Independent Director's retirement from the
Board in accordance with the Company's policy with respect to mandatory
retirement.
<PAGE>
In 1997, each Independent Director elected at the 1997 Meeting received a
non-qualified option to purchase 1,000 shares of the Company's Common Stock
under the Stock Incentive Plan on the date of the 1997 Meeting. These options
have an exercise price equal to the fair market value of the underlying Common
Stock on the date of grant, became fully exercisable six months after the date
of grant and will expire on the tenth anniversary of such date. The options also
terminate three months following the date upon which a participant ceases to be
a Director of the Company. This option program was discontinued in 1998.
Benefits under the Company's previous Board retirement plan were frozen
following the adoption of the Director Plan. As a result, no additional benefits
will be accrued for current Directors or be offered to newly elected Directors.
Under the current provisions of the Board retirement plan, Independent Directors
with at least five years of service as an Independent Director who resign or are
not nominated for re-election will receive an annual payment equal to the annual
Board retainer in effect on July 1, 1997 ($30,000 per year) for the number of
years during which the retiree served on the Board as an Independent Director
prior to October 31, 1997. In calculating a Director's eligibility for benefits
under this plan, partial years of service are rounded up to the nearest whole
number. Retirement payments do not extend beyond the lifetime of the retiree and
are contingent upon the retiree's remaining available for consultation with
management and refraining from engaging in any activity in competition with the
Company. All of the current Independent Directors (other than Hatim Tyabji) are
eligible for benefits under this plan. Allen F. Jacobson, who retired from the
Board in January 1999, is entitled to receive benefits under this plan for up to
seven years following his retirement and Whitney MacMillan, who retired from the
Board in May 1999, will be eligible to receive benefits for up to 10 years
following his retirement.
Exhibit 10.21
Rev. 10-28-99
AMENDMENT TO EXECUTIVE RETENTION AGREEMENT
This Amendment to Executive Retention Agreement ("Amendment") is made as of the
1st day of November, 1999, by and between Deluxe Corporation (the "Company") and
John A. Blanchard III ("Executive").
WHEREAS, the Company and Executive entered into an Executive Retention Agreement
dated January 9, 1998 which was intended to assure the Company of Executive's
continued dedication notwithstanding the possibility, threat or occurrence of a
Change of Control or Other Business Combination (as defined in the Executive
Retention Agreement, hereinafter referred to as the "Retention Agreement"), all
as provided in and subject to the provisions of the Retention Agreement;
WHEREAS, since entering the Retention Agreement, the Company has considered
other strategic alternatives which may involve a spin off, split up or other
similar strategy ("Strategic Alternative") which are not covered by the
Retention Agreement;
WHEREAS, the Board of Directors of the Company has determined that it is in the
best interests of the Company and its shareholders to reduce the inevitable
distractions associated with, and to assure the Company of the continued
dedication of the Executive notwithstanding, the possible implementation of one
of the Strategic Alternatives and has, therefore, caused the Company to enter
this Amendment;
NOW, THEREFORE, in consideration of these premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Company and Executive agree as follows:
1. The capitalized terms in this Amendment shall have the meanings
ascribed to them in the Retention Agreement unless otherwise
defined herein.
2. Section I.G.2 is hereby deleted in its entirety and replaced by
the following provision:
"(a) a sale, spin off, split up or other similar divestiture by
the Company of all or a substantial portion of its non-check
printing assets, business units and/or Affiliates (excluding those
assets, business units and Affiliates that have been offered for
sale prior to January 9, 1998), whether or not the Company
receives consideration in connection therewith (the "Non-Check
Printing Businesses"), or the sale, spin off, split up or other
similar divestiture by the Company of all or a substantial portion
of its check printing assets, business units and/or Affiliates,
whether or not the Company receives consideration in connection
therewith (the "Non-Check Printing Businesses") or (b) the
creation and public issuance of any class of Company securities
that is intended to track the assets, business or performance of
the Check
<PAGE>
Printing Businesses or the Non-Check Printing Businesses, whether
or not the Company receives consideration in connection with the
issuance thereof or whether such publicly issued securities
represent all or a portion of the Company's interest in the Check
Printing Businesses or the Non-Check Printing Businesses."
3. Insert a new sentence at the end of Section IV.C.1., as follows:
"For avoidance of doubt, the occurrence of an Other Business
Combination described in clause (a) of Section I.G.2. shall
constitute a diminution of Executive's position, authority, duties
and responsibilities within the meaning of this Section, whether
or not Executive is offered, accepts or continues employment by
the Company, a purchaser or any entity resulting from or created
by the Other Business Combination."
4. Insert the following at the end of Section III.B.2, as follows:
"If the compensation plan under which Executive receives an Annual
Incentive Payment permits the Executive to elect to receive other
consideration (such as, for example, shares or units of the
Company's common stock) in lieu of cash or to defer the receipt of
any such payment (whether in cash or other form of consideration),
and Executive makes the election to receive such consideration or
to defer receipt of such payment, the Annual Incentive Payment
herein shall be deemed to have been made at the time and to be
equal to the amount of cash Executive would otherwise have
received, had Executive not made such election. Any such amount
shall also be included in the computation of the Recent Annual
Incentive Payment."
5. Insert the following at the end of Section III. B.3:
"In order to prevent dilution of the benefits or potential
benefits to Executive associated with stock-based compensation
awards made to Executive prior to the Effective Date, the Company
shall make the adjustments to the number of shares subject to the
said stock-based awards and, if applicable, the exercise price
thereof (which may include the issuance of new or replacement
awards and/or awards involving the securities of any entity that
results from a split-up, spin off or similar corporate division),
contemplated by Section 4 (c) of the Deluxe Corporation Stock
Incentive Plan, or any similar provision contained in a plan under
which such stock-based compensation awards were made, or in the
absence of a plan, or a similar provision in the plan under which
such stock-based compensation awards were made, as if such
provision had been included in the relevant award agreement or
plan under which such stock-based compensation awards were made to
Executive."
6. Insert a new Section V.A.3.(e), as follows:
"Unless Executive is provided the benefits described in clause (d)
hereof, and if, and to the extent that, the number of shares
and/or exercise price of stock based awards made to Executive have
not previously been adjusted as provided in Section III. B.3.,
2
<PAGE>
in order to prevent dilution of the benefits or potential benefits
to Executive associated with stock-based compensation awards made
to Executive, the Company shall make the adjustments to the number
of shares subject to the said stock-based awards and, if
applicable, the exercise price thereof (which may include the
issuance of new or replacement awards and/or awards involving the
securities of any entity that results from a split-up, spin off or
similar corporate division), contemplated by Section 4 (c) of the
Deluxe Corporation Stock Incentive Plan, or any similar provision
contained in a plan under which such stock-based compensation
awards were made, or in the absence of a plan, or a similar
provision in the plan under which such stock-based compensation
awards were made, as if such provision had been included in the
relevant award agreement or plan under which such stock-based
compensation awards were made to Executive. If Executive is
compensated under the provisions of clause (d) hereof, in
determining the economic equivalent value therein provided, the
Company shall take into account the adjustments herein described."
7. Delete the words "without adjustment in the case of death or
Disability" appearing in the last sentence of Section V.A.1.(c).
8. The last sentence of Section VIII.A. is hereby deleted in its
entirety and replaced by the following provision:
"For purposes of determining the amount of the Gross-Up Payment,
the Executive shall be deemed to pay federal income tax at the
highest marginal rate of federal income taxation in the calendar
year in which the Gross-Up Payment is to be made (determined by
giving affect to the maximum loss of itemized deductions that
could be suffered by the Executive by virtue of his receipt of the
Gross-Up Payment) and state and local income taxes at the highest
marginal rate of taxation in the state and locality of Executive's
residence on the Date of Termination (or if there is no Date of
Termination, then the date on which the Gross-Up Payment is
calculated for purposes of this Section VIII.A.), net of the
maximum reduction in federal income taxes which could be obtained
from deduction of such state and local taxes."
9. This Amendment shall be retroactive, taking effect as of the date
of the Retention Agreement, and, except as modified herein, the
Retention Agreement shall continue in full force and effect in
accordance with the terms thereof.
IN WITNESS WHEREOF, that parties hereto have executed this Amendment as
of the day and year first above written.
DELUXE CORPORATION Executive
By: /s/ John H. LeFevre /s/ John A. Blanchard III
------------------------- -------------------------
John H. LeFevre John A. Blanchard III
Title: General Counsel
3
Exhibit 10.22
SCHEDULE IDENTIFYING OTHER
AMENDMENTS TO EXECUTIVE RETENTION AGREEMENTS
OMITTED FROM THIS REPORT ON FORM 10-K
The Registrant has also entered into Amendments to its Executive Retention
Agreements with John H. LeFevre, Morris Goodwin Jr., Thomas W. VanHimbergen and
Lawrence J. Mosner. Apart from the names of the parties thereto these amendments
are substantially identical to the Amendment to the Executive Retention
Agreement with John A. Blanchard, a copy of which was filed as Exhibit 10.21 to
this Annual Report on Form 10-K.
EXHIBIT 10.23
DELUXE CORPORATION
2000
EMPLOYEE STOCK PURCHASE PLAN
(AS AMENDED MARCH 29, 2000)
SECTION 1. CERTAIN DEFINITIONS.
1.01. PLAN. The term "Plan" shall mean the Employee Stock Purchase Plan, the
terms and provisions of which are set forth herein.
1.02. COMPANY. The term "company" shall mean Deluxe Corporation.
1.03. SHARES. The term "Shares" shall mean the $1 par value Common Shares of the
company.
1.04. PARTICIPANT. The term "Participant" shall mean a Full-Time Employee of the
company or of its Participating Subsidiaries, who is eligible to participate in
the Plan and who has elected to participate in the manner set forth in the Plan.
1.05. CURRENT COMPENSATION. The term "Current Compensation" shall mean all
regular wage, salary, and commission payments (including periodic sales
commission bonuses) paid by the company to a Participant in accordance with the
terms of his employment, including payments made to him under the short term
disability or paid time off plan of the company or subsidiary of which the
Participant is an employee in effect at the applicable time, but excluding all
overtime earnings, bonus and other incentive payments and awards, and all other
forms of extra compensation.
1.06. QUARTER DATE. The term "Quarter Date" shall mean the first business day of
each February, May, August, and November, commencing with the effective date of
the Plan and ending with the last such date during the term of this Plan, a
"business" day being, for this purpose, a trading day on the New York Stock
Exchange.
1.07. FULL-TIME EMPLOYEE. The term "Full-Time Employee" means, with respect to
employees of the company, all employees (including officers and directors who
are also employees of the company) who are employed on a full-time basis and
whose regularly scheduled work week consists of (i) prior to May 1, 2000, at
least forty (40) hours and (ii) from and after May 1, 2000 at least thirty-two
(32) hours.With respect to employees of subsidiaries, "Full-Time Employee" means
employees who are considered full-time employees under the employment policies
of their company. "Full-Time Employees" does not include seasonal or temporary
employees or independent contractors.
<PAGE>
1.08. STOCK PURCHASE ACCOUNT. The term "Stock Purchase Account" means a current
bookkeeping record maintained by the company of cumulative payroll deductions
made from the Current Compensation of each Participant in the Plan as reduced by
amounts applied toward the purchase of Shares under the Plan.
1.09. PARTICIPATING SUBSIDIARIES. The term "Participating Subsidiaries" shall
mean each subsidiary of the company that is not an Excluded Subsidiary.
1.10. EXCLUDED SUBSIDIARY. The term "Excluded Subsidiary" shall mean those
subsidiaries of the company that are designated as such by the Plan
Administrator.
1.11. PLAN ADMINISTRATOR. The term "Plan Administrator" shall mean the board of
directors of the company or any committee appointed by such board.
SECTION 2. ELIGIBLE EMPLOYEES AND ELECTION TO PARTICIPATE.
2.01. Each Full-Time Employee of the company and its Participating Subsidiaries
shall be eligible to participate in the Plan commencing with the Quarter Date on
which, or next following, the date on which he or she completes twelve (12)
consecutive months of employment with the company or its subsidiaries, provided
that an approved leave of absence shall not be deemed to terminate an employee's
continuous employment. Notwithstanding the foregoing, no employee shall be
granted any right to purchase Shares hereunder if such employee, immediately
after such a right to purchase is granted, would own, directly or indirectly,
within the meaning of Section 423(b)(3) and Section 424(d) of the Internal
Revenue Code of 1986, as amended, Shares possessing five percent (5%) or more of
the total combined voting power or value of all the classes of the capital stock
of the company or of all of its affiliates.
2.02. An eligible employee may elect to participate in the Plan by completing a
form known as "Payroll Deduction Authorization," which authorizes regular
payroll deduction from the employee's Current Compensation, beginning with the
first payroll period ending after a Quarter Date, provided the authorization is
received by the company's Employee Services Department at least fifteen days
prior to each Quarter Date. Payroll deductions shall continue until the employee
withdraws or ceases to be eligible to participate in the Plan.
2.03. Employees of an Excluded Subsidiary shall not be eligible to participate
in the Plan unless and until they transfer employment to the company or a
Participating Subsidiary or the Plan Administrator should redesignate the
Excluded Subsidiary as a Participating Subsidiary. In any such event, the period
during which an employee was employed by the Excluded Subsidiary shall, unless
otherwise determined by the Plan Administrator, be treated as employment by the
company or a Participating Subsidiary for purposes of determining the employee's
eligibility under Section 2.01 to participate in the Plan following such
transfer or redesignation.
<PAGE>
SECTION 3. PAYROLL DEDUCTIONS AND STOCK PURCHASE ACCOUNT.
3.01. A Participant may elect payroll deductions of any multiple of one percent
not less than three percent nor more than ten percent of his Current
Compensation. A Participant may, at any time, but only once in any twelve-month
period, increase or reduce the percentage of his or her payroll deduction within
the foregoing limitations by filing a "Notice of Change," such change to become
effective with the first payroll period commencing on or after the receipt of
the Notice of Change by the company's Employee Services Department.
3.02. Payroll deductions shall be credited currently to the Participant's Stock
Purchase Account. A Participant may not make any separate cash payment into his
Stock Purchase Account.
3.03. No interest will be paid upon payroll deductions or upon any amount
credited to, or on deposit in, an employee's Stock Purchase Account.
SECTION 4. PURCHASE OF SHARES.
4.01. On each Quarter Date, each Participant shall automatically have purchased
for him that number of whole Shares, not less than two, as can be purchased with
the amount in his or her Stock Purchase Account on such Quarter Date.
4.02. The per-Share purchase price of Shares purchased shall be seventy-five
percent (75%) of the fair market value of the Shares on the Quarter Date,
rounded up to the next higher full cent. The fair market value on any day means
the closing price of the Shares on the New York Stock Exchange on such day as
reported by the WALL STREET JOURNAL, MIDWEST EDITION.
SECTION 5. STOCK PURCHASE ACCOUNT BALANCE.
5.01. Any funds remaining in a Participant's Stock Purchase Account after the
purchase of Shares on a Quarter Date shall remain in his or her Stock Purchase
Account and be applied toward the purchase of Shares on the next Quarter Date,
unless the Participant withdraws from the Plan.
SECTION 6. WITHDRAWAL FROM THE PLAN.
6.01. A Participant may, at any time, by written notice to the Employee Services
Department, withdraw from the Plan and cease making any further payroll
deductions. In such event, the company shall refund, within thirty (30) days,
the entire balance, if any, in the employee's Stock Purchase Account. Once an
employee withdraws from the Plan, or his or her employment is terminated, the
employee shall not be eligible to re-enter the Plan for a period of twelve (12)
months. For purposes of the foregoing sentence, a transfer of an employee to an
Excluded Subsidiary or a designation of such employee's employer as an Excluded
Subsidiary shall not be deemed a termination of employment requiring the
employee to accrue an additional year of service time in the event the employee
thereafter transfers to a Participating Subsidiary or the designation of such
employee's employer is subsequently changed to a Participating Subsidiary.
<PAGE>
6.02. Participation in the Plan shall cease upon the date of a Participant's
termination of employment, death, transfer to other than full-time status,
transfer to an Excluded Subsidiary or a change in the designation of a
Participant's employer to an Excluded Subsidiary; and any amounts theretofore
credited to the individual's Stock Purchase Account shall be refunded within
thirty (30) days to the former Participant or to his or her estate; provided
that if during their lifetime a Participant has delivered to the Employee
Services Department a notice in writing, upon a form furnished by the company,
to pay such amount in the event of the Participant's death to a specified person
or persons, such amount in the event of the Participant's death, shall be
refunded to such person or persons whose designation as aforesaid has not been
revoked by the Participant during his or her lifetime. An approved leave of
absence shall not be deemed a termination of employment for purposes of this
section.
SECTION 7. TRANSFERABILITY.
7.01. Stock purchase benefits granted hereunder may not be assigned,
transferred, pledged, or hypothecated (whether by operation of law or otherwise)
and shall not be subject to execution, attachment or similar process. Any
attempted assignment, transfer, pledge, hypothecation, or other disposition or
levy of attachment or similar process upon the stock purchase benefits shall be
null and void and without effect.
7.02. The funds accumulated in a Stock Purchase Account may not be assigned,
transferred, pledged or hypothecated in any way, and any attempted assignment,
transfer, pledge, hypothecation or other disposition of the funds accumulated in
the Stock Purchase Account shall be null and void and without effect.
7.03. The Plan Administrator may, from time to time, establish or modify minimum
required holding periods for Shares purchased by Participants under the Plan
and, in connection therewith, may establish such rules and regulations as it
determines to be necessary or appropriate for the administration of such minimum
holding periods, including, without limiting the generality of the authority
herein, by requiring that the Shares issued under the Plan be restricted or bear
a legend against transfer or by requiring periodic certifications by
Participants concerning compliance with such minimum required holding periods,
provided that the establishment of or any change to any minimum required holding
period shall be made effective on a Quarter Date and that notice thereof shall
be given to Participants on or before the commencement of the calendar quarter
ending on such Quarter Date by such means as the Plan Administrator determines
to be appropriate in the circumstances. The failure of a Participant to receive
any such notice shall not affect the establishment of any such minimum holding
period or any change thereto with respect to that or any other Participant.
<PAGE>
SECTION 8. SHARE CERTIFICATES.
8.01. Shares purchased under the Plan may be originally issued in certificated
or uncertificated form, as determined by the Plan Administrator. Shares issued
under the Plan may contain restrictions against transfer (including applicable
legends to that effect) as provided in Section 7.03.
8.02. The company shall not be required to issue or deliver any Shares purchased
prior to registration under the Securities Act of 1933 or registration or
qualification under any state law if such registration is required. The company
will use its best efforts to accomplish such registration, if and to the extent
required or determined desirable, not later than a reasonable time following a
Quarter Date, and issuance of Shares may be deferred until such registration is
accomplished.
8.03. An employee shall have no interest in the Shares purchased until a Share
certificate representing the same is issued or an appropriate book-entry is made
with the transfer agent reflecting such purchase
8.04. The Share certificates or book-entries representing Shares issued under
the Plan shall be registered in the name of the Participant or jointly in the
name of the Participant and another person, as the Participant may direct.
SECTION 9. EFFECTIVE DATE AND AMENDMENT OR TERMINATION OF PLAN.
9.01. The Plan shall become effective on the date fixed by the board of
directors of the company; provided, however, that the date fixed by the board of
directors as the effective date of the Plan shall coincide with a Quarter Date.
9.02. The board of directors of the company may at any time terminate or amend
the Plan.
9.03. The Plan shall automatically terminate on the fifth (5th) anniversary date
of the Quarter Date it became effective (or next ensuing business day, as the
case may be).
SECTION 10. STOCK PLAN COMMITTEE.
10.01. In administering the Plan, it will be necessary to follow various laws
and regulations. It may be necessary from time to time to change or waive
requirements of the Plan to conform with law, to meet special circumstances not
anticipated or covered in the Plan, or to carry on successful operations of the
Plan. Therefore, the company reserves the right, exercisable by the Plan
Administrator, to make variations in the provisions of the Plan for such
purposes and to determine any questions which may arise regarding interpretation
and application of the provisions of the Plan. The determination of the Plan
Administrator as to the interpretation and operation of the Plan shall be final
and conclusive, provided that any such determination by a committee appointed by
the board of directors of the company shall be subject to review by such board.
<PAGE>
SECTION 11. STOCK DIVIDEND OR RECLASSIFICATION, MERGER, OR CONSOLIDATION.
11.01. Upon the payment of any stock dividend or reclassification by way of
split-up in the number of Shares of the company, the total number of Shares
authorized by Section 12 to be sold under the Plan shall be adjusted
accordingly.
11.02. If the company is merged into or consolidated with one or more
corporations during the Plan, appropriate adjustments shall be made to give
effect thereto on a equitable basis in terms of issuance of Shares of the
corporation surviving the merger or of the consolidated corporation, as the case
may be.
SECTION 12. SHARES TO BE SOLD.
12.01. The number of Shares authorized to be sold under the Plan during the
current renewal period, which commences February 1, 2000, shall not exceed 5
million.
SECTION 13. NOTICES.
13.01. Notices to the company pertaining to the Plan may be addressed as
follows:
Deluxe Corporation
Attention: Employee Benefits Department
Post Office Box 64235
St. Paul, MN 55164-0235
Exhibit 12.4
DELUXE CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
Earnings
- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income from Continuing Operations
before Income Taxes $324,655 $242,915 $115,150 $118,765 $169,319 $246,706 $235,913
Interest expense
(excluding capitalized interest) 8,506 8,273 8,822 10,649 13,099 9,733 10,070
Portion of rent expense under
long-term operating leases
representative of an interest factor 14,640 15,126 13,621 13,467 14,761 13,554 13,259
Amortization of debt expense 263 122 122 121 84 84 84
-------- -------- -------- -------- -------- -------- --------
TOTAL EARNINGS $348,064 $266,436 $137,715 $143,002 $197,262 $270,077 $259,326
Fixed charges
- -------------
Interest Expense
(including capitalized interest) 9,479 9,664 $ 9,742 $ 11,978 $ 14,714 $ 10,492 $ 10,555
Portion of rent expense under
long-term operating leases
representative of an interest factor 14,640 15,126 13,621 13,467 14,761 13,554 13,259
Amortization of debt expense 263 122 122 121 84 84 84
-------- -------- -------- -------- -------- -------- --------
TOTAL FIXED CHARGES $ 24,382 $ 24,912 $ 23,485 $ 25,566 $ 29,559 $ 24,130 $ 23,898
RATIO OF EARNINGS
TO FIXED CHARGES: 14.3 10.7 5.9 5.6 6.7 11.2 10.9
</TABLE>
Exhibit 21.1
DELUXE CORPORATION SUBSIDIARIES
Chex Systems, Inc. (Minnesota)
Deluxe Analytic Research Technologies, Inc. (Minnesota)
Designer Checks Inc. (Alabama)
Direct Checks Unlimited, Inc. (Colorado)
Deluxe Electronic Payment Systems Canada, Inc. (Canada)
DLX Check Printers, Inc. (Minnesota)
DLX Check Texas, Inc. (Minnesota)
eFunds Holding Ltd. (United Kingdom)
eFunds Corporation (Delaware)
Deluxe Financial Services, Inc. (Minnesota)
Deluxe Financial Services Texas, L.P. (Texas)
iDLX Corporation (Delaware)
iDLX International B.V. (Netherlands)
Deluxe Mexicana S.A. de C.V. (Mexico) (50% owned)
Deluxe Overseas, Inc. (Minnesota)
Deluxe Payment Protection Systems, Inc. (Delaware)
eFunds International Limited (United Kingdom)
eFunds Corporation (California)
iDLX Holdings N.V. (Netherlands)
iDLX Technology Partners, Inc. (Delaware)
iDLX Technology Partners Private Limited (India)
PPS Holding Company, Inc. (Minnesota)
PPS Services 1 Inc. (Minnesota)
PPS Services 2 Inc. (Minnesota)
Paper Payment Services LLC (Minnesota)
Exhibit 24.1
POWER OF ATTORNEY
Each of the undersigned directors and officers of DELUXE CORPORATION, a
Minnesota corporation, hereby constitutes and appoints John A. Blanchard III,
Thomas W. VanHimbergen, Lois M. Martin and John H. LeFevre his true and lawful
attorneys-in-fact, and each of them, with full power to act without the other,
to sign the Company's annual report on Form 10-K for the year ended December 31,
1999, and any and all amendments to such report, and to file the same and any
such amendment, with any exhibits, and any other documents required in
connection with such filing, with the Securities and Exchange Commission under
the provisions of the Securities Exchange Act of 1934.
Date
/s/ John A. Blanchard III 3/17/00
- -----------------------------------------------------------------------
John A. Blanchard III, Director and Principal Executive Officer
/s/ Thomas W. VanHimbergen 3/17/00
- -----------------------------------------------------------------------
Thomas W. VanHimbergen, Principal
Financial Officer and Principal Accounting Officer
/s/ Lawrence J. Mosner 3/17/00
- -----------------------------------------------------------------------
Lawrence J. Mosner, Director
/s/ James J. Renier 3/17/00
- -----------------------------------------------------------------------
James J. Renier, Director
/s/ Barbara B. Grogan 3/17/00
- -----------------------------------------------------------------------
Barbara B. Grogan, Director
/s/ Stephen P. Nachtsheim 3/17/00
- -----------------------------------------------------------------------
Stephen P. Nachtsheim, Director
/s/ Calvin W. Aurand, Jr. 3/17/00
- -----------------------------------------------------------------------
Calvin W. Aurand, Jr., Director
/s/ Donald R. Hollis March 17, 2000
- -----------------------------------------------------------------------
Donald R. Hollis, Director
/s/ Robert C. Salipante 3/17/00
- -----------------------------------------------------------------------
Robert C. Salipante, Director
/s/ Jack Robinson 3/17/00
- -----------------------------------------------------------------------
Jack Robinson, Director
/s/ Hatim A. Tyabji 3-17-2000
- -----------------------------------------------------------------------
Hatim A. Tyabji, Director
Exhibit 99.1
RISK FACTORS AND CAUTIONARY STATEMENTS
When used in this Annual Report on Form 10-K and in future filings by the
Company with the Securities and Exchange Commission (the "Commission"), in the
Company's press releases, letters to shareholders and in oral statements made by
the Company's representatives, the words or phrases "should result," "are
expected to," "targeted," "will continue," "will approximate," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are necessarily subject to
certain risks and uncertainties, including those discussed below, that could
cause actual results to differ materially from the Company's historical
experience and its present expectations or projections. Caution should be taken
not to place undue reliance on any such forward-looking statements, which speak
only as of the date made. The factors listed below could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ from any opinions or statements expressed with respect
thereto. Such differences could be material and adverse.
The Company will not undertake and specifically declines any obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances occurring after
the date of such statements or to reflect the occurrence of anticipated or
unanticipated events. This discussion supersedes the discussion in the Company's
current Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
Earnings Estimates; Cost Reductions. From time to time, representatives of the
Company may make predictions or forecasts regarding the Company's future
results, including estimated earnings or earnings from operations. Any forecast,
including the Company's current statements that it expects to achieve a minimum
of 11 percent annual growth in earnings in 2000, and that it has a target of
generating cumulative EBITDA (earnings before interest, income taxes,
depreciation and amortization) in excess of $2.3 billion over the next five
years, regarding the Company's future performance reflects various assumptions.
These assumptions are subject to significant uncertainties, and, as a matter of
course, many of them will prove to be incorrect. Further, the achievement of any
forecast depends on numerous factors (including those described in this
discussion), many of which are beyond the Company's control. In addition, it is
not expected that the earnings growth projected for 2000 will be representative
of results that may be achieved in subsequent years.
As a result, there can be no assurance that the Company's performance will be
consistent with any management forecasts or that the variation from such
forecasts will not be material and adverse. Investors are cautioned not to base
their entire analysis of the Company's business and prospects upon isolated
predictions, but instead are encouraged to utilize the entire available mix of
historical and forward-looking information made
<PAGE>
available by the Company, and other information affecting the Company and its
products, when evaluating the Company's prospective results of operations.
In addition, representatives of the Company may occasionally comment on the
perceived reasonableness of published reports by independent analysts regarding
the Company's projected future performance. Such comments should not be
interpreted as an endorsement or adoption of any given estimate or range of
estimates or the assumptions and methodologies upon which such estimates are
based. Generally speaking the Company does not make public its own internal
projections, budgets or estimates. Undue reliance should not be placed on any
comments regarding the conformity, or lack thereof, of any independent estimates
with the Company's own present expectations regarding its future results of
operations. The methodologies employed by the Company in arriving at its own
internal projections and the approaches taken by independent analysts in making
their estimates are likely different in many significant respects. Although the
Company may presently perceive a given estimate to be reasonable, changes in the
Company's business, market conditions or the general economic climate may have
varying effects on the results obtained through the use of differing analyses
and assumptions. The Company expressly disclaims any continuing responsibility
to advise analysts or the public markets of its view regarding the current
accuracy of the published estimates of outside analysts. Persons relying on such
estimates should pursue their own independent investigation and analysis of
their accuracy and the reasonableness of the assumptions on which they are
based.
Recent Strategic Initiatives. The Company has recently announced the creation of
Electronic Payment Solutions, a new business unit comprised of eFunds
Corporation (f/k/a Deluxe Electronic Payment Systems, Inc.), Debit Bureau(SM),
Chex Systems, Inc., Deluxe Payment Protection Systems, Inc. and a check
conversion company that it purchased in February 1999. It is hoped that
combining these businesses into a single business unit will increase their
opportunities for revenue and profit growth. The Company has also announced an
intention to transfer certain resources and responsibilities from its corporate
group to its operating units in an effort to enable them to more efficiently
respond to market opportunities and conditions. The precise benefits, if any,
that may result from these initiatives cannot presently be quantified. Further,
accomplishing the goals of the reorganization is dependent upon identifying and
developing new products and services, some or all of which may be directed at
markets not now served by the Company. The successful execution of this strategy
is also dependant upon identifying and retaining personnel and third parties
with the expertise needed to develop and implement the Company's strategic
initiatives. Portions of the initiative may also involve identifying and
reaching agreements with strategic alliance partners and acquisition targets.
Unexpected delays are common in endeavors of this type and can arise from a
variety of sources, many of which will likely have been unanticipated. The
likelihood that the reorganization will achieve its goal of incrementally
increasing the revenues and profits of the businesses included in this business
unit must be considered in light of the problems, expenses, complications and
delays frequently encountered in connection with the development and execution
of new business initiatives and the competitive, rapidly changing environment in
which this business will operate. As a result, although the Company
<PAGE>
has set annual revenue growth targets for this business unit at 20 percent for
the years 2000 and 2001, and hopes to achieve higher levels of growth in
subsequent years, there can be no assurance that these targets will in fact be
achieved. In addition, the implementation of these initiatives could lead to a
restructuring charge in an amount that, although not yet quantified, may be
material.
In January 2000, the Company announced that its Board of Directors approved a
plan to combine its Electronic Payment Solutions, Professional Services and
Government Services segments into a separate company to be called eFunds
Corporation ("eFunds") and that eFunds plans to issue shares of its common stock
to the public through an initial public offering. Unanticipated delays and
disruptions are common with regard to endeavors of this type due to business or
market developments, changes in the equity markets and other factors that are
difficult or impossible for the Company to control. As a result, there can be no
assurance that this initial public offering can be consummated in a timely
manner, or at all.
Although it is under no obligations to do so, the Company has announced that,
following any initial public offering by eFunds, it plans to distribute all of
its shares of eFunds common stock to its shareholders who tender shares of the
Company's common stock in an exchange offer (the "Split-Off). The Split-Off is
contingent upon the Company receiving a favorable tax ruling from the Internal
Revenue Service, and no assurance can be given that such a ruling will in fact
be obtained.
Professional Services. There can be no assurance that the services proposed to
be offered by the Company's Professional Services business unit will achieve
market acceptance in either the United States or India. To date, the operations
of this business unit have not been profitable. In addition, the Company has
only limited operational experience in India. The successful development of
Professional Services is subject to all of the risks inherent in the
establishment of a new business enterprise, including the absence of an extended
operating history, reliance on key personnel, a need to attract and retain
qualified employees in a highly competitive labor market, a competitive
environment characterized by numerous well-established and well-capitalized
competitors and the risk that the reputation of the business could be more
adversely affected by any customer service issues or problems than would be the
case with a more established firm. Further, in developing Professional Services,
the Company faces additional complexities arising from the maintenance of
certain of its functions in India. In addition to the normal complications that
arise in connection with the management of remote locations, operations in
foreign countries are subject to numerous potential obstacles including, among
other things, cultural differences, political unrest, export controls,
governmental interference or regulation (both domestic and foreign), currency
fluctuations, personnel issues and varying competitive conditions. There can be
no assurance that one or more of these factors, or additional causes or
influences, many of which are likely to have been unanticipated and beyond the
ability of the Company to control, will not operate to inhibit the success of
this business unit. As a result, there can be no assurance that this business
unit will achieve its projected rate of growth or that this unit will ever
generate significant revenues or profits or provide an adequate return on the
Company's investment.
<PAGE>
Debit Bureau(SM). The Company has announced its intention to offer decision
support tools and information to retailers and financial institutions that offer
or accept direct debit-based products, such as checking accounts, ATM cards,
debit cards and Internet payments. To date, this effort has primarily been
directed towards the creation of the supporting data warehouse and research
regarding the utility and value of the data available to the Company for use in
this area. There can be no assurance that the Company's Debit Bureau(SM)
initiative will result in the introduction of a significant number of new
products or services or that any new products or services introduced by the
Company will generate revenues in material amounts. In any event, the continued
development of Debit Bureau(SM) is expected to require a significant level of
investment by the Company.
IDDA Initiative. The Company has recently announced a initiative to develop an
Internet demand deposit account opening product. This product has only recently
been introduced and there can be no assurance that the system will achieve
widespread market acceptance or generate incremental revenues in material
accounts. In addition, technological change occurs at a rapid pace in the
Internet applications area, and there can be no assurance that competing
products or systems will not be introduced that will narrow or limit the market
for the Company's system or render it obsolete.
Share Repurchase Program. In April 1999, the Board of Directors of the Company
authorized the repurchase of up to 10,000,000 shares of the Company's Common
Stock. During 1999, the Company purchased 8,186,600 of the shares included in
this authorization. The completion of this program is, however, dependant upon
market conditions, including the availability of a sufficient number of shares
at prices determined by management of the Company to be reasonable, the amount
of cash available to the Company for this purpose and the Company's other
investment opportunities. Accordingly, if appropriate conditions or
circumstances do not prevail during the planned repurchase period, the Company
will not purchase the entire allotment of shares authorized by the Board.
Timing and Amount of Anticipated Cost Reductions. With regard to the results of
the Company's ongoing cost reduction efforts (including the Company's current
review of its SG&A expense levels), there can be no assurance that the projected
annual cost savings will be fully realized or will be achieved within the time
periods expected. The Company has previously experienced unanticipated delays in
the planned roll-out of its on-line ordering system and Year 2000 moratoriums by
the Company's customers have delayed the Company's original schedule for
transferring customers to this system. There can be no assurances that
additional sources of delays will not be encountered. Any such event could
adversely affect the expected productivity improvements and delay the
realization or reduce the amount of the anticipated expense reductions.
In addition, the achievement of the targeted level of cost savings is dependent
upon the successful execution of a variety of other cost reduction strategies
throughout the Company's operations. These additional efforts include the
consolidation of the Company's purchasing process and certain administrative and
sales support
<PAGE>
organizations, headcount reductions and other efforts. The optimum means of
realizing many of these strategies is being evaluated by the Company in view of
the Company's recent efforts to transfer certain resources and responsibilities
from its corporate group to its operating units. The goodwill amortization
associated with the Company's recent acquisitions of eFunds (Tustin), Designer
Checks and the remaining 50 percent ownership interest in its joint venture with
HCL Corporation of India, as well as any future acquisitions, may also act to
offset some of the benefits sought to be achieved through this program.
Unexpected delays, complicating factors and other hindrances are common in the
implementation of these types of endeavors and can arise from a variety of
sources, some of which are likely to have been unanticipated. The Company may
also incur additional charges against its earnings in connection with future
programs. A failure to timely achieve one or more of the Company's primary cost
reduction objectives could materially reduce the benefit to the Company of its
cost savings programs and strategies or substantially delay the full realization
of their expected benefits.
Further, there can be no assurance that increased expenses attributable to other
areas of the Company's operations or to increases in raw material, labor,
equipment or other costs will not offset some or all of the savings expected to
be achieved through the cost reduction efforts. Competitive pressures and other
market factors may also require the Company to share the benefit of some or all
of any savings with its customers or otherwise adversely affect the prices it
receives or the market for its products. As a result, even if the expected cost
reductions are fully achieved in a timely manner, such reductions are not likely
to be fully reflected by commensurate gains in the Company's net income, cash
position, dividend rate or the price of its Common Stock.
Other Dispositions and Acquisitions. In connection with its ongoing
restructuring and growth initiatives, the Company may also consider divesting or
discontinuing the operations of various business units and assets and the
Company may undertake one or more significant acquisitions. Any such divestiture
or discontinuance could result in write offs by the Company, some or all of
which could be significant. In addition, a significant acquisition could result
in future earnings dilution for the Company's shareholders. Acquisitions
accounted for as a purchase transaction could also adversely affect the
Company's reported future earnings due to the amortization of the goodwill and
other intangibles associated with the purchase.
Consumer Privacy Protection. Laws and regulations relating to consumer privacy
protection could harm the Company's ability to collect and use data, increase
its operating costs or otherwise harm its business. There is an increasing
public concern over consumer privacy rights. The Congress and state legislatures
have adopted and are considering adopting laws and regulations restricting the
purchase, sale and sharing of personal information about consumers. The new
federal financial modernization law, known as the Gramm-Leach-Bliley Act,
imposes significant new consumer information privacy requirements on a wide
range of companies. The Gramm-Leach-Bliley Act requires covered companies to
develop and implement policies to protect the security and confidentiality of
consumers' nonpublic information and to disclose those policies
<PAGE>
to consumers before a customer relationship is established and annually
thereafter. The Gramm-Leach-Bliley Act also mandates government agencies to
issue standards to implement these requirements. The Company's eFunds business
unit could experience increased costs in order to comply with any new standards.
In addition, the Gramm-Leach-Bliley Act requires covered companies to give an
opt-out notice to consumers before sharing consumer information with third
parties. The opt-out notice requirement is subject to several exceptions, which
the Company believes apply to its business, thereby allowing banks to continue
to provide nonpublic personal information to it. It is possible that new state
or federal legislation or regulations could restrict or prohibit the Company's
ability to collect and use some types of consumer information, which could have
an adverse effect on its business.
Competition. Although the Company believes it is the leading check printer in
the United States, it faces considerable competition from other smaller
companies in both its traditional sales channel to financial institutions and
from direct mail sellers of checks. From time to time, one or more of these
competitors reduce the prices of their products in an attempt to gain volume.
The corresponding pricing pressure placed on the Company has resulted in reduced
profit margins for the Company's check printing business in the past and similar
pressures can reasonably be expected in the future. The Company has also
experienced some loss of business due to its refusal to meet competitive prices
that fell below the Company's revenue and profitability per unit targets. The
timing and amount of reduced revenues and profits that may result from these
competitive pressures is not ascertainable.
Check printing is, and is expected to continue to be, an essential part of the
Company's business and the principal source of its operating income for at least
the next several years. A wide variety of alternative payment delivery systems,
including credit cards, debit cards, smart cards, ATM machines, direct deposit,
electronic and other bill paying services, home banking applications and
Internet-based payment services, are in various stages of maturity or
development and additional systems will likely be introduced. The Company
believes that there will continue to be a substantial market for checks for the
foreseeable future, although a reduction in the volume of checks used by
consumers is expected. The rate and the extent to which alternative payment
methods will achieve consumer acceptance and replace checks cannot, however, be
predicted with certainty. A surge in the popularity of any of these alternative
payment methods could have a material, adverse effect on the demand for the
Company's primary products and its account verification and payment protection
services. Although the Company believes that its recent acquisition of an
electronic check conversion company may contribute to the continued viability of
the paper check as a payment mechanism by accelerating processing times and
reducing processing costs, there can be no assurance that the check conversion
technology developed by this new subsidiary and its competitors will achieve
widespread acceptance or have a measurable impact on the sales volume of the
Company's principal products.
The introduction of the alternative payment methodologies described above has
also resulted in an increased interest by third parties in transaction
processing, authorization
<PAGE>
and verification, as well as other methods of effecting electronic payments, as
a source of revenue. This increased interest level has led to increased
competition for the Company's transaction processing and authorization
businesses. The payment processing industry is characterized by continuously
evolving technology and intense competition. Many participants in the industry
have substantially greater capital resources and research and development
capabilities than the Company. There can be no assurance that the Company's
competitors and potential competitors will not succeed in developing and
marketing technologies, services or products that are more accepted in the
marketplace than those offered or envisioned by the Company. Such a development
could result in the loss of significant customers by the Company's eFunds
business unit, render the Company's technology and proposed products obsolete or
noncompetitive or otherwise materially hinder the achievement of the growth
targets established for this business unit. Initiatives that may be undertaken
by the Company in connection with Internet commerce-based activities would be
particularly susceptible to these types of competitive risks and the rapid
development and deployment of Internet technologies, products and services may
present unanticipated competitive risks to the Company's current business that
may be material and adverse.
Effect of Financial Institution Consolidation. Recent consolidation within the
banking industry has resulted in increased competition and consequent pressure
on check prices. This concentration greatly increases the importance to the
Company of retaining its major customers and attracting significant additional
customers in an increasingly competitive environment. Although the Company
devotes considerable efforts towards the development of a competitively priced,
high quality suite of products for the financial services industry, there can be
no assurance that significant customers will not be lost or that any such loss
can be counterbalanced through the addition of new customers or by expanded
sales to the Company's remaining customers.
Revised Analytic Approach. The Company has announced that it is applying a new
methodology for evaluating the Company's projected return on various forms of
investment. The use of this methodology represents a revised analytic approach
by the Company and the long-term benefits to be derived therefrom cannot
presently be precisely determined.
Raw Material, Postage Costs and Delivery Costs. Increases in the price of paper
and the cost of postage can adversely affect the profitability of the Company's
printing and mail order businesses. Events such as the 1997 UPS strike can also
adversely impact the Company's margins by imposing higher delivery costs.
Competitive pressures and overall trends in the marketplace may have the effect
of inhibiting the Company's ability to reflect increased costs of production or
delivery in the prices of its products.
Limited Source of Supply. The Company's check printing business utilizes a paper
printing plate material that is available from only a limited number of sources.
The Company believes it has a reliable source of supply for this material and
that it maintains an inventory sufficient to avoid any production disruptions in
the event of an interruption of its supply. In the event, however, that the
Company's current supplier becomes unwilling or unable to supply the required
printing plate material at an acceptable price and the Company is unable to
locate a suitable alternative source within a reasonable time frame, the Company
would be forced to convert its facilities to an alternative printing process.
Any such conversion would require the unanticipated investment of significant
sums and there can be no assurance that the conversion could be accomplished
without production delays.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 140,465
<SECURITIES> 25,713
<RECEIVABLES> 115,775
<ALLOWANCES> 5,814
<INVENTORY> 11,616
<CURRENT-ASSETS> 418,749
<PP&E> 654,630
<DEPRECIATION> 359,845
<TOTAL-ASSETS> 992,643
<CURRENT-LIABILITIES> 404,666
<BONDS> 115,542
0
0
<COMMON> 72,020
<OTHER-SE> 345,288
<TOTAL-LIABILITY-AND-EQUITY> 992,643
<SALES> 1,650,500
<TOTAL-REVENUES> 1,650,500
<CGS> 741,241
<TOTAL-COSTS> 1,348,406
<OTHER-EXPENSES> (31,067)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,506
<INCOME-PRETAX> 324,655
<INCOME-TAX> 121,633
<INCOME-CONTINUING> 203,022
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 203,022
<EPS-BASIC> 2.65
<EPS-DILUTED> 2.64
</TABLE>
<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> 268,389
<SECURITIES> 41,133
<RECEIVABLES> 145,079
<ALLOWANCES> 3,487
<INVENTORY> 12,001
<CURRENT-ASSETS> 608,080
<PP&E> 763,922
<DEPRECIATION> 423,845
<TOTAL-ASSETS> 1,171,519
<CURRENT-LIABILITIES> 430,695
<BONDS> 106,321
0
0
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0
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