UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 2 to
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarterly period ending June 30, 2000
------------------------------------------------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________________ to ______________________
Commission file number: 1-7945
-----------------------
DELUXE CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0216800
------------------------------------------ ------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3680 Victoria St., N. Shoreview, Minnesota 55126-2966
------------------------------------------ ------------------------------------
(Address of principal executive offices) (Zip Code)
(651) 483-7111
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
The number of shares outstanding of registrant's common stock, par value $1.00
per share, at July 21, 2000 was 72,331,268.
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DELUXE CORPORATION AND SUBSIDIARIES
***CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, 2000
(Unaudited)
(As Revised, December 31,
See Note 1) 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 91,168 $ 140,465
Restricted custodial cash 6,311 3,429
Marketable securities 18,171 25,713
Trade accounts receivable, net of allowance for doubtful accounts of $3,311 and
$5,814, respectively 126,141 115,775
Inventories:
Raw material 2,478 3,110
Semi-finished goods 7,788 7,245
Finished goods 1,239 1,261
Supplies 13,872 15,007
Deferred advertising 11,776 17,189
Deferred income taxes 19,215 14,206
Prepaid expenses and other current assets 45,567 75,349
------------ ------------
Total current assets 343,726 418,749
------------ ------------
LONG-TERM INVESTMENTS 65,335 40,846
RESTRICTED CASH 28,748 28,939
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 40,679 41,157
Buildings and building improvements 163,069 165,028
Machinery and equipment 437,089 448,445
------------ ------------
Total 640,837 654,630
Less accumulated depreciation 368,486 359,845
------------ ------------
Property, plant, and equipment - net 272,351 294,785
INTANGIBLES
Cost in excess of net assets acquired - net 141,287 51,705
Internal use software - net 163,592 142,465
Other intangible assets - net 15,794 15,154
------------ ------------
Total intangibles 320,673 209,324
------------ ------------
Total assets $ 1,030,833 $ 992,643
============ ============
</TABLE>
2
<PAGE>
DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, 2000
(Unaudited)
(As Revised, December 31,
See Note 1) 1999
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 55,285 $ 60,876
Accrued liabilities:
Wages, including vacation pay 54,641 54,228
Employee profit sharing and pension 16,449 33,490
Accrued income taxes 38,991 28,405
Accrued rebates 26,308 28,281
Accrued contract losses 27,734 20,599
Other 107,951 111,330
Short-term debt 19,813 63,100
Long-term debt due within one year 102,755 4,357
------------ ------------
Total current liabilities 449,927 404,666
------------ ------------
LONG-TERM DEBT 13,499 115,542
DEFERRED INCOME TAXES 46,571 46,322
OTHER LONG-TERM LIABILITIES 8,144 8,805
MINORITY INTEREST IN NET ASSETS OF SUBSIDIARY 31,882 --
SHAREHOLDERS' EQUITY
Common shares - $1 par value (authorized 500,000,000 shares; issued: 2000 -
72,331,225 shares; 1999 - 72,019,898 shares) 72,331 72,020
Additional paid-in capital 38,936 --
Retained earnings 371,185 346,617
Unearned compensation -- (47)
Accumulated other comprehensive income (1,642) (1,282)
------------ ------------
Shareholders' equity 480,810 417,308
------------ ------------
Total liabilities and shareholders' equity $ 1,030,833 $ 992,643
============ ============
</TABLE>
See Notes to Unaudited Consolidated Financial Statements***
3
<PAGE>
DELUXE CORPORATION AND SUBSIDIARIES
***CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
June 30, June 30,
-------- --------
2000 2000
----- ----
(As Revised, (As Revised,
See Note 1) 1999 See Note 1) 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 406,756 $ 407,841 $ 811,182 $ 821,918
Cost of sales 180,209 184,260 351,894 370,338
------------ ------------ ------------ ------------
GROSS MARGIN 226,547 223,581 459,288 451,580
Selling, general and administrative expense 165,984 146,719 325,919 296,421
------------ ------------ ------------ ------------
Income from operations 60,563 76,862 133,369 155,159
OTHER INCOME (EXPENSE)
Other income (expense) (1,234) 2,518 540 4,121
Interest expense (3,567) (1,677) (7,248) (3,458)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 55,762 77,703 126,661 155,822
PROVISION FOR INCOME TAXES 20,921 29,924 47,498 60,010
------------ ------------ ------------ ------------
NET INCOME $ 34,841 $ 47,779 $ 79,163 $ 95,812
============ ============ ============ ============
NET INCOME PER SHARE - BASIC $ 0.48 $ 0.61 $ 1.10 $ 1.22
NET INCOME PER SHARE - DILUTED $ 0.48 $ 0.61 $ 1.10 $ 1.21
CASH DIVIDENDS PER COMMON SHARE $ 0.37 $ 0.37 $ 0.74 $ 0.74
</TABLE>
See Notes to Unaudited Consolidated Financial Statements***
4
<PAGE>
DELUXE CORPORATION AND SUBSIDIARIES
***CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------
2000
(As Revised,
See Note 1) 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 79,163 $ 95,812
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 21,748 27,855
Amortization of intangibles 23,274 12,768
Asset impairment charges -- 117
Stock purchase discount 1,582 2,481
Deferred income tax (4,797) --
Changes in assets and liabilities, net of effects from acquisitions and sales of
businesses:
Restricted cash (2,691) (13,336)
Trade accounts receivable (9,776) 21,127
Inventories 1,134 2,754
Accounts payable (5,916) (4,850)
Other assets and liabilities (2,842) (49,046)
------------ ------------
Net cash provided by operating activities 100,879 95,682
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of marketable securities with maturities of more than 3 months 7,627 17,438
Purchases of marketable securities with maturities of more than 3 months -- (17,915)
Purchases of capital assets (42,792) (51,592)
Payments for acquisitions, net of cash acquired (115,991) (35,666)
Net proceeds from sales of businesses, net of cash sold -- 24,447
Proceeds from sales of capital assets 11,909 52
Loans to others 32,500 --
Other (6,363) (104)
------------ ------------
Net cash used in investing activities (113,110) (63,340)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (payments) proceeds from short-term debt (43,863) 25,065
Payments on long-term debt (1,299) (8,038)
Net proceeds from issuance of subsidiary stock 61,995 --
Payments to retire common stock (1,047) (199,853)
Proceeds from issuing stock under employee plans 4,746 16,020
Cash dividends paid to shareholders (53,471) (59,372)
------------ ------------
Net cash used in financing activities (32,939) (226,178)
------------ ------------
NET CASH USED BY CERTAIN INTERNATIONAL OPERATIONS DURING DECEMBER 1999 (SEE
NOTE 9) (4,127)
------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (49,297) (193,836)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 140,465 268,389
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 91,168 $ 74,553
============ ============
</TABLE>
See Notes to Unaudited Consolidated Financial Statements***
5
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated balance sheet as of June 30, 2000, the consolidated
statements of income for the quarters and six months ended June 30, 2000 and
1999, and the consolidated statements of cash flows for the six months ended
June 30, 2000 and 1999 are unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of such financial statements are
included. Other than those discussed in the notes below, such adjustments
consist only of normal recurring items. Interim results are not necessarily
indicative of results for a full year. The consolidated financial statements and
notes are presented in accordance with instructions for Form 10-Q, and do not
contain certain information included in the Company's consolidated annual
financial statements and notes. The consolidated financial statements and notes
appearing in this Report should be read in conjunction with the Company's
consolidated audited financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
***REVISION TO CONSOLIDATED FINANCIAL STATEMENTS
In January 2000, the Company announced that its board of directors
approved a plan to operate the Company's eFunds segment as a separate,
independent, publicly traded company to be called eFunds Corporation (eFunds).
eFunds issued 5.5 million shares of its common stock to the public in June 2000.
Subsequent to this initial public offering, the Company continues to own 40
million shares of eFunds common stock, representing 87.9% of eFunds' total
outstanding common shares. A gain of $30.1 million was previously recognized
during the second quarter of 2000 for the difference between the net proceeds
from the offering and the carrying amount of the Company's investment in eFunds.
The Company's accounting policy is to recognize gains (or losses) arising from
issuances of subsidiary stock in the statement of income for all issuances that
meet the conditions of Staff Accounting Bulletin No. 51, ACCOUNTING FOR SALES OF
STOCK BY A SUBSIDIARY (SAB 51), for statement of income treatment.
In October 2000, subsequent to the issuance of the Company's
consolidated financial statements as of and for the quarter and six months ended
June 30, 2000, the Company announced it plans to complete the separation of the
eFunds segment by means of a spin-off rather than by an exchange offer, or
split-off, as had previously been announced. The 40 million shares of eFunds
common stock currently owned by the Company will now be distributed on a
designated distribution date to every Deluxe shareholder of record on a
designated record date. Each shareholder will receive a fixed number of eFunds
shares for each Deluxe share owned. The spin-off is contingent upon obtaining
confirmation from the Internal Revenue Service (IRS) that the spin-off will be
tax-free to the Company and to its shareholders for U.S. federal income tax
purposes. The Company has the sole discretion to determine whether to proceed
with the spin-off based on the best interests of the Company's shareholders and
to determine the timing and other aspects of the transaction. Subject to these
conditions, the Company plans to complete the spin-off by December 31, 2000.
Because the Company is now planning to spin-off eFunds, the previous issuance of
eFunds common stock no longer meets the conditions for gain recognition, and
accordingly, the gain recorded by the Company must be unwound and treated as a
capital transaction under the guidance of SAB 51. The Company's financial
statements have been revised to reflect this treatment for the issuance of
eFunds common stock. A summary of selected amounts before and after the revision
is as follows (included in this summary are selected financial statement amounts
that were not affected by the revision):
As Previously As
Reported Revised
(Dollars in thousands)
----------------------
BALANCE SHEET AT JUNE 30, 2000
------------------------------
Cash $ 91,168 $ 91,168
Total Assets 1,030,833 1,030,833
Accrued Income Taxes 44,244 38,991
Total Current Liabilities 455,180 449,927
Shareholders' Equity 475,557 480,810
QUARTER ENDED JUNE 30, 2000
---------------------------
Income from Operations $ 60,563 $ 60,563
Income before Income Taxes 85,875 55,762
Provision for Income Taxes 26,174 20,921
Net Income 59,701 34,841
Net Income Per Share -- Basic 0.83 0.48
Net Income Per Share -- Diluted 0.83 0.48
6
<PAGE>
As Previously As
Reported Revised
(Dollars in thousands)
----------------------
SIX MONTHS ENDED JUNE 30, 2000
------------------------------
Income from Operations $ 133,369 $ 133,369
Income before Income Taxes 156,774 126,661
Provision for Income Taxes 52,751 47,498
Net Income 104,023 79,163
Net Income Per Share -- Basic 1.44 1.10
Net Income Per Share -- Diluted 1.44 1.10
***
***2. The Company's total comprehensive income for the quarters ended
June 30, 2000 and 1999 was $34.6 million and $46.6 million, respectively. Total
comprehensive income for the six months ended June 30, 2000 and 1999 was $78.8
million and $94.5 million, respectively. The Company's total comprehensive
income consists of net income, unrealized holding gains and losses on securities
and foreign currency translation adjustments.***
***3. 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>
Quarters Ended Six Months Ended
June 30, June 30,
-------- -------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income per share-basic:
Net income $ 34,841 $ 47,779 $ 79,163 $ 95,812
Weighted average shares outstanding 72,275 77,776 72,203 78,790
------------------------------------------------------------------------------------------------
Net income per share-basic $ 0.48 $ 0.61 $ 1.10 $ 1.22
================================================================================================
Net income per share-diluted:
Net income $ 34,841 $ 47,779 $ 79,163 $ 95,812
------------------------------------------------------------------------------------------------
Weighted average shares outstanding 72,275 77,776 72,203 78,790
Dilutive impact of options 77 312 72 275
Shares contingently issuable 6 19 4 14
------------------------------------------------------------------------------------------------
Weighted average shares and potential
dilutive shares outstanding 72,358 78,107 72,279 79,079
------------------------------------------------------------------------------------------------
Net income per share-diluted $ 0.48 $ 0.61 $ 1.10 $ 1.21
================================================================================================
</TABLE>
***
4. As of June 30, 2000, the Company had committed lines of credit for
$450.0 million available for borrowing and as support for commercial paper. One
of these committed lines of credit for $300 million expires on August 30, 2000.
The Company is currently evaluating an extension. The average amount drawn on
these lines during the first six months of 2000 was $37.4 million at a
weighted-average interest rate of 6.38%. As of June 30, 2000, no amounts were
outstanding under these lines of credit. 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%. As of June 30, 2000, the Company had $15.0 million
of commercial paper outstanding at an interest rate of 7.10%. The average amount
of commercial paper outstanding during the first six months of 2000 was $2.5
million at a weighted-average interest rate of 6.54%. No commercial paper was
issued during 1999.
The Company also had a $10.0 million line of credit, denominated in Indian
rupees, available to its international operations at an interest rate of 15.81%.
The average amount drawn on this line during the first six months of 2000 was
$4.3 million. As of June 30, 2000, $4.8 million was outstanding. The average
amount drawn on this line during 1999 was $2.7 million. As of December 31, 1999,
$3.1 million was outstanding.
7
<PAGE>
The Company had uncommitted bank lines of credit of $40.0 million available at
variable interest rates. The average amount drawn on these lines of credit
during the first six months of 2000 was $65 thousand at a weighted-average
interest rate of 6.47%. The average amount drawn on these lines of credit during
1999 was $1.5 million at a weighted-average interest rate of 5.12%. As of June
30, 2000 and December 31, 1999, no amounts were outstanding under 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 outstanding indebtedness and other securities of
the Company. As of June 30, 2000 and December 31, 1999, no such notes were
issued or outstanding.
5. 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 (EBT) services for the Southern Alliance
of States. In September 1997, the Company recorded a pretax charge of $40
million to reserve for this judgment and other related costs. In 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 consolidated
statement of income for the six months ended June 30, 1999.
6. The Company's consolidated balance sheets reflect restructuring
accruals of $7.9 million and $15.1 million as of June 30, 2000 and December 31,
1999, respectively, for employee severance costs, and $0.5 million and $1.1
million as of June 30, 2000 and December 31, 1999, respectively, for estimated
losses on asset dispositions.
During the second quarter of 2000, the Company recorded restructuring charges of
$1.4 million. These charges primarily related to the Paper Payment Systems
segment's transfer of certain data entry functions to the eFunds segment and
administrative reductions within the eFunds segment. These charges assume the
termination of approximately 185 employees, 30 of which are employed with the
eFunds segment. Additionally, the Company reversed $3.0 million of restructuring
charges relating to the Company's initiative to reduce selling, general and
administrative (SG&A) expense. This is due to higher attrition than anticipated
and the reversal of "early termination" payments to a group of employees. Under
the Company's severance program, employees are provided 60 days notice prior to
being terminated. In certain situations, the Company asks the employees to leave
immediately because they may have access to crucial infrastructure or
information. In these cases, severance includes this additional amount. In
certain situations, management decided to keep employees working for the 60 day
period and thus, a reduction in the restructuring reserves was required since
this pay was no longer severance, but an operating expense. These new
restructuring charges and reversals are reflected in SG&A expense in the
Company's consolidated statements of income for the quarter and six months ended
June 30, 2000.
During the first quarter of 1999, restructuring accruals of $2.0 million were
reversed. These reversals related to the Company's decision in 1999 to retain
the international operations of its eFunds segment. During the second quarter of
1999, restructuring accruals of $4.2 million were reversed. These amounts
related to the Company's initiative to reduce SG&A expense and to discontinue
production of direct mail products. The excess accrual occurred and was reversed
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. Additionally, excess accruals resulted from 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. Also
during the second quarter of 1999, the Company recorded restructuring accruals
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
collections business which was sold in December 1999. These accrual reversals
and the new restructuring accruals are reflected in the consolidated statement
of income for the quarter ended June 30, 1999 as cost of sales expense of $0.9
million, a reduction in SG&A expense of $1.2 million and other income of $2.3
million. These accrual reversals and the new restructuring accruals are
reflected in the consolidated statement of income for the six months ended June
30, 1999 as cost of sales expense of $0.9 million, a reduction in SG&A expense
of $3.2 million and other income of $2.3 million.
The cumulative activity for the severance portion of the Company's
restructuring accruals as of June 30, 2000 is as follows (dollars in millions):
8
<PAGE>
<TABLE>
<CAPTION>
SG&A Reductions Collection Ctr
Check Printing & Direct Mail Closing/ Data Entry eFunds
Plant Closings(1) Production(2) Reductions Transfer Reductions Total
----------------- ------------- ---------- -------- ---------- -----
No. of No. of No. of No. of No. of No. of
employees employees employees employees employees employees
affected Amount affected Amount affected Amount affected Amount affected Amount affected Amount
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Original accrual 4,970 $ 68.0 860 $ 21.2 70 $ 0.8 155 $ 0.9 30 $ 0.4 6,085 $ 91.3
Severance paid (4,290) (58.8) (430) (9.2) (70) (0.7) (10) (0.3) -- -- (4,800) (69.0)
Adjustments to
accrual (545) (5.9) (330) (8.4) -- (0.1) -- -- -- -- (875) (14.4)
-------------------------------------------------------------------------------------------------------------------
Balance,
June 30, 2000 135 $ 3.3 100 $ 3.6 -- $ 0.0 145 $ 0.6 30 $ 0.4 410 $ 7.9
-------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes charges recorded in 1996 and 1998 for plans to close financial
institution check printing plants and charges recorded in 1996 and 1997 for
reductions in support functions at corporate operations and other businesses,
implementation of a new order processing and customer service system and
implementation of process improvements in the post-press phase of check
production. 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.
(2) Includes charges recorded in 1998 for the Company's initiatives to reduce
SG&A expense and discontinue production of direct mail products.
The majority of the remaining severance costs are expected to be paid in 2000
with cash generated from the Company's operations.
The remaining accrual for estimated losses on asset dispositions as of June 30,
2000 relates to charges recorded in 1996 and 1998 for plans to close financial
institution check printing plants. These plant closures were completed during
the first quarter of 2000. Through June 30, 2000, losses of $14.5 million on the
disposition of the assets of these plants have been applied against the
restructuring reserves.
7. In February 2000, the Company acquired all of the outstanding shares
of Designer Checks for $97.0 million in cash. Designer Checks produces specialty
design checks and related products for direct sale to consumers and is 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 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. Total cost in excess of net assets acquired in the amount of $88.8
million is being amortized over 15 years.
8. In March 2000, the Company paid cash of $20.0 million for an
approximately 24% interest in a limited liability company that provides
automated teller machine management and outsourcing services to retailers and
financial institutions. This investment is being accounted for under the equity
method of accounting and is included in other long-term investments in the
Company's consolidated balance sheet as of June 30, 2000. The Company's
consolidated financial statements reflect the results of this business
subsequent to its acquisition date in other income (expense) within the
Company's eFunds segment. The difference between the carrying value of the
investment and the underlying equity in the net assets of the limited liability
company is being accounted for in the same manner as goodwill and is being
amortized over 15 years.
9. Effective January 1, 2000, certain of the international operations of
the eFunds segment, which had previously reported its results of operations and
financial position on a one-month lag, changed its reporting dates to coincide
with the rest of the Company's subsidiaries. This change, which was made in
conjunction the implementation of the Company's central accounting and financial
reporting system, will reflect the financial results of these operations on a
more timely basis and will improve operating and planning efficiencies. The
results of operations for this portion of the eFunds segment for the month of
December 1999 were excluded from the Company's consolidated statements of income
and were reflected as an adjustment to retained earnings during the first
quarter of 2000. These operations generated a net loss of $1.1 million in the
month of December 1999.
9
<PAGE>
10. During the second quarter of 2000, the Company recorded net charges
of $9.7 million for additional expected future losses on the contracts of the
eFunds segment's EBT business. This amount is reflected in cost of sales in the
Company's consolidated statements of income for the quarter and six months ended
June 30, 2000. In April 2000, the Company completed negotiations with the prime
contractor for a state coalition for which the Company provides EBT services.
Prior to this, the Company and the prime contractor were operating without a
binding, legally enforceable contract. The Company increased its accrual for
expected future losses on long-term service contracts by $12.2 million to
reflect the fact that the Company now had a definitive agreement with this
contractor. Offsetting this charge was the reversal of $2.5 million of
previously recorded contract loss accruals. These reversals resulted from
productivity improvements and cost savings from lower than anticipated
telecommunications and interchange expenses.
11. In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS,
which provides guidance in applying generally accepted accounting principles to
revenue recognition in financial statements. Application of this SAB did not
have a material impact on the Company's reported operating results or financial
position.
12. In January 2000, the Company announced that its board of directors
approved a plan to combine its Electronic Payment Systems, Professional Services
and Government Services segments into a separate, independent, publicly traded
company called eFunds Corporation (eFunds). As a result, the Company modified
its management reporting in the first half of 2000 and restated its segment
information for prior years to conform to the current operating structure which
presents the business units as two operating segments based on the nature of the
products and services offered by each: Paper Payment Systems and eFunds. Paper
Payment Systems provides checks and related products to financial institutions,
consumers and small businesses. eFunds provides transaction processing and risk
management services to financial institutions, retailers, electronic funds
transfer networks, e-commerce providers and government agencies and offers
information technology consulting and business process management services both
on a stand-alone basis and as a complement to its electronic payments business.
In December 1999, the Company sold its collections business for $74.4 million.
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. The Company's segments operate primarily in the United States. The
eFunds segment also has some international operations.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies as presented in the Company's notes
to the consolidated financial statements included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1999. In evaluating segment
performance, management focuses on income from operations and earnings before
interest, income taxes, depreciation and amortization (EBITDA). The income from
operations measurement utilized by management excludes special charges (e.g.,
certain restructuring charges, asset impairment charges, certain one-time
charges that management believes are not reflective of on-going operations,
etc.).
During 1999, 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 corporate asset balances were also allocated to the
segments. During 2000, the majority of the costs for these support functions
were incurred directly by the operating segments. The remaining holding company
expenses were allocated to the segments based on estimates of the costs which
would have been incurred by the operating segments if they were stand-alone,
independent entities. Intersegment sales are generally based on current market
pricing.
Prior to the Company's acquisition of the remaining 50% interest in HCL-Deluxe,
N.V. in April 1999, 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
period are reflected in the business segment information for the eFunds segment
as if the business had been a consolidated entity.
10
<PAGE>
Segment information for the quarter and six months ended June 30, 2000 and 1999
is as follows (dollars in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED PAPER PAYMENT TOTAL
JUNE 30, 2000 SYSTEMS eFUNDS SEGMENTS
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales to external customers $ 320,587 $ 86,169 $ 406,756
Intersegment sales -- 14,801 14,801
Operating income excluding special
charges 80,487 6,969 87,456
Special (recoveries) charges (2,128) 12,575 10,447
Operating income (loss) including
special charges 82,615 (5,606) 77,009
EBITDA 98,975 1,229 100,204
Depreciation and amortization expense 16,094 6,893 22,987
Segment assets 554,488 392,750 947,238
Capital purchases 14,665 7,226 21,891
--------------------------------------------------------------------------------------------
<CAPTION>
QUARTER ENDED PAPER PAYMENT TOTAL
JUNE 30, 1999 SYSTEMS eFUNDS SEGMENTS
--------------------------------------------------------------------------------------------
Net sales to external customers $ 303,788 $ 73,553 $ 377,341
Intersegment sales -- 1,051 1,051
Operating income excluding special
charges 76,399 1,396 77,795
Special charges -- 898 898
Operating income including special
charges 76,399 498 76,897
EBITDA 89,167 6,195 95,362
Depreciation and amortization expense 13,765 5,863 19,628
Segment assets 513,503 264,679 778,182
Capital purchases 16,322 8,959 25,281
--------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED PAPER PAYMENT TOTAL
JUNE 30, 2000 SYSTEMS eFUNDS SEGMENTS
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales to external customers $ 640,399 $ 170,783 $ 811,182
Intersegment sales -- 30,442 30,442
Operating income excluding special
charges 158,188 9,710 167,898
Special (recoveries) charges (2,128) 12,575 10,447
Operating income (loss) including
special charges 160,316 (2,865) 157,451
EBITDA 190,809 10,454 201,263
Depreciation and amortization expense 31,540 13,432 44,972
Segment assets 554,488 392,750 947,238
Capital purchases 26,751 16,023 42,774
--------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED PAPER PAYMENT TOTAL
JUNE 30, 1999 SYSTEMS eFUNDS SEGMENTS
--------------------------------------------------------------------------------------------
Net sales to external customers $ 615,659 $ 143,106 $ 758,765
Intersegment sales -- 1,642 1,642
Operating income excluding special
charges 152,205 7,062 159,267
Special charges -- 898 898
Operating income including special
charges 152,205 6,164 158,369
EBITDA 177,516 18,176 195,692
Depreciation and amortization expense 27,679 10,954 38,633
Segment assets 513,503 264,679 778,182
Capital purchases 33,711 16,718 50,429
--------------------------------------------------------------------------------------------
</TABLE>
Segment information reconciles to consolidated amounts as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
June 30, June 30,
-------- --------
NET SALES TO EXTERNAL CUSTOMERS 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total segment net sales to external customers $ 406,756 $ 377,341 $ 811,182 $ 758,765
Divested businesses not included in segments -- 32,151 -- 66,559
eFunds pre-acquisition elimination -- (1,651) -- (3,406)
------------------------------------------------------------------------------------------------------------
Total consolidated net sales to external
Customers $ 406,756 $ 407,841 $ 811,182 $ 821,918
------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
June 30, June 30,
-------- --------
OPERATING INCOME INCLUDING SPECIAL CHARGES 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total segment operating income $ 77,009 $ 76,897 $ 157,451 $ 158,369
Divested businesses not included in segments -- (959) -- 1,575
eFunds pre-acquisition elimination -- 587 -- 1,234
Unallocated holding company expenses (16,446) 337 (24,082) (6,019)
------------------------------------------------------------------------------------------------------------
Total consolidated operating income $ 60,563 $ 76,862 $ 133,369 $ 155,159
------------------------------------------------------------------------------------------------------------
</TABLE>
Holding company expenses consisted primarily of charges for certain liabilities
that are not allocated to the segments.
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
June 30, June 30,
-------- --------
DEPRECIATION AND AMORTIZATION EXPENSE 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total segment depreciation and amortization
Expense $ 22,987 $ 19,628 $ 44,972 $ 38,633
Divested businesses not included in segments -- 541 -- 2,081
eFunds pre-acquisition elimination -- (49) -- (143)
Unallocated holding company expense 33 26 50 52
------------------------------------------------------------------------------------------------------------
Total consolidated depreciation and amortization
Expense $ 23,020 $ 20,146 $ 45,022 $ 40,623
------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
June 30,
--------
TOTAL ASSETS 2000 1999
-----------------------------------------------------------------------------------
<S> <C> <C>
Total segment assets $ 947,238 $ 778,182
Assets of divested businesses not included in
Segments -- 74,637
Unallocated holding company assets 83,595 137,785
-----------------------------------------------------------------------------------
Total consolidated assets $1,030,833 $ 990,604
-----------------------------------------------------------------------------------
</TABLE>
Unallocated holding company assets consist primarily of cash, investments and
deferred tax assets relating to holding company activities.
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
June 30, June 30,
-------- --------
CAPITAL PURCHASES 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total segment capital purchases $ 21,891 $ 25,281 $ 42,774 $ 50,429
Divested businesses not included in segments -- 711 -- 1,293
eFunds pre-acquisition elimination -- -- -- (145)
Holding company capital purchases -- 3 18 15
-----------------------------------------------------------------------------------------------------
Total consolidated capital purchases $ 21,891 $ 25,995 $ 42,792 $ 51,592
-----------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Revenues are attributed to geographic areas based on the location of the assets
and employees producing the revenues. The Company's operations by geographic
area are as follows (in thousands):
<TABLE>
<CAPTION>
Net Sales to External Customers
Quarters Ended Six Months Ended Long-Lived Assets
June 30, June 30, June 30,
-------------------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
United States $402,242 $402,597 $802,748 $811,633 $265,993 $332,794
Foreign countries 4,514 5,244 8,434 10,285 6,358 5,163
-------------------------------------------------------------------------------------------
Total consolidated $406,756 $407,841 $811,182 $821,918 $272,351 $337,957
-------------------------------------------------------------------------------------------
</TABLE>
***13. In January 2000, the Company announced that its board of directors
approved a plan to operate the Company's eFunds segment as a separate,
independent, publicly traded company to be called eFunds. eFunds issued 5.5
million shares of its common stock to the public in June 2000. Subsequent to
this initial public offering, the Company continues to own 40 million shares of
eFunds common stock, representing 87.9% of eFunds' total outstanding common
shares. Proceeds from the offering, based on the offering price of $13.00 per
share, totaled $71.5 million ($62.0 million, net of estimated offering
expenses). The difference of $30.1 million between the net proceeds from the
offering and the carrying amount of the Company's investment in eFunds was
recorded as additional paid-in capital. The Company also recorded charges of
$7.2 million for payments which must be made to certain officers of the Company
under change of control and executive employment agreements. These charges are
reflected in SG&A expense in the Company's consolidated statements of income for
the quarter and six months ended June 30, 2000.
In October 2000, the Company announced that it plans to distribute all of its
shares of eFunds common stock to its shareholders through a spin-off transaction
rather than by an exchange offer, or split-off, as had been previously
announced. The 40 million shares of eFunds common stock currently owned by the
Company will now be distributed on a designated distribution date to every
Deluxe shareholder of record on a designated record date. Each shareholder will
receive a fixed number of eFunds shares for each Deluxe share owned. Because the
Company is planning to spin-off eFunds, the issuance of eFunds common stock in
June 2000 was treated as a capital transaction under the guidance of SAB 51 (see
Note 1).
The Company's plans for a spin-off are subject to receiving confirmation from
the IRS that the spin-off will be tax-free to the Company and to its
shareholders for U.S. federal income tax purposes. The Company has the sole
discretion to determine whether to proceed with the spin-off based on the best
interests of the Company's shareholders and to determine the timing and other
aspects of the transaction. Subject to these conditions, the Company plans to
complete the spin-off by December 31, 2000. The Company has submitted a request
to the IRS for confirmation that the spin-off will be tax-free to the Company
and to its shareholders for U.S. federal income tax purposes. The Company cannot
be certain when or whether it will receive this confirmation from the IRS, or
that the distribution by the Company will be completed. If consummated, the
Company would recognize the distribution of eFunds stock as a reduction of
retained earnings and would reflect eFunds results of operations as discontinued
operations in the Company's consolidated financial statements. If the Company
does not complete the spin-off, it will continue to control eFunds and the
Company and eFunds may not realize the anticipated benefits from the separation
of the two companies.
In connection with the initial public offering of eFunds and the anticipated
spin-off, the Company and eFunds have entered 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 initial public offering and the distribution of eFunds
stock, registration rights for the Company, intercompany loans, information
technology consulting and business process management services, indemnification,
data sharing, real estate matters, tax sharing and transition services. For
transition services, eFunds will compensate the Company for providing services
and will negotiate for such services with third-parties at mutually agreed upon
rates after the transition arrangements terminate. The transition period varies
depending on the agreement, but many transition services will terminate upon
completion of the distribution of eFunds stock. Some of the transition
agreements may be extended beyond the initial transition period. Additionally,
the Company has agreed to indemnify eFunds for future losses arising from any
litigation based on the conduct of the EBT and medical eligibility verification
businesses prior to eFunds' initial public offering in June 2000, and from
future losses on identified loss contracts in excess of the Company's $29.2
million accrual for contract losses as of April 30, 2000. The indemnification
obligation
14
<PAGE>
does not apply to losses covered by the existing reserves. The maximum amount of
litigation and contract losses for which the Company will indemnify eFunds is
$14.6 million. After the spin-off, any indemnification payments will be recorded
as other expense in the Company's consolidated statements of income. Prior to
the spin-off, any indemnification payments will be treated as capital
contributions.***
14. Certain amounts in 1999 have been reclassified to conform with the
2000 presentation. These changes had no impact on previously reported results of
operations or shareholders' equity.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
*** In January 2000, we announced that our board of directors approved a
plan to operate our eFunds segment as a separate, independent, publicly traded
company to be called eFunds Corporation (eFunds). eFunds issued 5.5 million
shares of its common stock to the public in June 2000. Subsequent to this
initial public offering, we continue to own 40 million shares of eFunds common
stock, representing 87.9% of eFunds' total outstanding common shares. A gain of
$30.1 million was previously recognized during the second quarter of 2000 for
the difference between the net proceeds from the offering and the carrying
amount of our investment in eFunds. Our accounting policy is to recognize gains
(or losses) arising from issuances of subsidiary stock in the statement of
income for all issuances that meet the conditions of Staff Accounting Bulletin
No. 51, ACCOUNTING FOR SALES OF STOCK BY A SUBSIDIARY (SAB 51), for statement of
income treatment.
In October 2000, subsequent to the issuance of our consolidated
financial statements as of and for the quarter and six months ended June 30,
2000, we announced a plan to complete the separation of the eFunds segment by
means of a spin-off rather than by an exchange offer, or split-off, as had
previously been announced. The 40 million shares of eFunds common stock which we
currently own will now be distributed on a designated distribution date to every
Deluxe shareholder of record on a designated record date. Each shareholder will
receive a fixed number of eFunds shares for each Deluxe share owned. The
spin-off is contingent upon obtaining confirmation from the Internal Revenue
Service (IRS) that the spin-off will be tax-free to us and to our shareholders
for U.S. federal income tax purposes. We have the sole discretion to determine
whether to proceed with the spin-off based on the best interests of our
shareholders and to determine the timing and other aspects of the transaction.
Subject to these conditions, we plan to complete the spin-off by December 31,
2000. Because we are now planning to spin-off eFunds, the previous issuance of
eFunds common stock no longer meets the conditions for gain recognition, and
accordingly, the gain we recorded must be unwound and treated as a capital
transaction under the guidance of SAB 51. Our financial statements have been
revised to reflect this treatment for the issuance of eFunds common stock. See
Note 1 to the unaudited consolidated financial statements.***
Company Profile
In January 2000, we announced that our board of directors approved a
plan to combine our Electronic Payment Systems, Professional Services and
Government Services segments into a separate, independent, publicly traded
company called eFunds Corporation. As a result, we modified our management
reporting in the first half of 2000 and restated our segment information for
prior years to conform to the current operating structure which presents our
business units as two operating segments based on the nature of the products and
services offered by each: Paper Payment Systems and eFunds. Paper Payment
Systems provides checks and related products to financial institutions,
consumers and small businesses. eFunds provides transaction processing and risk
management services to financial institutions, retailers, electronic funds
transfer networks, e-commerce providers and government agencies and offers
information technology consulting and business process management services both
on a stand-alone basis and as a complement to its electronic payments business.
In December 1999, we sold our collections business, which did not fit into our
new business model. Our segments operate primarily in the United States. The
eFunds segment also has some international operations.
***We have announced that we plan to complete the separation of eFunds
by means of a spin-off rather than by an exchange offer, or split-off, as had
been previously announced. The 40 million shares of eFunds common stock which we
currently own will now be distributed on a designated distribution date to every
Deluxe shareholder of record on a designated record date. Each shareholder will
receive a fixed number of eFunds shares for each Deluxe share owned. Our plans
for a spin-off are subject to receiving confirmation from the IRS that the
spin-off will be tax-free to us and to our shareholders for U.S. federal income
tax purposes. We have the sole discretion to determine whether to proceed with
the spin-off based on the best interests of our shareholders and to determine
the timing and other aspects of the transaction. Subject to these conditions, we
plan to complete the spin-off by December 31, 2000. We have submitted a request
to the IRS for confirmation that the spin-off will be tax-free to us and to our
shareholders for U.S. federal income tax purposes. We cannot be certain when or
whether we will receive this confirmation from the IRS, or that the distribution
will be
15
<PAGE>
completed. If consummated, we would recognize the distribution of eFunds stock
as a reduction of retained earnings and would reflect eFunds results of
operations as discontinued operations in our consolidated financial statements.
If we do not complete the spin-off, we will continue to control eFunds and we
and eFunds may not realize the anticipated benefits from the separation of the
two companies.***
Results of Operations - Quarter and Six Months Ended June 30, 2000 Compared to
the Quarter and Six Months Ended June 30, 1999
NET SALES - Net sales decreased $1.0 million, or 0.3%, to $406.8 million
during the second quarter of 2000 from $407.8 million during the second quarter
of 1999. 1999 second quarter sales included $32.2 million of sales from our
collections business which was sold in December 1999. With these sales excluded,
net sales increased 8.3% during the second quarter of 2000.
Net sales decreased $10.7 million, or 1.3%, to $811.2 million during the
first six months of 2000 from $821.9 million during the first six months of
1999. 1999 sales included $66.6 million of sales from our collections business
which was sold in December 1999. With these sales excluded, net sales increased
7.4% during the first six months of 2000.
Paper Payment Systems net sales increased $16.8 million, or 5.5%, to
$320.6 million in the second quarter of 2000 from $303.8 million in the second
quarter of 1999. Net sales increased $24.7 million, or 4.0%, to $640.4 million
in the first six months of 2000 from $615.7 million in the first six months of
1999. These increases were due, in part, to the acquisition in February 2000 of
Designer Checks which contributed revenues of $15.6 million during the second
quarter of 2000 and $26.8 million during the first six months of 2000.
Additionally, the segment experienced volume increases in its direct checks
business, increased revenue per unit for both its financial institution checks
and business forms businesses, a price increase for postage within its financial
institution checks business and a price increase for phone reorders in its
direct checks business. Partially offsetting these improvements was a decrease
in volume for the financial institution checks business due to lost customers.
The loss of business was due primarily to competitive pricing requirements that
fell below the segment's revenue and profitability per unit targets.
eFunds net sales increased $28.4 million, or 39.1%, to $101.0 million in
the second quarter of 2000 from $72.6 million in the second quarter of 1999. Net
sales increased $60.8 million, or 43.3%, to $201.2 million in the first six
months of 2000 from $140.4 million in the first six months of 1999. On a full
year pro forma basis, taking into account our acquisition of the remaining 50%
interest in HCL-Deluxe, N.V. in April 1999, net sales increased $26.4 million,
or 35.3%, to $101.0 million in the second quarter of 2000 from $74.6 million in
the second quarter of 1999 and $56.5 million, or 39.0%, to $201.2 million in the
first six months of 2000 from $144.7 million in the first six months of 1999.
These increases were due primarily to volume increases across virtually all
product lines, except the electronic benefits transfer (EBT) portion of this
segment, which experienced a slight decrease in revenues. Additionally, the
segment initiated business process management and information technology
consulting services for our Paper Payment Systems segment in 2000. Excluding
intersegment sales on a pro forma basis, taking into account the HCL-Deluxe,
N.V. acquisition in April 1999, eFunds net sales increased $12.6 million, or
17.2%, to $86.2 million in the second quarter of 2000 from $73.6 million in the
second quarter of 1999 and increased $27.7 million, or 19.3%, to $170.8 million
in the first six months of 2000 from $143.1 million in the first six months of
1999.
GROSS MARGIN - Gross margin increased $2.9 million, or 1.3%, to $226.5
million for the second quarter of 2000 from $223.6 million for the second
quarter of 1999. Gross margin increased $7.7 million, or 1.7%, to $459.3 million
for the first six months of 2000 from $451.6 million for the first six months of
1999. As a percentage of net sales, gross margin increased to 55.7% for the
second quarter of 2000 from 54.8% for the second quarter of 1999 and increased
to 56.6% for the first six months of 2000 from 54.9% for the first six months of
1999. Cost of sales for the second quarter of 2000 included net charges of $9.7
million for additional expected future losses on the contracts of the eFunds
segment's EBT business. In April 2000, we completed negotiations with the prime
contractor for a state coalition for which eFunds provides EBT services.
Previously, we were operating without a binding, legally enforceable contract
with this contractor. We increased our accrual for expected future losses on
long-term service contracts by $12.2 million to reflect the fact that we now
have a definitive agreement with this contractor. Offsetting this charge was the
reversal of $2.5 million of previously recorded contract loss accruals resulting
from productivity improvements and cost savings from lower than anticipated
telecommunications and interchange expenses. Excluding the net $9.7 million of
charges, our gross margin percentage would
16
<PAGE>
have been 58.1% for the second quarter of 2000 and 57.8% for the first six
months of 2000. These increases were partially due to the sale of our
collections business in December 1999. This business had gross margin
percentages of 21.2% for the second quarter of 1999 and 27.8% for the first six
months of 1999.
Paper Payment Systems gross margin percentage increased to 65.3% for the
second quarter of 2000 from 62.4% for the second quarter of 1999 and increased
to 64.9% for the first six months of 2000 from 61.9% for the same period in
1999. These increases were due to cost reductions realized from closing
financial institution check printing plants, continuing process improvements
within all businesses and the loss of lower margin customers within the
financial institution checks business. The last of the scheduled check printing
plant closings was completed during the first quarter of 2000, and we
consolidated two facilities into one at the end of the second quarter. We plan
to continue our process improvements and focus on increasing sales of higher
margin products during the remainder of 2000.
eFunds gross margin percentage decreased to 31.5% for the second quarter
of 2000 from 37.8% for the second quarter of 1999 and decreased to 36.4% for the
first six months of 2000 from 37.2% for the same period in 1999. Cost of sales
for the second quarter of 2000 included net charges of $9.7 million for
additional expected future losses on the contracts of the segment's EBT
business. Excluding these charges, eFunds' gross margin percentage would have
been 41.1% for the second quarter of 2000 and 41.3% for the first six months of
2000, showing improvement over 1999. These improvements were due to a shift
toward electronic customer inquiries in the account verification business which
generate higher margins, increased utilization of existing infrastructure, less
reliance on sub-contractors, an increasing portion of work being performed at
the India facilities where margins are higher and the implementation of cost
containment measures within the segment's EBT business.
***SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE - SG&A expense
increased $19.3 million, or 13.1%, to $166.0 million during the second quarter
of 1999 from $146.7 million during the second quarter of 2000. SG&A expense
increased $29.5 million, or 10.0%, to $325.9 million during the first six months
of 2000 from $296.4 million during the first six months of 1999. As a percentage
of net sales, SG&A expense increased to 40.8% during the second quarter of 2000
as compared to 36.0% during the second quarter of 1999 and increased to 40.2%
during the first six months of 2000 as compared to 36.1% during the first six
months of 1999. SG&A expense for the first six months of 2000 included net
restructuring reversals of $1.6 million, charges of $7.2 million for payments
due to certain officers under change of control and executive employment
agreements, as well as additional charges of $3.2 million for administrative
costs relating to the planned spin-off of the eFunds segment. SG&A expense for
the first six months of 1999 included net restructuring reversals of $3.2
million. Additionally, the increase in SG&A expense was due to a number of other
factors including the HCL-Deluxe, N.V. and Designer Checks acquisitions, as well
as increased marketing and infrastructure expenses for new and existing
products. These increases were partially offset by the sale of our collections
business in December 1999. The collections business had $7.8 million and $17.0
million of SG&A expense in the second quarter and first six months of 1999,
respectively.***
Paper Payment Systems SG&A expense increased 11.9% in the second quarter
of 2000 from the second quarter of 1999 and 11.5% for the first six months of
2000 from the first six months of 1999. This reflects increased spending on
Internet commerce infrastructure and additional capabilities for new ventures,
as well as increased marketing expenses for the direct checks business as it
continues to emphasize new customer acquisition. Additionally, the segment
experienced increased SG&A expense due to the acquisition of Designer Checks in
February 2000. Partially offsetting these increases was the net reversal of $2.1
million of restructuring charges in the second quarter of 2000.
eFunds SG&A expense increased 42.0% in the second quarter of 2000 from
the second quarter of 1999 and 70.1% for the first six months of 2000 from the
first six months of 1999. As a percentage of net sales, SG&A expense increased
to 37.1% during the second quarter of 2000 compared to 36.3% during the second
quarter of 1999 and increased to 37.9% during the first six months of 2000
compared to 31.9% during the first six months of 1999. These increases were due
to several factors, including the acquisition of HCL-Deluxe, N.V. in April 1999,
additional promotional advertising geared toward creating brand awareness, and
infrastructure investments. Additionally, in the first quarter of 1999 the
segment reversed $2.0 million of restructuring accruals from prior periods
related to the decision to retain the international operations of this segment.
***OTHER INCOME (EXPENSE) - Other income decreased $5.6 million to
expense of $4.8 million during the second quarter of 2000 from income of $0.8
million during the second quarter of 1999. Other income decreased $7.4 million
to
17
<PAGE>
expense of $6.7 million during the first six months of 2000 from income of $0.7
million during the first six months of 1999. These decreases were due to higher
interest expense and lower investment income, as well as the fact that results
for the first six months of 1999 included the reversal of $2.1 million of
reserves for legal proceedings and $2.3 million of restructuring reserves.***
***PROVISION FOR INCOME TAXES - Our effective tax rate for the second
quarter and first six months of 2000 was 37.5% compared to 38.5% for the second
quarter and first six months of 1999. The decrease was due primarily to lower
state tax expense due to tax planning strategies.***
***NET INCOME - Net income for the second quarter of 2000 decreased $13.0
million, or 27.1%, to $34.8 million for the second quarter of 2000 from $47.8
million for the second quarter of 1999. Net income decreased $16.6 million, or
17.4%, to $79.2 million for the first six months of 2000 from $95.8 million for
the first six months of 1999. Our improved gross margin was offset by increased
SG&A expense related to Internet commerce spending and other infrastructure
investments, increased marketing expenses within the direct checks and eFunds
businesses and increased goodwill amortization due to acquisitions.***
Liquidity, Capital Resources and Financial Condition
***As of June 30, 2000, we had cash and cash equivalents of $91.2
million. We also had $6.3 million of restricted cash that we temporarily hold in
custodial accounts on behalf of clients and supplied $28.7 million in restricted
cash to a client who is a provider of ATM management and outsourcing services.
We have agreed to make up to $35.0 million of cash available for this purpose.
Our working capital on June 30, 2000 was a negative $106.2 million compared to a
positive $14.1 million on December 31, 1999. The current ratio on June 30, 2000
and December 31, 1999 was 0.8 to 1 and 1.0 to 1, respectively. The decreases in
working capital and the current ratio were primarily due to the fact that
formerly long-term debt of $100.0 million is payable in February 2001. Thus, the
debt is classified in current liabilities in the consolidated balance sheet at
June 30, 2000. Cash provided by operations represents our primary source of
working capital and the source for financing capital expenditures and paying
cash dividends. We believe that cash generated from operations and our current
credit facilities is sufficient to sustain our existing operations and our
current level of growth.***
Cash provided by operations was $100.9 million for the first six months
of 2000, compared to $95.7 million for the first six months of 1999. The
increase in 2000 was primarily due to the payment of $32.2 million in February
1999 resulting from a judgment in a lawsuit involving the eFunds segment and the
increase in restricted cash in 1999. Partially offsetting these uses of cash in
1999 was a decrease in accounts receivable in 1999. As the result of a
management plan to drive a reduction in accounts receivable and maximize working
capital, we saw a significant decrease in accounts receivable in 1999 due to an
increase in Automated Clearing House (ACH) processing of cash receipts within
the Paper Payment Systems segment.
Cash used in investing activities was $113.1 million during the first six
months of 2000 compared to $63.3 million during the same period in 1999. The
most significant use of cash for investing activities was the payment of $116.0
million in 2000 to complete the acquisition of Designer Checks and to purchase
an investment interest in a limited liability company. We paid $35.7 million in
1999 to complete two acquisitions. Purchases of capital assets totaled $42.8
million in 2000 and $51.6 million in 1999. Sources of investing cash flows were
the sales of businesses and capital assets and the collection of a note
receivable. These activities generated investing cash inflows of $44.4 million
during the first six months of 2000 and $24.5 million during the same period in
1999. We estimate that capital expenditures will be approximately $100 million
in 2000.
Cash used in financing activities was $32.9 million during the first six
months of 2000 and $226.2 million during the same period in 1999. During the
first six months of 1999, we used cash of $199.9 million to repurchase our
common stock. We used only $1.0 million during the first six months of 2000 for
this purpose. Additionally, we used cash to repay debt and pay dividends to
shareholders. These activities used cash of $98.6 million during the first six
months of 2000 and $67.4 million during the first six months of 1999. The
primary sources of cash from financing activities were the sale of approximately
12% of eFunds common stock to the public in June 2000 and the issuance of our
common stock to employees under our stock purchase plan. The sale of eFunds
common stock provided cash of $62.0 million in 2000. Common stock issued to
employees generated financing cash inflows of $4.7 million during the first six
months of 2000 and $16.0 million during the same period in 1999. Additionally,
during the first six months of 1999, we had net short-term borrowings of $25.1
million.
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As of June 30, 2000, we had committed lines of credit for $450.0 million
available for borrowing and as support for commercial paper. One of these
committed lines of credit for $300 million expires on August 30, 2000. We are
currently evaluating an extension. The average amount drawn on these lines
during the first six months of 2000 was $37.4 million at a weighted-average
interest rate of 6.38%. As of June 30, 2000, no amounts were outstanding under
these lines of credit. 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%. As of June 30, 2000, we had $15.0 million of commercial paper
outstanding at a weighted-average interest rate of 7.10%. The average amount of
commercial paper outstanding during the first six months of 2000 was $2.5
million at a weighted-average interest rate of 6.54%. No commercial paper was
issued during 1999.
We also had a $10.0 million line of credit, denominated in Indian rupees,
available to our international operations at an interest rate of 15.81%. The
average amount drawn on this line during the first six months of 2000 was $4.3
million. As of June 30, 2000, $4.8 million was outstanding. The average amount
drawn on this line during 1999 was $2.7 million. As of December 31, 1999, $3.1
million was outstanding.
We had uncommitted bank lines of credit of $40.0 million available at
variable interest rates. The average amount drawn on these lines of credit
during the first six months of 2000 was $65 thousand at a weighted-average
interest rate of 6.47%. The average amount drawn on these lines of credit during
1999 was $1.5 million at a weighted-average interest rate of 5.12%. As of June
30, 2000 and December 31, 1999, no amounts were outstanding under these lines of
credit.
We have a shelf registration in place for the issuance of up to $300.0
million in medium-term notes. These notes could be used for general corporate
purposes, including working capital, capital expenditures, possible acquisitions
and repayment or repurchase of our outstanding indebtedness and securities. As
of June 30, 2000 and December 31, 1999, no notes were issued or outstanding
under this shelf registration.
Outlook/Recent Developments
***In January 2000, we announced that our board of directors approved a
plan to operate our eFunds segment as a separate, independent, publicly traded
company to be called eFunds. eFunds issued 5.5 million shares of its common
stock to the public in June 2000. Subsequent to this initial public offering, we
continue to own 40 million shares of eFunds common stock, representing 87.9% of
eFunds' total outstanding common shares. The difference of $30.1 million between
the net proceeds from the offering and the carrying amount of our investment in
eFunds was recorded as additional paid-in capital.
In October 2000, we announced a plan to complete the separation of the
eFunds segment by means of a spin-off rather than by an exchange offer, or
split-off, as had previously been announced. The 40 million shares of eFunds
common stock which we currently own will now be distributed on a designated
distribution date to every Deluxe shareholder of record on a designated record
date. Each shareholder will receive a fixed number of eFunds shares for each
Deluxe share owned. The spin-off is contingent upon obtaining confirmation from
the IRS that the spin-off will be tax-free to us and to our shareholders for
U.S. federal income tax purposes. We have the sole discretion to determine
whether to proceed with the spin-off based on the best interests of our
shareholders and to determine the timing and other aspects of the transaction.
Subject to these conditions, we plan to complete the spin-off by December 31,
2000. Because we are planning to spin-off eFunds, the issuance of eFunds common
stock in June 2000 was treated as a capital transaction under the guidance of
SAB 51.
If the spin-off is consummated, we would recognize the distribution of
eFunds stock as a reduction of retained earnings and would reflect eFunds
results of operations as discontinued operations in our consolidated financial
statements. If we do not complete the spin-off, we will continue to control
eFunds and we and eFunds may not realize the anticipated benefits from the
separation of the two companies. We will incur additional costs associated with
the spin-off of eFunds. These costs will be expensed in future periods.
In connection with eFunds' initial public offering and the anticipated
spin-off, we have entered into various agreements with eFunds that address the
allocation of assets and liabilities between us and that define our relationship
after
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the separation. The agreements relate to matters such as consummation of the
initial public offering and the distribution of eFunds stock, our registration
rights, intercompany loans, information technology consulting and business
process management services, indemnification, data sharing, real estate matters,
tax sharing and transition services. For transition services, eFunds will
compensate us for providing services and will negotiate for such services with
third-parties at mutually agreed upon rates after the transition arrangements
terminate. The transition period varies depending on the agreement, but many
transition services will terminate upon completion of the distribution of eFunds
stock. Some of the transition agreements may be extended beyond the initial
transition period. Additionally, we have agreed to indemnify eFunds for future
losses arising from any litigation based on the conduct of the EBT and medical
eligibility verification businesses prior to eFunds' initial public offering in
June 2000, and from future losses on identified loss contracts in excess of our
$29.2 million accrual for contract losses as of April 30, 2000. The
indemnification obligation does not apply to losses covered by the existing
reserves. The maximum amount of litigation and contract losses for which we will
indemnify eFunds is $14.6 million. After the spin-off, any indemnification
payments will be recorded as other expense in our consolidated statements of
income. Prior to the spin-off, any indemnification payments will be treated as
capital contributions.***
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS,
which provides guidance in applying generally accepted accounting principles to
revenue recognition in financial statements. Application of this SAB did not
have a material impact on our reported operating results or financial position.
We estimate that we will incur additional expense and investment within
Paper Payment Systems in 2000 as compared to 1999. We are making this additional
investment in order to create more opportunities to offer new types of
customized products to individuals and small businesses. Some of these expenses
have been incurred in the first half of 2000.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
As of June 30, 2000, we had an investment portfolio of fixed income
securities, excluding those classified as cash and cash equivalents, of $18.2
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, we have the ability to hold these fixed income investments until
maturity and therefore would not expect to recognize an adverse impact on income
or cash flows.
We operate internationally, and so are subject to potentially adverse
movements in foreign currency rate changes. We have not entered into foreign
exchange forward contracts to reduce our exposure to foreign currency rate
changes on intercompany foreign currency denominated balance sheet positions. As
of June 30, 2000, we have borrowed $4.8 million on a line of credit denominated
in Indian rupees. The rate on the borrowing remains fixed for the term of the
borrowing. The rupee-denominated funds borrowed are used exclusively by the
business within India to pay for expenses denominated in Indian rupees. We are
exposed to foreign exchange risk to the extent of adverse fluctuations in the
Indian rupee and British pound. We do not believe that a change in the Indian
rupee and British pound exchange rates of 10% would result in a material impact
on our future earnings, financial position or cash flows. Historically, the
effect of movements in these exchange rates has been immaterial to our
consolidated results.
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PART II - OTHER INFORMATION
Item 5. Other Information
RISK FACTORS AND CAUTIONARY STATEMENTS.
When used in this Quarterly Report on Form 10-Q and in future filings by
the Company with the Securities and Exchange Commission (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
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.
Earnings Estimates. 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 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. As a result, there can be no assurance that
the Company's performance will be consistent with any management forecasts or
that the variation from such forecasts will not be material and adverse.
Investors are cautioned not to base their entire analysis of the Company's
business and prospects upon isolated predictions, but instead are encouraged to
utilize the entire available mix of historical and forward-looking information
made available by the Company, and other information affecting the Company and
its products, when evaluating the Company's prospective results of operations.
In addition, representatives of the Company may occasionally comment on
the perceived reasonableness of published reports by independent analysts
regarding the Company's projected future performance. Such comments should not
be interpreted as an endorsement or adoption of any given estimate or range of
estimates or the assumptions and methodologies upon which such estimates are
based. Generally speaking the Company does not make public its own internal
projections, budgets or estimates. Undue reliance should not be placed on any
comments regarding the conformity, or lack thereof, of any independent estimates
with the Company's own present expectations regarding its future results of
operations. The methodologies employed by the Company in arriving at its own
internal projections and the approaches taken by independent analysts in making
their estimates are likely different in many significant respects. Although the
Company may presently perceive a given estimate to be reasonable, changes in the
Company's business, market conditions or the general economic climate may have
varying effects on the results obtained through the use of differing analyses
and assumptions. The Company expressly disclaims any continuing responsibility
to advise analysts or the public markets of its view regarding the current
accuracy of the published estimates of outside analysts. Persons relying on such
estimates should pursue their own independent investigation and analysis of
their accuracy and the reasonableness of the assumptions on which they are
based.
***Recent Strategic Initiatives. In January 2000, the Company announced
that its Board of Directors approved a plan to operate its eFunds segment as a
separate company to be called eFunds Corporation (eFunds). The Company has
announced that it plans to complete the separation of eFunds by means of a
spin-off rather than by an exchange offer, or split-off, as had been previously
announced. The 40 million shares of eFunds common stock currently owned by the
Company will now be distributed on a designated distribution date to every
Deluxe shareholder of record on a designated record date. Each shareholder will
receive a fixed number of eFunds shares for each Deluxe share owned. The
spin-off is contingent upon the Company receiving confirmation from the Internal
Revenue Service that the spin-off will be tax-free to the Company and to its
shareholders for U.S. federal
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income tax purposes, and no assurance can be given that such a confirmation will
in fact be obtained. Additionally, the timing of the spin-off, if consummated,
could have an adverse impact on the Company's ability to meet profitability and
operating earnings targets. Once the spin-off occurs, the results of eFunds will
no longer be included in the Company's consolidated results of operations.
In addition, the Company will incur additional costs associated with the
spin-off. These costs will be expensed in future periods and may adversely
affect the Company's ability to achieve expected levels of profitability.***
Acquisitions. The Company may also consider undertaking one or more
significant acquisitions. 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.
***Spin-off of eFunds. The Company has announced that it plans to
complete the separation of eFunds by means of a spin-off rather than by an
exchange offer, or split-off, as had been previously announced. The 40 million
shares of eFunds common stock currently owned by the Company will now be
distributed on a designated distribution date to every Deluxe shareholder of
record on a designated record date. Each shareholder will receive a fixed number
of eFunds shares for each Deluxe share owned. The Company's plans for the
spin-off are subject to receiving confirmation from the Internal Revenue Service
that the spin-off will be tax-free to the Company and to its shareholders for
U.S. federal income tax purposes. The Company has the sole discretion to
determine whether to proceed with the spin-off based on the best interests of
the Company's shareholders and to determine the timing and other aspects of the
transaction. Subject to these conditions, the Company plans to complete the
spin-off by December 31, 2000. The Company has submitted a request to the
Internal Revenue Service for confirmation that the spin-off will be tax-free to
the Company and to its shareholders for U.S. federal income tax purposes. The
Company cannot be certain when or whether it will receive this confirmation from
the Internal Revenue Service, or that the distribution by the Company will be
completed. If consummated, the Company would recognize the distribution of
eFunds stock as a reduction of retained earnings and would reflect eFunds
results of operations as discontinued operations in the Company's consolidated
financial statements. If the Company does not complete the spin-off, it will
continue to control eFunds and the Company and eFunds may not realize the
anticipated benefits from the separation of the two companies.***
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 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 segment
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. 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,
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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
primarily sells checks for personal and small business use and believes that
there will continue to be a substantial demand for those checks for the
foreseeable future. However, according to Company estimates, growth in total
checks written by individuals and small businesses was flat in 1999. The rate
and the extent to which alternative payment methods will achieve consumer
acceptance and replace checks cannot 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.
The introduction of the alternative payment methodologies described above
has also resulted in an increased interest by third parties in transaction
processing, authorization and verification, as well as other methods of
effecting electronic payments, as a source of revenue. 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
segment, 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.
Paper Payment Initiatives. The Paper Payment Systems segment is
developing and evaluating plans and launching initiatives for future growth.
These plans and initiatives will involve increased investment in the development
of Internet commerce capabilities for new ventures and infrastructure. There is
no assurance that the amount of this investment will not exceed the Company's
expectations and result in materially increased levels of expenses. Also, as
these Internet commerce initiatives involve new technologies and business
methods, are dependent on product and service innovations and serve new or
developing markets, there is no assurance that they will achieve targeted
revenue or profit levels or result in positive returns on the Company's
investment. Further, Internet commerce is rapidly evolving and there is no
assurance that the Company's products and services will achieve acceptance or be
competitive with the current or future offerings of existing or emerging
competitors. Internet commerce is also a recent phenomenon and may not continue
to expand as a medium of commerce.
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.
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
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require the unanticipated investment of significant sums and there can be no
assurance that the conversion could be accomplished without production delays.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
Exhibit No. Description Method of Filing
----------- ----------- ----------------
12.3 Amended Statement re: computation of ratios*** Filed herewith
27.5 Amended Financial Data Schedule for the six
months ended June 30, 2000*** Filed herewith
No other exhibits were amended.
(b) Reports on Form 8-K: None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELUXE CORPORATION
(Registrant)
Date: October 26, 2000 /s/ J. A. Blanchard III
-----------------------------------
J.A. Blanchard III, President
and Chief Executive Officer
(Principal Executive Officer)
Date: October 26, 2000 /s/ Lois M. Martin
-----------------------------------
Lois M. Martin
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
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INDEX TO EXHIBITS
Exhibit No. Description Page Number
----------- ----------- -----------
12.3 Amended Statement re: computation of ratios***
27.5 Amended Financial Data Schedule for the Six Months
Ended June 30, 2000***
No other exhibits were amended.
26
