10-K405: Annual report [Sections 13 and 15(d), S-K Item 405]

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999.

Commission file number 1-7945.

DELUXE CORPORATION

(Exact name of registrant as specified in its charter)

Minnesota 41-0216800
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

3680 Victoria St. N., Shoreview, Minnesota 55126-2966
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (651) 483-7111.

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $1.00 per share New York Stock Exchange
(Title of Class) (Name of each exchange on which
registered)

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. _x_ Yes ___ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [x]

The aggregate market value of the voting stock held by non-affiliates of the
registrant is $1,836,947,704 based on the last sales price of the registrant's
common stock on the New York Stock Exchange on March 15, 2000. The number of
outstanding shares of the registrant's common stock as of March 15, 2000 was
72,218,276.


1


PART I


ITEM 1. NARRATIVE DESCRIPTION OF BUSINESS

Deluxe Corporation (collectively with its subsidiaries, the "Company") is a
leading provider of integrated risk management, electronic transaction services
and paper payments to the financial services and retail industries. The Company
is headquartered in Shoreview, Minnesota, and has facilities in the United
States, India, Canada and the United Kingdom. The Company's products and
services are sold primarily in the United States.

The Company's operations are conducted by Deluxe Corporation and 25
subsidiaries. During 1999, the Company classified its operations into four
business segments: Paper Payment Systems, Electronic Payment Solutions,
Professional Services and Government Services. During 1997 and 1998, the Company
had two additional segments: Direct Response and Deluxe Direct. These businesses
were divested in 1998.

The Company was incorporated under the laws of the State of Minnesota in
1920. From 1920 until 1988, the Company was named Deluxe Check Printers,
Incorporated. The Company's principal executive offices are located at 3680
Victoria St. N., Shoreview, Minnesota 55126-2966, telephone (651) 483-7111.

Paper Payment Systems

Paper Payment Systems ("PPS") provides check printing services to financial
services companies and markets checks and business forms directly to households
and small businesses. PPS sold checks to more than 10,000 financial institutions
and fulfilled approximately 105 million check order equivalent units in 1999, as
opposed to approximately 111 million equivalent units in 1998. Depositors
commonly submit initial check orders and reorders to their financial
institutions, which forward them to one of PPS' printing plants. Printed checks
are shipped directly by PPS to the depositors and PPS' charges are typically
paid directly from the depositors' accounts. PPS, through a separate subsidiary,
also provides direct mail checks to consumers and small businesses. PPS
endeavors to produce and ship all check orders within two days after receipt of
the order. PPS generated revenues of approximately $1,232.9 million in 1999,
accounting for approximately 74.7% of the Company's total revenues during that
year.

Payment systems and methods have been changing in the United States in recent
years as banking and other industries have introduced alternatives to the
traditional check, including, among others, charge cards, credit cards, debit
cards and electronic payment systems. Sales of checks have also been subject to
increased competition and consequent pressure on prices. In addition, the direct
mail segment of the check market is growing as a lower-priced alternative to
financial institution checks and, in 1999, represented an estimated 21 percent
of the personal check industry. These developments have produced a mature market
for checks and have created pricing pressure on PPS' check sales.


2


The Company believes that checks will likely remain an important part of
consumers' payment options for many years. To stabilize its check printing
operations and improve profitability, the Company has focused in recent years on
controlling expenses and increasing efficiency (see "Recent Developments"). The
Company has also focused on higher margin products and services, such as
specially designed checks and licensed check designs. At the same time, the
growing direct mail check segment has been an opportunity for PPS' direct mail
personal check operations.

In addition, Business Forms & Supplies, a business unit of PPS, produces and
markets short-run computer and business forms and checks. Both product lines are
sold primarily through direct mail, telephone marketing and new account
referrals from financial institutions.

Electronic Payment Solutions

The Electronic Payment Solutions segment includes eFunds Corporation (f/k/a
Deluxe Electronic Payment Systems, Inc.), Chex Systems, Inc. ("Chex Systems"),
DebitBureau(SM), Deluxe Payment Protection Systems, Inc. and an electronic check
conversion company that the Company acquired in February 1999 (see "Recent
Developments"). This business is a leading third party processor of electronic
funds transfers in the United States and processed approximately five billion
transactions in 1999. The business offers software for such purposes in the
United States and foreign markets. The Electronic Payment Solutions segment
serves the growing debit payment industry and provides a number of decision
support and risk management products and services to combat identity fraud and
account abuse using the Debit Bureau(SM) database. Chex Systems is the leader in
the account verification business, providing risk management information to
approximately 85,000 financial institution offices. Through its Shared Check
Authorization Network ("SCAN"), Deluxe Payment Protection Systems, Inc. operates
one of the nation's leading check verification services with a network
consisting of thousands of retail locations that share risk-management
information. Electronic Payment Solutions had revenues (including inter-company
sales) of $241.4 million in 1999, or approximately 14.4% of the Company's total
1999 revenues.

Professional Services

In April 1999, the Company acquired the remaining 50% ownership interest in
HCL-Deluxe, N.V., a joint venture which the Company entered into with HCL
Corporation of India in 1996, for $23.4 million. The joint venture commenced
operations in 1997. This business provides information technology development,
maintenance and support services and business process management services to
financial services companies and to all the Company's businesses. Professional
Services had net sales (including inter-company sales) of $19.4 million for all
of 1999.

Government Services

Government Services provides electronic benefit transfer ("EBT") services to
state and local governments. The business manages, supports and controls the
electronic payment of


3


government food and cash benefits for the purchase of goods and services in a
retail environment and the distribution of cash in a bank network and retail
environment. Government Services currently supports, alone or in conjunction
with other providers, electronic benefit transfer programs in nine individual
states and local governments and three consortiums comprising 21 states.
Government Services also provides Medicaid verification services. Government
Services produced approximately $48.3 million in revenues in 1999.

Deluxe Direct

Deluxe Direct, which was divested in 1998, marketed specialty papers, and
other products to small businesses and sold direct mail greeting cards, gift
wrap and related products to households. Deluxe Direct had net sales of
approximately $224 million in 1998 and generated approximately 12% of the
Company's total revenues in that year. Deluxe Direct marketed its products
primarily through the Social Expressions division of Current, Inc. ("Current")
and Paper Direct, Inc. ("Paper Direct").

Current is a direct mail supplier of social expression products, including
greeting cards, gift wrap, small gifts and related products. Current's Social
Expressions business is seasonal and holiday-related. Historically, more than
one-third of Current's annual sales have been made in the fourth quarter.
Current's direct mail check business was not included in the divestiture and is
included in "Paper Payment Systems." Paper Direct is a direct mail marketer of
specialty papers, presentation products and pre-designed forms for laser
printing and desktop publishing.

Direct Response

Direct Response, which was divested in 1998, developed targeted direct mail
marketing campaigns for financial institutions and it also sold personalized
plastic ATM cards and credit and debit cards to financial institutions and
retailers and driver's licenses and other identification cards to government
agencies. Direct Response provided database products from the Company's Deluxe
Data Resources, FUSION Marketing(SM) and Deluxe MarketWise(TM) businesses and
fulfillment services that included printing and mailing direct mail marketing
pieces (including letter checks offered to credit card holders) and tracking
customer response rates. The Direct Response business unit contributed
approximately $43 million in revenues in 1998.

RECENT DEVELOPMENTS

eFunds (Tustin) Acquisition

In February 1999, the Company acquired all of the outstanding shares of
eFunds Corporation of Tustin, California for $13 million. This company provides
electronic check conversion and electronic funds transfer solutions for
financial services companies and retailers. This business is included in the
Electronic Payment Solutions segment.


4


IPO/Split-off of eFunds

During 1999, the Company announced that it planned to reduce its corporate
support group and move most corporate resources into the Company's operating
units to enable them to operate more independently. These moves were
substantially completed by the end of 1999. In April 1999, the Company announced
that it was changing its business model to a holding company structure with four
independently operated business units: Paper Payment Systems; Electronic Payment
Solutions; Professional Services and Government Services. In January 2000, the
Company announced that its Board of Directors approved a plan to combine its
Electronic Payment Solutions, Professional Services and Government Services
segments into a separate, independent, publicly traded company to be called
eFunds Corporation ("eFunds"). Management believes that the plan to split-off
the Company's higher growth businesses is consistent with its strategy to create
strategically focused enterprises that can independently achieve their business
objectives, raise capital and pursue growth opportunities in their respective
markets. Management also believes that splitting-off its electronic payment and
e-commerce related businesses into a publicly traded company maximizes
shareholder value.

The Company has announced that eFunds plans to issue shares of its common
stock to the public through an initial public offering. After this offering, the
Company will continue to own at least 80.1% of eFunds' outstanding shares. The
Company plans to distribute all of its shares of eFunds' common stock to its
shareholders who tender shares of the Company's common stock in an exchange
offer (the Split-off). The Company intends to request a private letter ruling
from the Internal Revenue Service (IRS) that the Split-off would be a tax-free
transaction to the Company and its shareholders. The Split-off is contingent
upon the Company receiving a favorable tax ruling from the IRS.

As part of the Split-off, the Company and eFunds will enter into various
agreements that address the allocation of assets and liabilities between them
and that define their relationship after the separation. The agreements relate
to matters such as consummation of the public offering and the Split-off,
registration rights for the Company, intercompany loans, software development
and business process management services, indemnification, data sharing, real
estate matters, tax sharing and transition services.

Sale of NRC

In December 1999, the Company sold NRC Holding Corporation and its
subsidiaries (NRC) as these collection businesses did not fit into the Company's
new business model.

Acquisition of Designer Checks

In February 2000, the Company acquired all of the outstanding shares of
Designer Checks for $97.0 million. Designer Checks produces specialty design
checks and related products for direct sale to consumers and will be included in
the Company's Paper Payment Systems segment.


5


ATM Provider

In March 2000, the Company paid $20 million for an approximately 24% interest
in a limited liability company that provides automated teller machine (ATM)
management and outsourcing services to retailers and financial institutions. The
Company has previously entered into vault cash agreements with the limited
liability company to supply cash for ATMs in various locations throughout the
United States.

Plant Closings

In the first quarter of 1996, the Company announced a plan to close 21 of its
financial institution check printing plants over a two-year period. Four
additional closings were scheduled to occur in 1999 and 2000. The plant closings
were made possible by advancements in the Company's telecommunications, order
processing and printing technologies. As of December 31, 1999, the production
and front-end functions at all 21 of the plants included in the 1996
announcement were closed. The front-end operations of three of these plants
remained open at the end of 1998 and were closed in 1999. Also, three of the
four plants scheduled to be closed in 1999 and 2000 were closed as of December
31, 1999, with the fourth plant closed in March 2000.

Restructuring Charges

During the third quarter of 1998, the Company recorded pretax restructuring
charges of $39.5 million. The restructuring charges included costs associated
with the Company's initiative to reduce its selling, general and administrative
(SG&A) expense, discontinuing production of the Direct Response segment's direct
mail products, as well as the closing of four additional financial institution
check printing plants. The Company anticipated eliminating 800 SG&A positions
within sales, marketing, finance, human resources and information services.
Discontinuing production of direct mail products was expected to result in the
elimination of 60 positions. The check printing plant closures were expected to
affect approximately 870 employees. As of the end of 1999, three of the four
check printing plants were closed, with the remaining plant closed in the first
quarter of 2000. Reductions in SG&A positions are expected to continue through
2000.

During 1999, restructuring accruals of $12.2 million were reversed. The
majority of this amount related to the Company's initiatives to reduce its SG&A
expense and to discontinue production of direct mail products. The excess
accrual amount occurred when the Company determined that it was able to use in
its ongoing operations a greater portion of the assets used in the production of
direct mail products than originally anticipated, as well as changes in the SG&A
expense reduction plans due to the plan announced in April 1999 to reorganize
the Company into four independently operated business units. The remainder of
the accrual reversal related to the Company's planned reductions within its
financial institution check printing business and the Company's decision in 1999
to maintain the international operations of Electronic Payment Solutions. Also
during 1999, the Company recorded a restructuring accrual of $.8 million for
employee severance and $.8 million for estimated losses on asset dispositions
related to the


6


planned closing of one collections office and planned employee reductions in
another collections office within the Company's collections business that was
sold in 1999.

Government Services Charges

Asset impairment charges of $.5 million and $26.3 million were recorded in
1999 and 1998, respectively, to write-down the carrying value of long-lived
assets of the Government Services segment. The assets consist of point-of-sale
equipment, internal-use software and capitalized installation costs utilized in
the electronic benefits transfer (EBT) activities of this segment. Management
has concluded that the operating losses incurred by this business will continue.
This is primarily due to the fact that the variable costs associated with
supporting benefit recipient activity are higher than originally anticipated and
actual transaction volumes are below original expectations. In calculating the
impairment charges, the Company determined that the assets utilized by this
business have no fair market value, and so the long-lived assets of this
business were reduced to a carrying value of $0. The charges recorded in 1999
represent the write-down of long-lived assets purchased by the Government
Services segment during 1999.

During 1998, the Company recorded charges of $14.7 million to reserve for
expected future losses on existing long-term contacts of the Government Services
segment. Due to a continuing strong economy, record low unemployment and welfare
reform, the actual transaction volumes and expected future revenues of this
business are well below original expectations. Additionally, actual and expected
future telecommunications, installation, help desk and other costs are
significantly higher than originally anticipated. These factors resulted in
expected future losses on the existing electronic benefits transfer contracts
of this business.

During 1999, charges of $8.2 million were recorded to reserve for additional
expected future losses on the contracts of the Government Services segment. A
majority of the charges resulted from the conclusion of settlement negotiations
with a prime contractor regarding the timing and costs of transitioning
switching services to a new processor. Also, lower than projected actual
transaction volumes (primarily related to states fully rolled-out in 1999)
contributed to the changes in the estimates underlying the 1998 charges. These
increases to the reserve for accrued contract losses were partially offset by
the application of $2.3 million of contract losses against the reserve during
1999.

The Company is currently in negotiations with the prime contractor for a
state coalition for which the Company's Government Services business provides
EBT services. To date, the Company and the prime contractor have been operating
without a binding, legally enforceable contract. The Company is continuing to
negotiate towards a final agreement with the prime contractor, and it is likely
that the execution of this definitive agreement will result in additional
charges.

It is anticipated that Government Services will be part of eFunds following
the Split-off and will likely be managed in accordance with the business
strategies of eFunds as an independant company.

EMPLOYEES

The Company had approximately 11,900 full- and part-time employees as of
March 1, 2000. It has a number of employee benefit plans, including a 401(k)
plan, retirement and


7


profit sharing plans and medical and hospitalization plans. The Company has
never experienced a work stoppage or strike and considers its employee relations
to be good.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

Reference is made to the information appearing under the caption "Note 15.
Business segment information" of the Notes to Consolidated Financial Statements
appearing in Part II of this Annual Report on Form 10-K.

FINANCIAL INFORMATION ABOUT DOMESTIC OPERATIONS AND EXPORT SALES

Reference is made to the information appearing under the caption "Note 15.
Business segment information" of the Notes to Consolidated Financial Statements
appearing in Part II of this Annual Report on Form 10-K.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company are elected by the Board of Directors
each year. The term of office of each executive officer will expire at the
annual meeting of the Board of Directors that will be held after the regular
shareholders meeting on August 4, 2000. The principal occupation of each
executive officer is with the Company, and their positions are as follows:

Executive
Officer
Name Position Age Since
---- -------- --- -----

John A. Blanchard III Chairman of the Board, President 57 1995
and Chief Executive Officer

Lawrence J. Mosner Vice Chairman of the Board and 57 1995
Executive Vice President

Thomas W. VanHimbergen Executive Vice President and Chief 51 1997
Financial Officer

Ronald E. Eilers Senior Vice President and 52 1996
General Manager, Paper
Payment Systems

Debra A. Janssen President and Chief Operating 43 1999
Officer, eFunds

John H. LeFevre Senior Vice President, Secretary 56 1994
and General Counsel

MR. BLANCHARD has served as President and Chief Executive Officer of the
Company since May 1, 1995 and as Chairman of the Board of Directors since May 6,
1996. Mr. Blanchard also serves as Chairman of the Board and Chief Executive
Officer of eFunds, and he is expected to continue in that role following the
Split-off. From January 1994 to April 1995, Mr. Blanchard was executive vice
president of General Instrument Corporation, a supplier of systems and equipment
to the cable and satellite television industry. From 1991 to 1993, Mr.


8


Blanchard was chairman and chief executive officer of Harbridge Merchant
Services, a national credit card processing company. Previously, Mr. Blanchard
was employed by American Telephone & Telegraph Company for 25 years, most
recently as senior vice president responsible for national business sales. Mr.
Blanchard also serves as a director of Wells Fargo and Company and ADC
Telecommunications, Inc.

MR. MOSNER has served as Executive Vice President of the Company with overall
responsibility for all of its day-to-day operations since July 1997 and he
became Vice-Chairman of the Company's Board of Directors in August 1999.
Following the Split-off, Mr. Mosner is expected to succeed Mr. Blanchard as
Chairman of the Board and Chief Executive Officer of the Company. Mr. Mosner
served as Senior Vice President of the Company from November 1995 until October
1996, when he became President of Deluxe Direct, Inc. ("DDI") a subsidiary of
the Company that provided management services to the companies in its Deluxe
Direct business unit. As a Senior Vice President of the Company and President of
DDI, Mr. Mosner served as the Principal Executive Officer of Deluxe Direct. In
February 1997, Mr. Mosner returned to the office of Senior Vice President of the
Company and he served as President of its Paper Payment Systems business unit
until he became Executive Vice President of the Company. Mr. Mosner was
executive vice president and chief operating officer of Hanover Direct, a direct
marketing company, with responsibility for non-apparel products, from 1993 until
he joined the Company. Previously, he was employed for 28 years by Sears,
Roebuck and Company, where he was Vice President of catalog merchandising from
1991 to 1993.

MR. VANHIMBERGEN served as Senior Vice President and Chief Financial Officer
of the Company from May 1997 through August 1999, when he became Executive Vice
President and Chief Financial Officer. From 1996 until he joined the Company,
Mr. VanHimbergen served as senior vice president and chief financial officer of
Federal-Mogul Corporation ("Federal-Mogul") and from 1994 until 1996, Mr.
VanHimbergen served as vice president and chief financial officer of Allied
Signal Automotive, Inc. ("Allied Signal"). Prior to joining Allied Signal, Mr.
VanHimbergen was employed by Tenneco Corporation ("Tenneco") from 1988 through
1994, where he served in a variety of capacities, including vice president and
chief financial officer for Tenneco Automotive from 1993 to 1994. Tenneco,
Allied Signal and Federal Mogul are global manufacturers and distributors of
automotive parts. From 1971 through 1988, Mr. VanHimbergen served in various
financial, human resource and treasury positions for A.O. Smith Corporation, a
diversified manufacturer and distributor and a provider of electronic payment
systems and information services. Mr. VanHimbergen is expected to leave the
employ of the Company in April 2000.

MR. EILERS joined the Company in 1988 when it purchased Current. From 1990 to
1995, Mr. Eilers served as Vice President and General Manager of Current's
direct mail check business. In 1995, Mr. Eilers became President of PaperDirect,
Inc. and the manager of the Company's business forms division. Mr. Eilers became
a Vice President of DDI in October 1996 and he succeeded Mr. Mosner as the
President of DDI in February 1997. In August 1997, Mr. Eilers became a Senior
Vice President of the Company and he now manages its


9


Paper Payment Systems business. Mr. Eilers is expected to serve as President and
Chief Operating Officer of the Company following the Split-off.

MS. JANSSEN has served as President and Chief Operating Officer of eFunds
since March 1, 2000 and she is expected to continue in that capacity following
the Split-off. She joined the Electronic Payment Solutions business unit in
February 1998 as Senior Vice President and was named President and CEO of this
segment in March 1998. Prior to joining the Company, Ms. Janssen worked for 14
years for M&I Data Services in a variety of capacities, most recently as senior
vice president and chief information officer. M&I Data Services is an electronic
transaction processor.

MR. LEFEVRE has served as Senior Vice President, General Counsel and
Secretary of the Company since February 1994. From 1978 to February 1994, Mr.
LeFevre was employed by Wang Laboratories, Inc. From 1988 until February 1994,
he held various positions in Wang Laboratories' law department, including
corporate counsel, vice president, general counsel and secretary. Wang
Laboratories was in the business of manufacturing and selling computer hardware
and software and related services. Mr. LeFevre presently expects to leave the
employ of the Company following the Split-off.

ITEM 2. PROPERTIES

The Company conducts its operations in 47 principal facilities, 46 of which
are used for production and service operations. These facilities are located in
17 states, Canada, India and the United Kingdom and total approximately
3,025,000 square feet. The Company's headquarters occupies a 158,000 square foot
building in Shoreview, Minnesota. Paper Payment Systems has three principal
facilities in Shoreview, Minnesota, totaling approximately 550,000 square feet.
These sites are devoted to sales, administration, marketing, manufacturing
support and call centers. Electronic Payment Solutions' primary administrative
facility occupies a 171,000 square foot building in Glendale, Wisconsin and its
principal data processing centers are located in New Berlin, Wisconsin and
Phoenix, Arizona. Electronic Payment Solutions occupies four additional
principal facilities in Bloomington, Minnesota, Dallas, Texas and Bothell,
Washington totaling approximately 152,000 square feet. Professional Services has
sales offices in New York, New York, San Francisco, California, Charlotte, North
Carolina and Dallas, Texas totaling approximately 20,000 square feet and three
facilities in New Delhi and Chennai, India totaling approximately 111,000 square
feet. The offices in India are used for software development and business
process outsourcing. Government Services shares space with Electronic Payment
Solutions in Glendale, Wisconsin and has two service facilities in Baltimore,
Maryland and Centerville, Utah totaling approximately 2,100 square feet. All but
13 of the Company's facilities are one-story buildings and most were constructed
and equipped in accordance with the Company's plans and specifications.

More than half of the Company's total production area has been constructed
during the past 20 years. The Company owns 20 of its principal facilities and
leases the remainder for terms


10


expiring from 2000 to 2009. Depending upon the circumstances, when a lease
expires, the Company either renews the lease or constructs a new facility to
replace the leased facility.

In 1999, the Company entered into a $42.5 million sale-leaseback transaction
whereby the Company sold five existing facilities in Shoreview, Minnesota and
leased back three of these facilities for periods ranging from five to 10 years.
The Company provided short-term financing for $32.5 million of the proceeds of
this sale. This loan was paid in full in January 2000.

In 1996, the Company announced a plan to close 21 of its financial
institution check printing plants. Four additional plant closings scheduled for
1999 and 2000 were announced in 1998. These plant closings were made possible by
advancements in the Company's telecommunications, order processing and printing
technologies. All of these plants were closed by March 2000. The Company's nine
remaining plants are equipped with sufficient capacity to produce at or above
current order volumes. As a result of its consolidation efforts, the Company
currently owns five vacant facilities. These facilities, which total
approximately 301,000 square feet, are or will be held for sale.

ITEM 3. LEGAL PROCEEDINGS

Other than routine litigation incidental to its business, there are no
material pending legal proceedings to which the Company or any of its
subsidiaries is a party or to which any of the Company's property is subject.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock is traded on the New York Stock Exchange under the
symbol DLX. During the years ended December 31, 1999 and 1998 the Company
declared dividends of $0.37 per share during each quarterly period. As of
December 31, 1999 the number of shareholders of record was 13,907. The table
below shows the per-share price ranges of the Company's common stock for the
past two fiscal years as quoted on the New York Stock Exchange.

STOCK PRICE RANGES (DOLLARS) HIGH LOW CLOSE
----------------------------------------------------------------------
1999
Quarter 1 37 3/8 29 1/8 29 1/8
Quarter 2 38 13/16 28 5/16 38 13/16
Quarter 3 40 1/2 33 1/8 34
Quarter 4 34 13/16 24 3/4 27 7/16
----------------------------------------------------------------------
1998
Quarter 1 35 11/16 32 1/2 32 15/16
Quarter 2 35 3/4 31 3/8 35 3/4
Quarter 3 37 15/16 28 3/8 28 7/16
Quarter 4 37 26 3/8 36 9/16
----------------------------------------------------------------------

ITEMS 6, 7, 7A AND 8. SELECTED FINANCIAL DATA, MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
AND FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


11

DELUXE CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

COMPANY PROFILE

In April 1999, the Company announced that it was changing its business model
to a holding company structure with four independently operated business units:
Paper Payments Systems; Electronic Payment Solutions; Professional Services and
Government Services. Paper Payment Systems provides check printing services to
financial services companies and markets checks and business forms directly to
households and small businesses. Government Services provides electronic
benefits transfer services and online medical eligibility verification services
to state and local governments. Electronic Payment Solutions combined under
single management five of the Company's former operating units: Deluxe
Electronic Payment Systems, Inc., DebitBureau(SM), Chex Systems, Inc., Deluxe
Payment Protection Systems, Inc. and an electronic check conversion company
which was acquired in February 1999. These businesses were combined into a
single integrated unit in order to provide opportunities for revenue and profit
growth in excess of what would have been generated had they continued to operate
independently. This segment serves the financial services and retail industries
by providing comprehensive electronic payment management solutions which combine
transaction processing with decision support and risk management tools.

The Company also announced in April 1999 that it acquired the remaining 50%
ownership interest in HCL-Deluxe, N.V., a joint venture which the Company
entered into with HCL Corporation of India in 1996. The joint venture commenced
operations in 1997. This business comprises the Company's Professional Services
segment and provides information technology development, maintenance and support
and business process management to financial services companies and to all of
the Company's businesses. Prior to acquiring the remaining ownership interest,
the Company recorded the results of this business under the equity method of
accounting. As such, the Company's 50% ownership of the joint venture's results
of operations prior to April 1999 were reflected in other expense in the
consolidated statements of income. Subsequent to April 1999, this segment's
entire results of operations and account balances are included in the Company's
consolidated financial statements.

During 1999, the Company also announced that it planned to reduce its
corporate support group and move most corporate resources into the Company's
business units in order to enable them to operate more independently. These
moves were essentially completed by the end of 1999.

In December 1999, the Company sold NRC Holding Corporation and its
subsidiaries (NRC), the Company's collections business, as it did not fit into
the Company's new business model.


12


Prior to 1999, the Company also operated two other business segments: Direct
Response and Deluxe Direct. The sales of both of these businesses were completed
in December 1998. Direct Response provided direct marketing, customer database
management and related services to the financial industry and other businesses.
Deluxe Direct primarily sold greeting cards, stationery and specialty paper
products through direct mail.

The Company's segments operate primarily in the United States. The Electronic
Payment Solutions and Professional Services segments also have international
operations.

RESULTS OF OPERATIONS

YEAR ENDED 1999 COMPARED TO YEAR ENDED 1998

NET SALES - Net sales decreased $283.2 million, or 14.6%, to $1,650.5 million in
1999 from $1,933.7 million in 1998. This decrease was primarily due to
discontinuing production of direct mail products and the sale of the remaining
businesses in the Direct Response and Deluxe Direct segments in 1998. These
segments contributed net sales of $266.6 million in 1998. NRC contributed
approximately $120 million in net sales in both 1999 and 1998, but will not be
included in the Company's operations in 2000 as it was sold in December 1999.

Paper Payment Systems' net sales decreased $48.8 million, or 3.8%, to $1,232.9
million in 1999 from $1,281.7 million in 1998. This decrease was primarily due
to lower volume in the financial institution check printing business due to lost
customers. The loss of business was due to competitive pricing requirements
which fell below the Company's revenue and profitability per unit targets. This
volume decrease was partially offset by increased volume for both the direct
checks and business forms businesses and increased revenue per unit for all
businesses. This segment expects to benefit from the volume increases
experienced in 1999 in the direct checks business through increased reorder
revenues in 2000.

Electronic Payment Solutions' net sales increased $17.9 million, or 8.0%, to
$241.4 million in 1999 from $223.5 million in 1998. Increased net sales due to
greater transaction processing and account verification inquiry volumes and
price increases were partially offset by decreased software sales due to
customer reluctance to make significant software changes prior to 2000.
Transaction processing and account verification inquiry volumes increased 27.0%
and 6.0%, respectively, as the result of higher volumes from existing
customers. Net sales in 1999 did not include significant contributions from
several new products which were launched in late 1999. These and other new
products launched in early 2000 provide additional sales opportunities in 2000.

Professional Services' net sales of $14.5 million during 1999 represents an
increase over 1998, as this segment was acquired in the second quarter of 1999.
Sales to external customers were $7.3 million. While the net sales for this
segment are not included in the Company's consolidated statements of income for
1998 or the first quarter of 1999, its net sales did increase to $19.4 million
for all of 1999 from $13.2 million in 1998. This growth was driven by new
clients, increased sales to existing clients and the initiation of business


13


process management services for the Company. Significant investments in
infrastructure and sales capabilities were made in 1999. As such, management
believes that 2000 revenues will increase over 1999.

Government Services' net sales increased $4.3 million, or 9.8%, to $48.3 million
in 1999 from $44.0 million in 1998. This increase was due to the roll-out of
additional states during the latter half of 1998 and early 1999 and price
increases on contract extensions for online medical eligibility verification
services. Barring further extensions of existing contracts, management believes
that 2000 net sales will be lower than 1999 due to contract expirations.

GROSS MARGIN - Gross margin for the Company was 55.1% in 1999 compared to 51.6%
in 1998. The increase was primarily due to the $32.2 million reduction in loss
contract and asset impairment charges described below. Reduced restructuring
charges also contributed to the increase.

1999 cost of sales included charges of $8.2 million for additional expected
future losses on the contracts of the Government Services segment. A majority of
the charges resulted from the conclusion of settlement negotiations with a prime
contractor regarding the timing and costs of transitioning switching services
from the Company to a new processor. Also, lower than projected actual
transaction volumes (primarily related to states fully rolled-out in 1999)
contributed to the changes in the estimates underlying the 1998 charges. These
charges were partially offset by the net reversal of $2.0 million of
restructuring reserves. Restructuring reserves, relating to the closing of
financial institution check printing plants within the Paper Payment Systems
segment, were reduced by $2.9 million. The closing check printing plants
experienced higher attrition rates than anticipated, resulting in lower
severance payments than originally estimated. Offsetting this reduction was
additional restructuring charges of $0.9 million relating to reductions within
the Company's collection business. By comparison, 1998 cost of sales included
restructuring charges of $10.9 million relating to discontinuing production of
the Direct Response segment's direct mail products and the planned closure of
four financial institution check printing plants within the Paper Payment
Systems segment. Additionally, charges of $40.9 million were recorded in 1998
for asset impairments and accrued contract losses relating to the Government
Services segment. With these items excluded in each year, the Company's gross
margin was 55.5% in 1999 and 54.3% in 1998.

Paper Payment Systems' gross margin increased to 62.9% in 1999 from 60.8% in
1998. This increase was due to cost reductions realized from closing financial
institution check printing plants, process improvements within all businesses
and the loss of lower margin customers within the financial institution check
printing business. Management plans to continue its process improvements and
increase sales of higher margin products in 2000.

Electronic Payment Solutions' gross margin decreased to 42.8% in 1999 from 43.2%
in 1998. This decrease was due primarily to the introduction of certain new
services, such as electronic check conversion services, which in their initial
stages have a higher cost of sales than the Company anticipates will be the case
in future years.


14


Professional Services, which was acquired in April 1999, contributed a gross
margin of 26.4% in 1999. This compares favorably with the 22.6% gross margin
realized by the business in 1998, prior to the inclusion of its results in the
Company's consolidated financial statements. The increase can be attributed to
sales and execution of more profitable contracts, less reliance on
sub-contractors and an increasing proportion of work being done offshore where
margins are higher despite lower billing rates. Management expects that margins
will continue to improve in 2000 as operations expand and new customers are
added.

Gross margin for Government Services increased to 2.1% in 1999 from a negative
93.9% in 1998. This increase during 1999 was due primarily to the $32.2 million
reduction in loss contract and asset impairment charges, as well as lower
depreciation and amortization expense in 1999 due to the asset impairment
charges recorded in 1998.

SELLING, GENERAL AND ADMINSTRATIVE (SG&A) - SG&A expense decreased $151.1
million, or 20.1%, to $602.2 million in 1999 from $753.3 million in 1998. 1999
SG&A expense includes the net reversal of $6.3 million of restructuring
reserves. Restructuring reserves of $7.0 million relating to the Company's
initiatives to reduce SG&A expense and to discontinue production of direct mail
products, as well as the Company's decision in 1999 to retain the international
operations of its Electronic Payment Solutions segment were reversed. The excess
accrual amount occurred when the Company determined that it was able to use a
greater portion of the direct mail production assets in its ongoing operations
than was originally anticipated, as well as changes in the SG&A expense
reduction initiative due to the plan announced in April 1999 to reorganize the
Company into four independently operated business units. Offsetting these
reversals were additional restructuring charges of $0.7 million relating to
reductions within the Company's collection business. By comparison, 1998 SG&A
expense included $21.1 million of restructuring charges relating to the
Company's initiative to reduce its SG&A expense and the planned closing of four
additional financial institution check printing plants. With these items
excluded in each year, SG&A expense decreased $123.7 million, or 16.9%, from
1998. This decrease was largely due to discontinuing production of the Direct
Response segment's direct mail products and the sale of the remaining businesses
within the Direct Response and Deluxe Direct segments in 1998. These businesses
had $146.7 million of SG&A expense in 1998. NRC had approximately $32.0 million
of SG&A expense in both 1998 and 1999 which will not be included in the
Company's operations in 2000 because the business was sold in December 1999.

Paper Payment Systems' SG&A expense decreased 2.6% from 1998 to 1999. This
reflected a decrease within the financial institution check printing business
resulting from consolidation efforts and reductions in the number of employees.
These decreases were offset by increased marketing expenses for the direct
checks business due to an increased emphasis on new customer acquisition.
Management believes that SG&A expense will increase from current levels as a
percentage of sales during 2000 as the segment continues to grow its direct
checks business and create an e-commerce platform for future growth.


15


Electronic Payment Solutions' SG&A expense increased 13.0% from 1998 due
primarily to costs incurred in conjunction with the Company's investment in its
DebitBureau(SM) capabilities. This increase was partially offset by initiatives
designed to lower SG&A expense, reductions in corporate support SG&A expense,
which resulted in lower expenses allocated to the segment, and reduced
restructuring charges. 1999 SG&A expense included the reversal of $2.4 million
of restructuring charges, while 1998 SG&A expense included net restructuring
charges of $2.2 million.

SG&A expense for Professional Services was $13.3 million, or 92.0%, of net sales
in 1999. This compares to SG&A expense of $6.4 million, or 48.2%, of net sales
in 1998, when the results of this business were not consolidated within the
Company's financial statements. The increase in 1999 relates to infrastructure
investments and goodwill amortization.

Government Services' SG&A expense increased $1.3 million, or 19.9%, from 1998 to
1999. This was due primarily to an increase in bad debt expense in 1999. This
increase was partially offset by the fact that corporate support expenses were
not allocated to this segment in 1999.

RESEARCH AND DEVELOPMENT (R&D) - R&D expense increased to $5.0 million, or 0.3%
of net sales, in 1999 compared to $1.4 million, or 0.1% of net sales, in 1998.
Substantially all of this increase was incurred in conjunction with the
development of the DebitBureau(SM) capabilities in the Electronic Payment
Solutions segment. The Company expects to maintain R&D expenditures at
approximately the same level in 2000.

OTHER INCOME (EXPENSE) - Other income increased $22.7 million from 1998 to 1999.
1999 included a $19.8 million gain on the sale of NRC, while 1998 included a
combined loss of $4.9 million on sales of businesses. Additionally, the losses
of the Professional Services segment were no longer included in other expense
after April 1999 when the Company acquired the remaining ownership interest in
this business. After this date, the Company began consolidating this business'
results of operations in its consolidated financial statements.

PROVISION FOR INCOME TAXES - The Company's effective tax rate decreased to 37.5%
for 1999 from 41.1% for 1998 due primarily to decreased state tax expense as the
result of various tax reduction initiatives undertaken by the Company.

NET INCOME - Net income for 1999 increased to $203.0 million, compared to $143.1
million in 1998. This increase was due in part to the reduced restructuring
charges, asset impairment charges and accrued losses on long-term service
contracts in 1999. The increase was also due in part to improvement in the
Company's operating margin resulting from better performance from its ongoing
operations as well as from the sales of the businesses within the Direct
Response and Deluxe Direct segments in 1998.


16


YEAR ENDED 1998 COMPARED TO YEAR ENDED 1997

NET SALES - In 1998, the Company's net sales increased $13.0 million, or 0.7% to
$1,933.7 million in 1998 from $1,920.6 million in 1997. Revenues lost due to
divestitures were more than offset by growth in the Electronic Payment Solutions
and Government Services segments. Excluding businesses divested in both years,
the Company's consolidated net sales increased 2.0% from 1997 to 1998.

Paper Payment Systems' sales decreased $7.7 million, or 0.6% to $1,281.7 million
in 1998 from $1,289.4 million in 1997. The decrease is primarily due to lower
volume in financial institution check printing resulting from lost customers.
The loss of business was due to competitive pricing requirements which fell
below the Company's revenue and profitability per unit targets. This decrease
was partially offset by increased volume for the direct checks business and new
pricing strategies within the financial institution market.

Electronic Payment Solutions' sales increased $21.4 million, or 10.6% to $223.5
million in 1998 from $202.1 million in 1997. Increased transaction processing
and account verification inquiry volumes, higher software licensing and
professional services contributed to this increase. Transaction processing and
account verification inquiry volumes increased 19.0% and 5.9%, respectively,
driven by higher volumes from existing customers. Software licensing and
professional services increased due to customers' concerns over the year 2000
impacts.

Government Services' sales increased $17.0 million, or 63.1%, to $44.0 million
in 1998 from $27.0 million in 1997. This increase was due to additional state
contracts and the roll-out of existing contracts.

Net sales of divested businesses decreased 5.1% from 1997 to $388.7 million.
This decrease was due primarily to lost customers, price decreases for direct
mail products, lower catalog circulation and business divestitures, partially
offset by volume increases in the collections business.

GROSS MARGIN - The Company's consolidated gross margin was 51.6% in 1998,
compared to 53.3% in 1997. 1998 cost of sales included the restructuring
charges, asset impairment charges and long-term service contract losses
discussed above. 1997 cost of sales included restructuring charges of $7.7
million associated with the Company's 1996 plan to close 21 financial
institution check printing plants and severance related to implementing process
improvements in the post-press phase of check production. With these charges
excluded from both years, consolidated gross margin was 54.3% in 1998, compared
to 53.7% in 1997.

Paper Payment Systems' gross margin increased to 60.8% in 1998 from 59.0% in
1997. The segment's slight sales decrease was more than offset by cost savings
realized from closing financial institution check printing plants and other
efficiency improvements.

Electronic Payment Solutions' gross margin was 43.2% in both 1998 and 1997.
Revenue growth was more than offset by increased information services and other
infrastructure costs,


17


reflecting the Company's investment in this segment. However, these increased
infrastructure costs were substantially offset by reduced incentive compensation
costs.

Government Services' gross margin declined from negative 8.4% in 1997 to
negative 93.9% in 1998, primarily due to loss contract and asset impairment
charges totaling $40.9 million. Excluding these charges, this segment's gross
margin improved to negative 0.7% in 1998, reflecting increased volume and lower
depreciation and amortization expense in 1998 due to the asset impairment
charges recorded in the third quarter of 1998.

Divested businesses' gross margins decreased to 41.9% in 1998 from 45.1% in
1997, due to decreased volume, lower prices for direct mail products and the
divestiture of a higher margin business in late 1997.

SELLING, GENERAL AND ADMINSTRATIVE (SG&A) - In 1998, the Company's SG&A expense
decreased $29.2 million, or 3.7%, from 1997. As discussed above, 1998 SG&A
expense included $21.1 million of restructuring charges relating to the
Company's initiative to reduce SG&A expense and the planned closing of four
additional financial institution check printing plants. 1997 SG&A expense
included restructuring charges of $13.9 million associated with the Company's
1996 plan to close 21 financial institution check printing plants, the
implementation of a new order processing and customer service system and
reductions in support functions at corporate operations and other businesses.
1997 SG&A expense also included asset impairment charges of $16.1 million
related to businesses held for sale. Excluding these charges from both years,
SG&A expense decreased $20.3 million, or 2.7%, from 1997.

Paper Payment Systems' SG&A expense decreased 1.8% from 1997. Increased costs
associated with implementing a new order processing and customer service system
and increased selling expenses to support the volume increases in the direct
checks business were more than offset by lower restructuring charges in 1998
than in 1997.

Electronic Payment Solutions' SG&A expense increased 18.7% from 1997 due to
increased selling and marketing costs associated with the growth of and
investment in this business and $2.7 million of costs incurred in connection
with the development of DebitBureau(SM) capabilities.

Government Services' SG&A expense decreased 36.3% from 1997 primarily because of
lower legal costs.

SG&A expense for divested units decreased 18.3% from 1997, primarily because of
reduced discretionary spending, reduced catalog circulation, and lower costs
resulting from reorganizing a portion of the marketing function at the direct
mail businesses.

GOODWILL IMPAIRMENT CHARGES - During 1996, the Company announced its plans to
divest three businesses within its Deluxe Direct segment. During 1997, the
Company determined that it would divest certain international operations of its
Electronic Payment


18


Solutions segment. In 1997, the Company recorded impairment charges of $99.0
million to write these businesses down to their estimated fair values less costs
to sell. Of this amount, $82.9 million related to the goodwill of these
businesses. The sales of the Deluxe Direct businesses were completed in 1998.
Also during 1998, there was a change in the management of the Electronic Payment
Solutions segment. As a result, in January 1999, the Company determined that the
international operations of this segment maintained a continuing strategic
importance and were no longer considered held for sale.

OTHER INCOME (EXPENSE) - Other income increased $40.5 million from 1997 to 1998.
1997 results included an accrual of $40.0 for legal proceedings related to the
Government Services segment. During 1997, a judgment was entered against the
Company in the U.S. District Court for the Western District of Pennsylvania. The
case was brought against the Company by Mellon Bank in connection with a
potential bid to provide electronic benefits transfer services for the Southern
Alliance of States. In September 1997, the Company recorded a pretax charge of
$40.0 million to reserve for this judgment and other related costs. In 1998,
Mellon's motion for prejudgment interest was denied by the district court and
the Company reversed $4.2 million of the $40 million liability. This reversal
was reflected in other income in the 1998 consolidated statement of income.

PROVISION FOR INCOME TAXES - In 1998, the Company's effective tax rate decreased
to 41.1% from 61.2% in 1997. This was due to a lower base of non-deductible
expenses resulting primarily from the non-deductible goodwill impairment charges
recognized in 1997.

NET INCOME - 1998 net income increased to $143.1 million from $44.7 million in
1997. The primary reason for this increase was the lower amount of
reorganization and other charges discussed above.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

Cash provided by operations represents the Company's primary source of working
capital and the source for financing capital expenditures and paying cash
dividends.

Cash provided by operations was $220.9 million in 1999 compared to $294.3
million in 1998. A majority of the decrease was due to a payment of $32.2
million in 1999 to settle legal proceedings related to the Government Services
segment and a $25.0 million increase in restricted cash supplied to ATMs in the
Electronic Payment Solutions segment. These decreases were partially offset by
cash inflows from decreases in accounts receivable due to an increase in
Automated Clearing House (ACH) processing of cash receipts within the Paper
Payment Systems segment.

The Company's working capital on December 31, 1999 was $14.1 million compared to
$177.4 million on December 31, 1998. The current ratio on December 31, 1999 was
1.0 to 1, compared to 1.4 to 1 on December 31, 1998. The decrease in working
capital and current ratio is due primarily to the following uses of cash during
1999: $314.9 million to repurchase


19


stock of the Company, $115.0 million to purchase capital assets and $113.5
million to pay dividends to shareholders.

Cash used in investing activities was $0.3 million in 1999 and $36.9 million in
1998. Purchases of capital assets was the most significant use of cash for
investing activities, totaling $115.0 million for 1999 compared to $121.3
million in 1998. Payments for acquisitions, net of cash acquired, totaled $35.7
million in 1999. There were no acquisitions in 1998. In 1999, the Company used
$32.5 million to provide short-term financing on sales of facilities. Sources
of investing cash flows were primarily the sales of businesses and capital
assets. These activities generated investing cash flows of $166.4 million in
1999 and $117.9 million in 1998. As of December 31, 1999, the Company had no
significant fixed asset purchase commitments. The Company anticipates that 2000
capital expenditures will not significantly exceed the 1999 level.

Cash used in financing activities was $348.6 million in 1999 and $160.4 million
in 1998. The primary uses of cash for financing activities were payments to
repurchase the Company's common stock and the payment of dividends to
shareholders. These activities used cash totaling $428.4 million in 1999
compared to $180.0 million in 1998. Sources of cash from financing activities
were the issuance of common stock to employees under the Company's stock
purchase plan and proceeds from borrowings. Common stock issued to employees
generated financing cash flows of $29.2 million in 1999 and $26.2 million in
1998. Proceeds from borrowings were $61.7 million in 1999. There were no
borrowings during 1998. Repayments of debt used cash of $11.1 million in 1999
compared to $6.6 million in 1998.

As of December 31, 1999, the Company had committed lines of credit for $650.0
million available for borrowing and as support for commercial paper. The average
amount drawn on these lines during 1999 was $39.8 million at a weighted-average
interest rate of 6.39%. As of December 31, 1999, $60.0 million was outstanding
under these lines of credit at an interest rate of 6.39%. No amounts were drawn
on these lines during 1998 and there was no outstanding balance at December 31,
1998. The Company issued no commercial paper during 1999 or 1998.

The Company also had a $5.0 million line of credit, which is denominated in
Indian rupees, available to its international operations at an interest rate of
15.81%. The average amount drawn on this line during 1999 was $2.7 million. As
of December 31, 1999, $3.1 million was outstanding. This line of credit was not
available in 1998.

The Company had uncommitted bank lines of credit for $115.0 million available at
variable interest rates. The average amount drawn on these lines during 1999 was
$1.5 million at a weighted-average interest rate of 5.12%. No amounts were drawn
on these lines during 1998 and there was no outstanding balance at December 31,
1999 and 1998 on these lines of credit.

The Company has a shelf registration in place for the issuance of up to $300.0
million in medium-term notes. Such notes could be used for general corporate
purposes, including working capital, capital expenditures, possible acquisitions
and repayment or repurchase of


20


outstanding indebtedness and other securities of the Company. As of December 31,
1999 and 1998, no such notes were issued or outstanding.

Cash provided by operations in 1998 of $294.3 million was down slightly from
$295.8 million in 1997. Improved operating results in 1998 were offset by an
increase in severance payments from 1997. The Company's working capital on
December 31, 1998 was $177.4 million compared to $131.1 million on December 31,
1997. The Company's current ratio on December 31, 1998 was 1.4 to 1 compared to
1.3 to 1 on December 31, 1997.

Cash used in investing activities was $36.9 million in 1998 compared to $89.4
million in 1997. Purchases of capital assets was the most significant use of
cash for investing activities, totaling $121.3 million in 1998 and $109.5
million in 1997. Sources of investing cash flows were primarily the sales of
businesses and capital assets. These activities generated investing cash flows
of $117.9 million in 1998 and $41.7 million in 1997.

Cash used in financing activities was $160.4 million in 1998 and $177.5 million
in 1997. The primary uses of cash for financing activities were the payment of
dividends to shareholders and payments to repurchase the Company's common stock.
These activities used cash totaling $180.0 million in 1998 compared to $177.6
million in 1997. Sources of cash from financing activities were the issuance of
common stock to employees under the Company's stock purchase plan and proceeds
from borrowings. Common stock issued to employees generated financing cash flows
of $26.2 million in 1998 and $23.7 million in 1997. Repayments of debt used cash
of $6.6 million in 1998 compared to $23.6 million in 1997.

YEAR 2000 READINESS

In 1996, the Company initiated a program to prepare its computer systems,
applications, embedded chip equipment and third-party suppliers/customers for
the year 2000. The year 2000 issue affected the Company and most of the other
companies and governmental agencies in the world. Historically, certain computer
programs were written using two digits rather than four to define the applicable
year. As a result, some programs may recognize a date which uses the two digits
"00" as 1900 rather than the year 2000, which among other things may cause them
to generate erroneous data, lose data elements and possibly fail.

The year 2000 issue did not cause significant operational problems for the
Company. Ongoing reviews are scheduled into 2000 to ensure that compliance
control processes continue to be used.

The Company incurred expenses of approximately $26.0 million over the life of
its year 2000 project, consisting of both internal staff costs and consulting
expenses. SAP software implementation costs and other capital expenditures
associated with replacing or improving affected systems are not included in
these costs. No material information technology project was deferred as a result
of this initiative.


21


MARKET RISK DISCLOSURE

As of December 31, 1999, the Company had an investment portfolio of fixed
income securities, excluding those classified as cash and cash equivalents, of
$25.7 million. These securities, like all fixed income instruments, are subject
to interest rate risk and will decline in value if market interest rates
increase. However, the Company has the ability to hold its fixed income
investments until maturity and therefore the Company would not expect to
recognize an adverse impact on income or cash flows.

The Company operates internationally, and thus is subject to potentially adverse
movements in foreign currency rate changes. The Company does not enter into
foreign exchange forward contracts to reduce its exposure to foreign currency
rate changes on intercompany foreign currency denominated balance sheet
positions. Historically, the effect of movements in the exchange rates have been
immaterial to the consolidated operating results of the Company.

OUTLOOK/RECENT EVENTS

In January 2000, the Company announced that its board of directors approved a
plan to combine its Electronic Payment Solutions, Professional Services and
Government Services segments into a separate, independent publicly traded
company to be called eFunds Corporation (eFunds). Management believes that the
plan to split-off the Company's higher growth businesses is consistent with its
strategy to create strategically focused enterprises that can independently
achieve their business objectives, raise capital and pursue growth opportunities
in their respective markets. Management also believes that splitting-off its
electronic payment and e-commerce related businesses into a publicly traded
company maximizes shareholder value.

The Company has announced that eFunds plans to issue shares of its common stock
to the public through an initial public offering. After this offering, the
Company will continue to own at least 80.1% of eFunds' outstanding shares. The
Company plans to distribute all of its shares of eFunds' common stock to its
shareholders who tender shares of the Company's common stock in an exchange
offer (the Split-off). The Company intends to request a private letter ruling
from the Internal Revenue Service (IRS) that the Split-off would be a tax-free
transaction to the Company and its shareholders. The Split-off is contingent
upon the Company receiving a favorable tax ruling from the IRS.

As part of the Split-off, the Company and eFunds will enter into various
agreements that address the allocation of assets and liabilities between them
and that define their relationship after the separation. The agreements relate
to matters such as consummation of the public offering and the Split-off,
registration rights for the Company, intercompany loans, software development
and business process management services, indemnification, data sharing, real
estate matters, tax sharing and transition services.

In February 2000, the Company acquired all of the outstanding shares of Designer
Checks for $97.0 million. Designer Checks produces specialty design checks and
related products for direct sale to consumers and will be included in the
Company's Paper Payment Systems segment. This acquisition was accounted for
under the purchase method of accounting.


22


Accordingly, the consolidated financial statements of the Company will include
the results of this business subsequent to its acquisition date. The purchase
price was allocated to the assets acquired and liabilities assumed based on
their fair values on the date of purchase. Estimated total cost in excess of net
assets acquired in the amount of $88.8 million will be reflected as goodwill and
will be amortized over 15 years.

In March 2000, the Company paid $20 million for an approximately 24% interest in
a limited liability company that provides automated teller machine (ATM)
management and outsourcing services to retailers and financial institutions.
This investment will be accounted for under the equity method of accounting.
Accordingly, the Company's consolidated statements of income will reflect the
results of this business in other income (expense) within the Company's
Electronic Payment Solutions segment. The Company has also entered into vault
cash agreements with the limited liability company to supply cash for ATMs in
various locations throughout the United States.

The Company is currently in negotiations with the prime contractor for a state
coalition for which the Company's Government Services segment provides
electronic benefits transfer services. To date, the Company and the prime
contractor have been operating without a binding, legally enforceable contract.
The Company is continuing to negotiate towards a final agreement with the prime
contractor. The Company will adjust its provision for expected future losses on
long-term contracts when a definitive agreement, not subject to negotiation, is
finalized; but it is likely that the execution of this definitive agreement will
result in additional charges.

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

The accompanying consolidated financial statements and related information are
the responsibility of management. They have been prepared in conformity with
generally accepted accounting principles and include amounts that are based on
our best estimates and judgments under the existing circumstances. The financial
information contained elsewhere in this annual report is consistent with that in
the consolidated financial statements.

The Company maintains internal accounting control systems that are adequate to
provide reasonable assurance that the assets are safeguarded from loss or
unauthorized use. These systems produce records adequate for preparation of
financial information. We believe the Company's systems are effective, and the
costs of the systems do not exceed the benefits obtained.

The audit committee of the board of directors has reviewed all financial data
included in this report. The audit committee is composed entirely of outside
directors and meets periodically with the internal auditors, management and the
independent public accountants on financial reporting matters. The independent
public accountants have free access to meet with the audit committee, without
the presence of management, to discuss their audit results and opinions on the
quality of financial reporting.


23


The role of the independent public accountants is to render an independent,
professional opinion on management's consolidated financial statements to the
extent required by generally accepted auditing standards.

Deluxe recognizes its responsibility for conducting its affairs according to the
highest standards of personal and corporate conduct. It has distributed to all
employees a statement of its commitment to conducting all Company business in
accordance with applicable legal requirements and the highest ethical standards.

Signature Title
- --------- -----

By /s/ John A. Blanchard III Chairman of the Board of Directors,
--------------------- President and Chief Executive Officer
John A. Blanchard III

By /s/ Thomas W. VanHimbergen Executive Vice President and Chief
---------------------- Financial Officer
Thomas W. VanHimbergen


January 26, 2000


24


DELUXE CORPORATION

FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA