March 23, 2001 - EXHIBIT 13 2000 ANNUAL REPORT TO SHAREHOLDERS - 10-K405: Annual report [Sections 13 and 15(d), S-K Item 405] | Deluxe Corporation (DLX)

Exhibit 13

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

COMPANY PROFILE

During 2000, we operated two business segments: Paper Payment Systems and
eFunds. Paper Payment Systems provides checks and related products to
individuals and small businesses located in the United States. eFunds provides
transaction processing and risk management services to financial institutions,
retailers, electronic funds transfer networks, e-commerce providers and
government agencies and also offers information technology consulting and
business process management services. On December 29, 2000, we distributed our
40 million shares of eFunds Corporation stock, representing 87.9% of eFunds'
total outstanding stock, to our shareholders of record on December 11, 2000.
Each shareholder received .5514 eFunds share for each Deluxe share owned. Cash
was issued in lieu of fractional shares. We received confirmation from the
Internal Revenue Service that this spin-off transaction would be tax-free to
us and to our shareholders for U.S. federal income tax purposes, except to the
extent that cash was received in lieu of fractional shares. The results of the
eFunds segment are reflected as discontinued operations in our consolidated
financial statements.
During 1999 and 1998, we also operated NRC Holding Corporation, a collections
business. This business was sold in December 1999.
During 1998, we operated two additional 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.

UNUSUAL CHARGES AND CREDITS

Over the past three years, we have had charges for restructurings, asset
impairments and other developments, as well as gains and losses from the
dispositions of businesses. These items have had a significant impact on our
results of operations and financial position over this period of time. The
significant items recorded in 2000, 1999 and 1998, on a pre-tax basis, were:

Year Ended December 31,
- --------------------------------------------------------------------------------
(dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Continuing operations:
Net restructuring (reversals) charges $ (2,253) $ (8,155) $36,327
Asset impairment charges 9,740 -- --
(Gains) losses on sales of businesses -- (19,770) 4,850
- --------------------------------------------------------------------------------
Total continuing operations 7,487 (27,925) 41,177
Discontinued operations 27,041 4,207 38,943
- --------------------------------------------------------------------------------
Total charges (gains) $ 34,528 $(23,718) $80,120
================================================================================

These items are reflected in our consolidated statements of income as follows:

Year Ended December 31,
- --------------------------------------------------------------------------------
(dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Cost of goods sold $ -- $ (1,950) $10,853
Selling, general and
administrative expense 7,369 (3,863) 17,941
Other expense (income) 118 (22,112) 12,383
- --------------------------------------------------------------------------------
Total continuing operations 7,487 (27,925) 41,177
Discontinued operations 27,041 4,207 38,943
- --------------------------------------------------------------------------------
Total charges (gains) $34,528 $(23,718) $80,120
================================================================================

For more information about these items, see Notes 4, 5, 6 and 16 to our
consolidated financial statements.

18 Deluxe Corporation * 2000 Annual Report

RESULTS OF OPERATIONS

The following table presents, for the periods indicated, the relative
composition of selected statement of income data:

(1) Units represents an equivalent measure used across all product lines to
measure sales volume.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999

REVENUE: Revenue decreased $101.1 million, or 7.4%, to $1,262.7 million for 2000
from $1,363.8 million for 1999. Our collections business, which was sold in
December 1999, had revenue of $124.1 million in 1999. With this revenue excluded
from 1999, revenue increased $23.0 million, or 1.9%, in 2000. We acquired
Designer Checks in February 2000, which contributed revenue of $55.9 million.
Additionally, revenue per unit increased 5.9% due to price increases and sales
of higher priced products. We increased sales of higher priced products by
selling directly to consumers where we could pursue opportunities to sell
additional products. Partially offsetting these increases, was a 3.8% decrease
in units due to lost financial institution clients and fewer new customers for
products sold directly to consumers, excluding those obtained through the
Designer Checks acquisition. The loss of financial institutions was due
primarily to bank consolidations and competitive pricing which fell below our
revenue and profitability per unit targets. There were fewer new customers for
direct-to-consumer sales due to reduced spending on direct marketing.
In 2001, we plan to offset volume declines by expanding product offerings and
increasing our customer base through promotional spending.

GROSS PROFIT: Gross profit increased $3.6 million to $811.5 million for 2000
from $807.9 million for 1999. As a percentage of revenue, gross margin increased
to 64.3% in 2000 from 59.2% in 1999. Excluding our collections business which
was sold in December 1999, gross profit increased $34.1 million and our 1999
gross margin percentage was 62.7%. The improvement over 1999 was due to process
improvements, the loss of lower margin financial institution clients due to bank
consolidations and competitive pricing, and increased revenue per unit. We
continued to see cost savings from check printing plant closings, as well as
general production efficiencies, including reduced inventory and supplies levels
and improved production workflow. The last of the scheduled check printing
plant closings was completed during the first quarter of 2000, and two
facilities were consolidated into one at the end of the second quarter of 2000.
We plan to continue our process improvements in 2001, although the large levels
of cost savings seen in previous years are not anticipated.

Enhancing shareholder value 19

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE: Selling, general and administrative
(SG&A) expense increased $24.4 million, or 4.8%, to $534.1 million for 2000 from
$509.7 million for 1999. Excluding our collections business which was sold in
December 1999, SG&A expense increased $53.0 million, or 11.0% in 2000. 2000 SG&A
expense includes asset impairment charges of $9.7 million and restructuring
charges of $0.9 million relating to a discontinued e-commerce project. During
2000, we introduced PlaidMoon.com, an Internet-based business concept that
allowed consumers to design and purchase personalized items. In October 2000, we
announced that we were scaling back and repositioning our PlaidMoon.com business
concept. Instead of being a standalone business as had been planned, it is being
folded into the rest of the business. As a result of this decision, we completed
an evaluation to determine to what extent the long-lived assets and employees
of the business could be utilized by our other businesses or with external
alliance partners. We recorded the asset impairment and restructuring charges in
the fourth quarter of 2000 based on the results of this evaluation. The increase
in SG&A expense was also due to the acquisition of Designer Checks in February
2000 and increased spending on e-commerce capabilities for existing businesses.
In 2001, we anticipate continuing spending on e-commerce infrastructure and
increasing promotional spending to obtain new customers.

OTHER INCOME: Other income decreased $21.4 million to $2.5 million for 2000 from
$23.9 million for 1999. This was primarily due to a gain of $19.8 million
recognized in 1999 on the sale of our collections business.

INTEREST EXPENSE: Interest expense increased $3.2 million to $10.8 million for
2000 as compared to $7.6 million for 1999. This was due to higher levels of
borrowings in 2000 than in 1999. During 2000, we had an average of $18.8 million
drawn on our lines of credit, as well as an average of $6.2 million of
commercial paper outstanding. During 1999, we had an average of $13.8 million
drawn on our lines of credit and no commercial paper outstanding.

INVESTMENT INCOME: Investment income decreased $3.6 million to $4.5 million for
2000 as compared to $8.1 million for 1999. This was due to lower levels of
investments in marketable securities and short-term investments (cash
equivalents) during 2000. Our average investment level was $77.5 million during
2000 as compared to $161.7 million during 1999. We had higher levels of cash
available for investment in 1999 due to proceeds from sales of businesses which
occurred in December 1998. The acquisition of Designer Checks in February 2000
reduced cash available for investment during 2000.

PROVISION FOR INCOME TAXES: Our effective tax rate for continuing operations was
38.0% for 2000 compared to 36.7% for 1999. We anticipate a 2001 effective tax
rate between 37.0% and 38.0%.

INCOME FROM CONTINUING OPERATIONS: Income from continuing operations decreased
$34.8 million to $169.5 million for 2000 from $204.3 million for 1999. Our
improved gross profit was more than offset by the impact of increased spending
on e-commerce initiatives. Additionally, 1999 results included a $19.8 million
gain from the sale of our collections business.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998

REVENUE: Revenue decreased $309.9 million, or 18.5%, to $1,363.8 million for
1999 from $1,673.7 million for 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. With
divested businesses excluded from both years, revenue decreased $46.0 million,
or 3.6%, to $1,239.7 million for 1999 from $1,285.7 million for 1998. This
decrease was primarily due to a 5.9% decrease in units due primarily to lost
financial institution clients. The loss of business was due to competitive
pricing which fell below our revenue and profitability per unit targets. This
volume decrease was partially offset by a 2.4% increase in revenue per unit due
to a focus on sales of higher priced products.

20 Deluxe Corporation * 2000 Annual Report

GROSS PROFIT: Gross profit decreased $136.1 million, or 14.4%, to $807.9 million
for 1999 from $944.0 million for 1998. As a percentage of revenue, gross margin
increased to 59.2% in 1999 from 56.4% in 1998. Excluding divested businesses
from both years, gross profit decreased $1.7 million, or 0.2%, to $777.3 million
for 1999 from $779.0 million for 1998. Gross margin excluding divested
businesses in both years was 62.7% in 1999 and 60.6% in 1998. 1998 cost of goods
sold for on-going businesses included restructuring charges of $8.3 million
relating to the planned closure of four check printing plants. By comparison
1999 cost of goods sold for on-going businesses included the reversal of $2.9
million of restructuring reserves relating to the closing of check printing
plants. The closing check printing plants experienced higher attrition rates
than anticipated, resulting in lower severance payments than originally
estimated. Also contributing to the improvement in gross margin were cost
reductions realized from closing check printing plants, process improvements and
the loss of lower margin financial institution clients.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE: SG&A expense decreased $176.4
million, or 25.7%, to $509.7 million for 1999 from $686.1 million for 1998.
Excluding divested businesses in both years, SG&A expense decreased $26.1
million, or 5.1%, to $481.1 million for 1999 from $507.2 million for 1998. 1998
SG&A expense included $17.9 million of restructuring charges relating to our
initiative to reduce SG&A expense and the planned closing of four additional
check printing plants. By comparison, 1999 SG&A expense for on-going businesses
included the reversal of $4.5 million of restructuring charges primarily related
to changes made to our initiative to reduce SG&A expense as a result of a plan
announced in April 1999 to reorganize Deluxe. Additionally, SG&A expense
decreased due to consolidation efforts and reductions in the number of
employees. Partially offsetting these decreases was increased marketing expense
for products sold directly to consumers.

OTHER INCOME (EXPENSE): Other income increased $27.6 million to income of $23.9
million for 1999 from expense of $3.7 million for 1998. 1999 included a gain of
$19.8 million on the sale of our collections business, while 1998 included a net
loss of $4.9 million on the sales of the remaining businesses of the Direct
Response and Deluxe Direct segments.

PROVISION FOR INCOME TAXES: Our effective tax rate for continuing operations
decreased to 36.7% for 1999 from 40.1% for 1998 due primarily to decreased state
tax expense.

INCOME FROM CONTINUING OPERATIONS: Income from continuing operations increased
$50.7 million to $204.3 million for 1999 from $153.6 million for 1998. 1998
included restructuring charges and losses on sales of businesses of $41.2
million, while 1999 included net restructuring reversals and a gain on the sale
of a business of $27.9 million. Additionally, our operating margin improved as a
result of better performance from our on-going operations, as well as from the
sales of the businesses within the Direct Response and Deluxe Direct segments.

DISCONTINUED OPERATIONS

We reported losses from discontinued operations of $7.5 million in 2000, $1.3
million in 1999 and $10.5 million in 1998. These losses represent the results of
the Company's eFunds segment, which was spun-off in December 2000. See Notes 3
and 16 to our consolidated financial statements for more information.
Pre-tax income from the operations of discontinued operations increased in
2000 due to revenue increases across product lines resulting from increased
volumes. Additionally, the business took steps to improve its gross margin.
Partially offsetting the revenue and gross margin improvements was increased
SG&A expense due to additional promotional advertising geared toward creating
brand awareness, and infrastructure investments.
Pre-tax income from the operations of discontinued operations increased in
1999 due to charges of $38.9 million recorded in 1998 primarily relating to
asset impairments and losses on long-term service contracts of the government
services business. Additionally, revenue increased from 1998 due to greater
transaction processing

Enhancing shareholder value 21

and account verification inquiry volumes and price increases, the acquisition of
the professional services business in April 1999 and the roll-out of additional
states for the government services business. Partially offsetting these
improvements over 1998 were costs incurred in conjunction with the development
of new products and services, as well as costs resulting from the acquisition of
the professional services business in April 1999.

LIQUIDITY, CAPITAL RESOURCES AND
FINANCIAL CONDITION

As of December 31, 2000, we had cash and cash equivalents of $69.8 million, as
well as marketable securities of $18.5 million. Our working capital was negative
$96.4 million and positive $14.1 million on December 31, 2000 and 1999,
respectively. The current ratio on December 31, 2000 and 1999 was 0.7 to 1 and
1.0 to 1, respectively. The decrease in working capital and the current ratio
was primarily due to the fact that formerly long-term debt of $100.0 million
was payable in February 2001. Thus, the debt was classified in current
liabilities in our consolidated balance sheet as of December 31, 2000. This debt
was paid in February 2001 with cash on hand.
The following table shows our cash flow activity for the past three years and
should be read in conjunction with our consolidated statements of cash flows:

Year Ended December 31,
- --------------------------------------------------------------------------------
(dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Continuing operations:
Cash provided by
operating activities $ 253,572 $ 221,237 $ 265,130
Cash (used) provided by
investing activities (96,141) 72,637 (5,670)
Cash used by financing activities (159,925) (343,612) (157,681)
- --------------------------------------------------------------------------------
Cash (used) provided by
continuing operations (2,494) (49,738) 101,779
Cash (used) provided by
discontinued operations (32,360) (97,981) 2,961
- --------------------------------------------------------------------------------
Net (decrease) increase in
cash and cash equivalents $ (34,854) $(147,719) $ 104,740
================================================================================

Cash provided by continuing operations was $253.6 million for 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 provided by operations, as well as cash available from our current
credit facilities and commercial paper program, is sufficient to sustain our
existing operations, provide cash for share repurchases and fund possible
acquisitions.
Earnings before interest, taxes, depreciation and amortization (EBITDA) was
$348.4 million for 2000. We also generated cash flows of $16.8 million by
decreasing accounts receivable. Over the past two years, we have been able to
increase the level of trade accounts receivable settled via Automated Clearing
House (ACH) processing, resulting in quicker collection of receivables. We do
not expect to see as large of a reduction in accounts receivable levels in 2001,
as most of our customers which have the ability to settle via ACH processing now
do so. Partially offsetting these cash inflows were income tax payments of $93.6
million and reductions in accounts payable and miscellaneous accruals. During
2000, we also generated $47.0 million of cash through sales of capital assets
and the collection of a loan receivable. These cash inflows were used to
purchase capital assets ($48.5 million), acquire Designer Checks ($96.0
million), pay cash dividends ($107.2 million) and pay-off short-term debt
($60.0 million). We anticipate that purchases of capital assets in 2001 will
approximate the 2000 amount.
We have agreed to indemnify eFunds for future losses arising from any
litigation based on the conduct of its electronic benefits transfer and medical
eligibility verification businesses prior to eFunds' initial public offering in
June 2000, and from certain future losses on identified loss contracts. The
maximum amount of litigation and contract losses for which we will indemnify
eFunds is $14.6 million.
As of December 31, 2000, we had both committed and uncommitted bank lines of
credit. These lines of credit could be withdrawn if we failed to comply with the
covenants established in the credit agreements. Commitment fees on the committed
lines of credit range from six and one-half to seven basis points.
Our committed lines of credit for $450.0 million were available for borrowing
and as support for our $150.0 million commercial paper program. The average
amount drawn on these lines during 2000 was $18.8 million at a weighted-average
interest rate of 6.26%. As of December 31, 2000, no amounts were outstanding
under these lines

22 Deluxe Corporation * 2000 Annual Report

of credit. The average amount drawn on these lines during 1999 was $12.7 million
at a weighted-average interest rate of 6.10%. As of December 31, 1999, $60.0
million was outstanding under these lines of credit at an interest rate of
6.39%. The average amount of commercial paper outstanding during 2000 was $6.2
million at a weighted-average interest rate of 6.56%. No commercial paper was
issued during 1999. There was no outstanding commercial paper at December 31,
2000 or 1999. In March 2001, we increased the amount of our commercial paper
program to $300.0 million.
Our uncommitted bank lines of credit for $35.0 million had variable interest
rates. The average amount drawn on these lines during 2000 was $33,000 at a
weighted-average interest rate of 6.38%. The average amount drawn on these
lines during 1999 was $1.1 million at a weighted-average interest rate of
5.12%. As of December 31, 2000 and 1999 there was no outstanding balance 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. 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
Deluxe. As of December 31, 2000 and 1999, no such notes were issued or
outstanding.

RECENT DEVELOPMENTS

On January 1, 2001, we adopted Statement of Financial Accounting Standard (SFAS)
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as
amended by SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND
CERTAIN HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that all derivatives, including those embedded in other contracts, be recognized
as either assets or liabilities and that those financial instruments be measured
at fair value. The accounting for changes in the fair value of derivatives
depends on their intended use and designation. We have reviewed the requirements
of SFAS No. 133 and have determined that we currently have no free-standing or
embedded derivatives. Application of this SFAS did not have a material impact on
our reported operating results or financial position.
On December 31, 2000, we adopted Emerging Issues Task Force (EITF) Issue No.
00-10, ACCOUNTING FOR SHIPPING AND HANDLING FEES AND COSTS. EITF No. 00-10
establishes the appropriate statement of income classification for amounts
charged to customers for shipping and handling, as well as for costs incurred
related to shipping and handling. Application of this guidance did not result in
a material reclassification within our consolidated statements of income.
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.
In January 2001, we announced that our board of directors approved a stock
repurchase program, authorizing the repurchase of up to 14 million shares of
Deluxe common stock. Depending on market conditions, we anticipate completing
these purchases over the next 12 to 18 months.
In February 2001, our $100.0 million unsecured and unsubordinated notes were
due. We paid these notes utilizing cash on hand.
In March 2001, we increased the amount of our commercial paper program to
$300.0 million.

MARKET RISK DISCLOSURE

As of December 31, 2000, we had an investment portfolio of fixed income
securities, excluding those classified as cash and cash equivalents, of $18.5
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 we would not expect to recognize an adverse impact on
earnings or cash flows.
As of December 31, 2000, we had only fixed rate debt which was due on
February 15, 2001. Thus, interest rate fluctuations would not impact interest
expense or cash flows. If we were to undertake additional debt, interest rate
changes would impact our earnings and cash flows.
Since the spin-off of eFunds in December 2000, we no longer operate
internationally. Thus, we are no longer exposed to foreign exchange risk.

Enhancing shareholder value 23

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
accounting principles generally accepted in the United States of America and
include amounts that are based on our best estimates and judgments under
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 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 the financial data
included in this report. The audit committee is composed entirely of outside
directors and meets periodically with the Company's internal auditors,
management and the independent public accountants on financial reporting
matters. The independent public accountants have free access to meet with the
audit committee, without the presence of management, to discuss their audit
results and opinions on the quality of financial reporting.
The role of the independent public accountants is to render an independent,
professional opinion on management's consolidated financial statements to the
extent required by auditing standards generally accepted in the United States of
America.
Deluxe recognizes its responsibility for conducting its affairs according to
the highest standards of personal and corporate conduct.

/s/ Lawrence J. Mosner

Lawrence J. Mosner
Chairman of the Board of Directors
and Chief Executive Officer

/s/ Douglas J. Treff

Douglas J. Treff
Senior Vice President
and Chief Financial Officer

January 25, 2001

24 Deluxe Corporation * 2000 Annual Report

FIVE-YEAR SUMMARY

(1) Information is not available.
(2) Information reflects data as of the end of the year.
(3) Information reflects only the on-going operations of the Company. Divested
businesses have been excluded from these figures.
(4) Units represents an equivalent measure used across all product lines to
measure sales volume.

Enhancing shareholder value 25

CONSOLIDATED BALANCE SHEETS

See Notes to Consolidated Financial Statements

26 Deluxe Corporation * 2000 Annual Report

CONSOLIDATED STATEMENTS OF INCOME

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

See Notes to Consolidated Financial Statements

Enhancing shareholder value 27

CONSOLIDATED STATEMENTS OF CASH FLOWS

See Notes to Consolidated Financial Statements

28 Deluxe Corporation * 2000 Annual Report

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION: The consolidated financial statements include the accounts of the
Company and all majority owned subsidiaries. All significant intercompany
accounts, transactions and profits have been eliminated.

CASH AND CASH EQUIVALENTS: The Company considers all cash on hand, money market
funds and other highly liquid investments with original maturities of three
months or less to be cash and cash equivalents. The carrying amounts reported in
the consolidated balance sheets for cash and cash equivalents approximate fair
value.

MARKETABLE SECURITIES: Marketable securities consist of debt and equity
securities. They are classified as available for sale and are carried at fair
value, based on quoted market prices. Unrealized gains and losses, net of tax,
are reported in other accumulated comprehensive income in the shareholders'
equity section of the consolidated balance sheets. Realized gains and losses and
permanent declines in value are included in investment income in the
consolidated statements of income. The cost of securities sold is determined
using the specific identification method.

ACCOUNTS RECEIVABLE: Accounts receivable are stated net of allowances for
uncollectible accounts of $1.4 million and $1.3 million at December 31, 2000 and
1999, respectively. The Company records allowances for uncollectible accounts
when it is probable that the full amount of its accounts receivable balance will
not be collected and when this uncollectible amount can be reasonably estimated.
Increases in the allowances for uncollectible accounts are recorded as bad debt
expense and are reflected in selling, general and administrative expense in the
Company's consolidated statements of income. Bad debt expense for continuing
operations was $3.8 million in 2000, $3.1 million in 1999 and $1.4 million in
1998. Bad debt expense reflected in discontinued operations was $3.3 million,
$2.9 million and $1.1 million in 2000, 1999 and 1998, respectively. As of
December 31, 2000 and 1999, no one customer accounted for 10% or more of total
receivables.

INVENTORIES: Inventories are stated at the lower of cost or market. Cost is
determined using the last-in, first-out (LIFO) method for substantially all
inventories. LIFO inventories were approximately $2.7 million and $6.3 million
less than replacement cost at December 31, 2000 and 1999, respectively.
Inventories were comprised of the following at December 31:

- --------------------------------------------------------------------------------
(dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------
Raw materials $ 2,879 $ 3,110
Semi-finished goods 6,504 7,245
Finished goods 1,177 1,231
- --------------------------------------------------------------------------------
Total $ 10,560 $ 11,586
================================================================================

During 2000, inventory quantities were reduced, which resulted in a
liquidation of LIFO inventory layers carried at lower costs which prevailed in
prior years. The effect of this liquidation was to decrease cost of goods sold
by $2.4 million and to increase income from continuing operations by $1.5
million, or $0.02 per share diluted. There were no significant liquidations of
LIFO inventories in 1999 or 1998.

SUPPLIES: These costs consist of items not used directly in the production of
goods, such as maintenance and packaging supplies. Such costs are deferred and
charged to expense when used.

DEFERRED ADVERTISING: These costs consist of materials, production, postage and
design expenditures required to produce newspaper and magazine inserts, direct
mail advertisements and catalogs for products sold directly to consumers. Such
costs are amortized over periods (averaging 18 months) that correspond to the
estimated revenue streams of the individual advertisements. The actual timing of
these revenue streams may differ from these estimates. Sales materials are
charged to expense when no longer owned or expected to be used. Costs of
nondirect response advertising are

Enhancing shareholder value 29

expensed as incurred. The total amount of advertising expense for continuing
operations was $67.6 million in 2000, $49.8 million in 1999 and $99.7 million in
1998. Total advertising expense for discontinued operations was $9.9 million,
$0.7 million and $0.4 million in 2000, 1999 and 1998, respectively.

LONG-TERM INVESTMENTS: At December 31, 2000 and 1999, long-term investments
consist principally of cash surrender values of insurance contracts, notes
receivable and other investments. Such investments are carried at cost or
amortized cost which approximates their fair values.

PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment, including
leasehold and other improvements that extend an asset's useful life or
productive capabilities, are stated at historical cost. Buildings with 40-year
lives and machinery and equipment with lives of three to 11 years are generally
depreciated using accelerated methods. Leasehold and building improvements are
depreciated on a straight-line basis over the estimated useful life of the
property or the life of the lease, whichever is shorter. Property, plant and
equipment was comprised of the following at December 31:

- --------------------------------------------------------------------------------
(dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------
Land and land improvements $ 32,739 $ 36,165
Buildings and building improvements 113,848 131,344
Machinery and equipment 323,181 353,405
- --------------------------------------------------------------------------------
Total 469,768 520,914
Accumulated depreciation (295,812) (301,430)
- --------------------------------------------------------------------------------
Property, plant and equipment-net $ 173,956 $ 219,484
================================================================================

INTANGIBLES: Intangible assets are stated at historical cost. Amortization
expense is generally determined on the straight-line basis over periods of 15 to
30 years for cost in excess of net assets acquired (goodwill) and one to 10
years for internal-use software and other intangibles. Other intangibles consist
primarily of a customer database obtained upon the acquisition of Designer
Checks in February 2000 (see Note 6). The Company continually re-evaluates the
original assumptions and rationale utilized in the establishment of the
estimated lives of its identifiable intangible assets and goodwill. The carrying
values of its intangible assets are evaluated for impairment in accordance with
the Company's policy on impairment of long-lived assets and intangibles.
Intangibles were comprised of the following at December 31:

- --------------------------------------------------------------------------------
(dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------
Cost in excess of net assets acquired $ 96,826 $ 8,000
Internal-use software 195,515 172,000
Other intangible assets 5,812 451
- --------------------------------------------------------------------------------
Total 298,153 180,451
Accumulated amortization (75,355) (41,926)
- --------------------------------------------------------------------------------
Intangibles-net $ 222,798 $ 138,525
================================================================================

CAPITALIZATION OF INTERNAL-USE SOFTWARE: The Company capitalizes costs of
software developed or obtained for internal use once the preliminary project
stage has been completed, management commits to funding the project and it is
probable that the project will be completed and the software will be used to
perform the function intended. Capitalized costs include only (1) external
direct costs of materials and services consumed in developing or obtaining
internal-use software, (2) payroll and payroll-related costs for employees who
are directly associated with and who devote time to the internal-use software
project, and (3) interest costs incurred, when material, while developing
internal-use software. Capitalization of costs ceases when the project is
substantially complete and ready for its intended use. The carrying value of
internal-use software is reviewed in accordance with the Company's policy on
impairment of long-lived assets and intangibles.

WEB SITE DEVELOPMENT COSTS: The Company capitalizes costs associated with the
development of web sites in accordance with its policy on capitalization of
internal-use software. Costs incurred in populating the site with information
about the Company or products available to customers are expensed as incurred.

30 Deluxe Corporation * 2000 Annual Report

IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES: The Company periodically
evaluates the recoverability of property, plant, equipment and identifiable
intangibles not held for sale by measuring the carrying amount of the asset
against the estimated undiscounted future cash flows associated with it. When
the asset being evaluated was acquired in a purchase business combination in
which goodwill was recorded, a pro rata portion of the goodwill value is
included in the carrying amount of the asset. This pro rata portion of goodwill
is based on the relative fair values at the date of acquisition of the
long-lived assets and identifiable intangibles acquired. Should the sum of the
expected future net cash flows be less than the carrying value of the asset
being evaluated, an impairment loss would be recognized. The impairment loss
would be calculated as the amount by which the carrying value of the asset
exceeds the fair value of the asset. The pro rata portion of any goodwill
allocated to the asset would be eliminated before recording any reduction of the
original carrying amount of the asset.
The Company periodically evaluates the recoverability of property, plant,
equipment and identifiable intangibles held for sale by comparing the asset's
carrying amount with its fair value less costs to sell. If a large segment or
separable group of assets which were acquired in a purchase business combination
are held for sale, all of the unamortized goodwill associated with those assets
is included in the carrying amount of the assets for purposes of this
evaluation. Should the fair value less costs to sell be less than the carrying
value of the long-lived asset(s), an impairment loss would be recognized. The
impairment loss would be calculated as the amount by which the carrying value of
the asset(s) exceeds the fair value of the asset(s) less costs to sell. The
unamortized goodwill associated with those assets would be eliminated before
recording any reduction in the original carrying value of the asset(s).
The Company evaluates the carrying value of goodwill at an enterprise level
when events or changes in circumstances at the businesses to which the goodwill
relates indicate that the carrying amount may not be recoverable. Such
circumstances could include, but are not limited to, (1) a current period
operating or cash flow loss combined with a history of operating or cash flow
losses, (2) a forecast that demonstrates continuing losses, (3) a significant
adverse change in legal factors or in business climate, or (4) an adverse action
or assessment by a regulator. In evaluating the recoverability of enterprise
goodwill, the Company measures the carrying amount of the goodwill against the
estimated undiscounted future net cash flows of the businesses to which the
goodwill relates. In determining the future net cash flows, the Company looks to
historical results and current forecasts. The estimated net cash flows include
the effects of income tax payments and interest charges. Should the sum of the
expected future net cash flows be less than the carrying value of the goodwill,
an impairment loss would be recognized. The impairment loss would be calculated
as the amount by which the net book value of the related businesses exceeds the
fair value of these businesses.

INCOME TAXES: Deferred income taxes result from temporary differences between
the financial reporting basis of assets and liabilities and their respective tax
reporting bases. Future tax benefits are recognized to the extent that
realization of such benefits is more likely than not.

REVENUE RECOGNITION: The Company records revenue for the majority of its
operations as products are shipped or as services are performed. When products
are shipped, title to the goods passes to the customer and the customer assumes
the risks and rewards of ownership. Revenue includes amounts billed to customers
for shipping and handling. Costs incurred by the Company for shipping and
handling are reflected in cost of goods sold.

SALES INCENTIVES: The Company enters into contractual agreements with its
customers for rebates on certain products it sells. The Company records these
amounts as reductions of revenue and records a liability reflected as accrued
rebates on the Company's consolidated balance sheets. As these rebate amounts
are determined when the contract is entered into, these revenue reductions are
recorded at the time the related revenue is recorded.
The Company also does, at times, sell its products at discounted prices,
issue coupons and provide free products to customers when they purchase a
specified product. The discount and coupon amounts are recorded as reductions of
revenue at the time the related revenue is recorded. The cost of free products
is recorded as cost of goods sold when the revenue for the related purchase is
recorded.

Enhancing shareholder value 31

EMPLOYEE STOCK-BASED COMPENSATION: As permitted by Statement of Financial
Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
the Company continues to account for its employee stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES. Accordingly, no compensation cost has been recognized for
fixed stock options issued under the Company's stock incentive plan. The Company
discloses pro forma net income and net income per share as if the fair value
method of SFAS No. 123 had been used (see Note 10).

COMPREHENSIVE INCOME: Comprehensive income includes charges and credits to
shareholders' equity that are not the result of transactions with shareholders.
The Company's total comprehensive income consists of net income, foreign
currency translation adjustments and unrealized gains and losses on securities.
The foreign currency translation adjustments and unrealized gains and losses on
securities are reflected as accumulated other comprehensive income in the
Company's consolidated balance sheets and in the Company's shareholders' equity
statement presented in Note 14.

RECLASSIFICATIONS: Other than the reclassifications to reflect the results of
the eFunds segment as discontinued operations (see Note 3), certain other
amounts reported in 1999 and 1998 have been reclassified to conform with the
2000 presentation. These changes had no impact on previously reported net income
or shareholders' equity.

USE OF ESTIMATES: The Company has prepared the accompanying consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America. In this process, it is necessary for management
to make certain assumptions and related estimates affecting the amounts reported
in the consolidated financial statements and attached notes. These estimates and
assumptions are developed based upon all information available using
management's best efforts. However, actual results can differ from assumed and
estimated amounts.

NEW ACCOUNTING PRONOUNCEMENTS: On January 1, 2001, the Company adopted SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended by
SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING
ACTIVITIES. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that all
derivatives, including those embedded in other contracts, be recognized as
either assets or liabilities and that those financial instruments be measured at
fair value. The accounting for changes in the fair value of derivatives depends
on their intended use and designation. The Company has reviewed the requirements
of SFAS No. 133 and has determined that it currently has no free-standing or
embedded derivatives. Application of this standard did not have a material
impact on the Company's reported operating results or financial position.
On December 31, 2000, the Company adopted Emerging Issues Task Force (EITF)
Issue No. 00-10, ACCOUNTING FOR SHIPPING AND HANDLING FEES AND COSTS. EITF No.
00-10 establishes the appropriate statement of income classification for amounts
charged to customers for shipping and handling, as well as for costs incurred
related to shipping and handling. Application of this guidance did not result in
a material reclassification within the Company's consolidated statements of
income.
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.

32 Deluxe Corporation * 2000 Annual Report

NOTE 2

EARNINGS PER SHARE

The following table reflects the calculation of basic and diluted earnings per
share from continuing operations.

During 2000, 1999, and 1998, options to purchase a weighted-average number
of shares of 5.4 million, 2.0 million and 0.7 million, respectively, were
outstanding but were not included in the computation of diluted earnings per
share. The exercise prices of the excluded options were greater than the average
market price of the Company's common shares during the respective periods.

NOTE 3

DISCONTINUED OPERATIONS

In January 2000, the Company announced that its board of directors approved a
plan to combine its electronic payments, professional services and government
services businesses into an independent, publicly-traded company to be called
eFunds Corporation (eFunds). The Company contributed ownership of various
subsidiaries and certain assets and liabilities to eFunds on March 31, 2000. In
June 2000, eFunds sold 5.5 million shares of its common stock to the public. On
December 29, 2000, the Company distributed its 40 million shares of eFunds
stock, representing 87.9% of eFunds' total outstanding shares, to all Company
shareholders of record on December 11, 2000. Each shareholder received .5514
eFunds share for each Deluxe share owned. Cash was issued in lieu of fractional
shares. The net assets distributed to shareholders of $254.0 million was
reflected as a reduction of retained earnings. The Company received confirmation
from the Internal Revenue Service that the spin-off transaction would be
tax-free to the Company and to its shareholders for U.S. federal income tax
purposes, except to the extent that cash was received in lieu of fractional
shares. The results of eFunds are reflected as discontinued operations in the
Company's consolidated financial statements for all periods presented. See Note
16 for additional discontinued operations disclosures not included elsewhere in
these notes to consolidated financial statements.

NOTE 4

RESTRUCTURING CHARGES

During 2000, the Company recorded restructuring charges of $2.0 million within
continuing operations. During the second quarter of 2000, the Company announced
its plan to outsource certain data entry functions to the Company's discontinued
operations. This outsourcing effort affected approximately 155 employees. In the
fourth quarter of 2000, the Company announced that it would be scaling back its
PlaidMoon.com project (see Note 5). This decision is expected to result in the
termination of approximately 40 employees. Additionally, the Company reversed
$4.3 million of restructuring charges primarily relating to the Company's
initiative to reduce selling, general and administrative

Enhancing shareholder value 33

(SG&A) expense. This was 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 subsequently 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 the Company's 2000
consolidated statement of income as a reduction in SG&A expense of $2.4 million
and a decrease in other income of $0.1 million.
During 1999, restructuring accruals of $9.8 million were reversed within
continuing operations. The majority of this amount related to the Company's
initiatives to reduce SG&A expense and to discontinue production of direct mail
products. The excess accrual amount occurred when the Company determined that it
was able to use a greater portion of the direct mail production assets in its
ongoing operations than was originally anticipated, as well as changes in the
SG&A expense reduction initiative due to the 1999 reorganization of the Company
into four independently operated business units. The remainder of the accrual
reversal related to the Company's planned reductions within its Paper Payment
Systems segment. Closing check printing plants experienced higher attrition
rates than anticipated, resulting in lower severance payments than originally
estimated. Also during 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
collection business which was sold in 1999 (see Note 6). These accrual reversals
and the new restructuring accruals are reflected in the 1999 consolidated
statement of income as a reduction in cost of goods sold of $2.0 million, a
reduction in SG&A expense of $3.9 million and other income of $2.3 million.
During 1998, the Company recorded restructuring charges of $36.3 million
within continuing operations. These charges included costs associated with the
Company's initiative to reduce SG&A expense, discontinuing production of the
Direct Response segment's direct mail products and closing four additional check
printing plants. The charges anticipated the elimination of 725 SG&A positions
within sales, marketing, finance, human resources and information services.
Discontinuing production of direct mail products was expected to result in the
elimination of 60 positions. The Company also planned to close four additional
check printing plants, affecting approximately 870 employees. The restructuring
charges consisted of employee severance costs of $28.0 million and $8.3 million
for expected losses on the disposition of assets. Expenses of $10.9 million were
included in cost of goods sold, $17.9 million was included in SG&A expense and
$7.5 million was included in other expense in the Company's 1998 consolidated
statement of income. As of the end of 1999, three of the four check printing
plants were closed, with the remaining plant closed in the first quarter of
2000. The majority of the reductions in SG&A positions were completed in 2000.
The Company's consolidated balance sheets reflect restructuring accruals for
continuing operations of $3.1 million and $13.9 million as of December 31, 2000
and 1999, respectively, for employee severance costs. Additionally, the Company
had restructuring accruals for estimated losses on asset dispositions of $1.1
million as of December 31, 1999.

34 Deluxe Corporation * 2000 Annual Report

The status of the severance portion of the Company's restructuring accruals
for continuing operations as of December 31, 2000 was as follows:

(1) Includes charges recorded in 1996 and 1998 for plans to close check printing
plants and charges recorded in 1996 and 1997 for reductions in corporate
support functions, implementation of a new order processing and customer
service system and implementation of process improvements in the post-press
phase of check production. As of December 31, 2000, all accruals recorded in
1996 and 1997 had been fully utilized.
(2) Includes charges recorded in 1998 for the Company's initiatives to reduce
SG&A expense and to discontinue production of direct mail products.
(3) Includes charges recorded in 1999 for a collection center closing and
reductions, and charges recorded in 2000 for the outsourcing of certain data
entry functions and the scaling-back of PlaidMoon.

The status of the estimated loss on asset dispositions portion of the
Company's continuing operations restructuring accruals as of December 31, 2000
was as follows:

(1) Includes charges recorded in 1996 for the plan to close 21 check printing
plants.

NOTE 5

IMPAIRMENT LOSSES

During 2000, the Company recorded impairment charges of $9.7 million related to
a discontinued e-commerce initiative. Earlier in 2000, the Company announced an
e-commerce growth strategy. One outcome of this strategy was PlaidMoon.com, an
Internet-based business concept that allowed consumers to design and purchase
personalized items. In October 2000, the Company announced that it was scaling
back and repositioning the PlaidMoon.com business concept. Instead of being a
stand-alone business as had been planned, PlaidMoon.com will be folded into the
rest of the business. As a result of this decision, the Company completed an
evaluation to determine to what extent the long-lived assets of the business
could be utilized by its other businesses or with external alliance partners.
This evaluation resulted in the impairment charges of $9.7 million. The impaired
assets consisted of internal-use software developed

Enhancing shareholder value 35

for use by the PlaidMoon.com web site. The estimated fair value of the software
was determined by calculating the present value of net cash flows expected to be
generated by the Company's alternative uses of these assets. These impairment
charges are reflected in SG&A expense in the Company's 2000 consolidated
statement of income.

NOTE 6

BUSINESS COMBINATIONS AND DIVESTITURES

2000 ACQUISITION: During February 2000, the Company acquired all of the
outstanding shares of Designer Checks, Inc. for $96.0 million, net of cash
acquired. Designer Checks produces specialty design checks and related products
for direct sale to consumers. This acquisition was accounted for under the
purchase method of accounting. 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.

1999 DIVESTITURES: During 1999, the Company sold substantially all of the assets
of NRC Holding Corporation and all of the outstanding stock of United Creditors
Alliance International Limited, the Company's collections businesses. The cash
proceeds, net of cash sold, from the sales of these businesses was $74.4
million. The 1999 consolidated statement of income reflects a net gain of $19.8
million on these sales. The consolidated financial statements of the Company
include the results of these businesses through their sale dates. These
businesses contributed revenue of $124.1 million and $121.3 million in 1999 and
1998, respectively.

1998 DIVESTITURES: During 1998, the Company sold substantially all of the assets
of PaperDirect (UK) Limited, ESP Employment Screening Partners, Inc., Social
Expressions, and the remaining businesses within the Direct Response segment.
The Company also sold all of the outstanding stock of PaperDirect, Inc. The
aggregate net sales price for these businesses was $113.7 million, consisting of
cash proceeds of $87.9 million and notes receivable of $25.8 million. The
Company realized a loss of $10.5 million on the combined sale of PaperDirect and
Social Expressions. The individual gains and losses recognized on the sales of
the other businesses did not have a material impact on the results of the
Company. The consolidated financial statements of the Company include the
results of these businesses through their individual sale dates. The notes
receivable from the sales of these businesses were collected in full by the end
of 1999.
The following summarized, unaudited pro forma results of operations for 1998
assumes the divestitures occurred as of the beginning of the period. No
assumptions were made in the pro forma information concerning the use of the
cash received in consideration for the sales of the businesses.

- --------------------------------------------------------------------------------
(dollars in thousands, except per share amounts) 1998
- --------------------------------------------------------------------------------
Revenue $1,423,919
Cost of goods sold 609,056
Selling, general and administrative expense 552,129
Other income, interest expense and investment income 7,887
Provision for income taxes 107,750
- --------------------------------------------------------------------------------
Income from continuing operations $ 162,871
================================================================================

Income from continuing operations per share - basic $ 2.02
Income from continuing operations per share - diluted $ 2.01
================================================================================

36 Deluxe Corporation * 2000 Annual Report

NOTE 7

SALE-LEASEBACK TRANSACTION

During 1999, the Company entered into a $42.5 million sale-leaseback
transaction whereby the Company sold five facilities in Shoreview, Minnesota and
entered into leases for three of these facilities for periods ranging from five
to 10 years. Of the related leases, two are being accounted for as operating
leases and one is a capital lease. The result of this sale was a $17.1 million
gain, of which $10.6 million was deferred and is being amortized over the lease
terms in the case of the operating leases and over the life of the capital asset
in the case of the capital lease. $6.7 million and $8.7 million of the deferred
gain is reflected in other long-term liabilities in the December 31, 2000 and
1999 consolidated balance sheets, respectively. The Company provided short-term
financing for $32.5 million of the proceeds from this sale. This amount is
reflected in prepaid expenses and other current assets in the December 31, 1999
consolidated balance sheet and is reflected as loans to others in the 2000 and
1999 consolidated statements of cash flows. The loan was paid in full in January
2000.

NOTE 8

MARKETABLE SECURITIES

On December 31, 2000 and 1999, investments classified as available for sale
consisted of the following:

December 31, 2000
- --------------------------------------------------------------------------------
Unrealized
holding
(dollars in thousands) Cost loss Fair value
- --------------------------------------------------------------------------------
Debt securities issued by the U.S. Treasury
and other government agencies $ 18,724 $ (266) $ 18,458
Other debt securities (cash equivalents) 76,483 -- 76,483
- --------------------------------------------------------------------------------
Total $ 95,207 $ (266) $ 94,941
================================================================================

December 31, 1999
- --------------------------------------------------------------------------------
Unrealized
holding
(dollars in thousands) Cost loss Fair value
- --------------------------------------------------------------------------------
Debt securities issued by the U.S. Treasury
and other government agencies $ 24,352 $ (636) $ 23,716
Debt securities issued by states of the U.S.
and political subdivisions of states 2,000 (3) 1,997
- --------------------------------------------------------------------------------
Total marketable securities 26,352 (639) 25,713
Other debt securities (cash equivalents) 124,110 -- 124,110
- --------------------------------------------------------------------------------
Total $150,462 $ (639) $149,823
================================================================================

At December 31, 2000, debt securities maturing in 2001 have a cost basis of
$84.5 million and a fair value of $84.4 million. Debt securities maturing in
2002 have a cost basis of $10.7 million and a fair value of $10.5 million.
Proceeds from sales of marketable securities available for sale were $47.6
million, $32.8 million and $19.2 million in 2000, 1999 and 1998, respectively.
The Company realized net gains of $0.7 million, $0.8 million and $0.1 million on
the sales of marketable securities in 2000, 1999 and 1998, respectively.

NOTE 9

PROVISION FOR INCOME TAXES

The components of the provision for income taxes for continuing operations were
as follows:

- --------------------------------------------------------------------------------
(dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Current tax provision:
Federal $ 90,533 $ 61,268 $ 71,396
State 8,320 10,710 21,882
- --------------------------------------------------------------------------------
Total 98,853 71,978 93,278
Deferred tax provision:
Federal 2,870 42,797 9,409
State 2,234 3,486 52
- --------------------------------------------------------------------------------
Total $103,957 $118,261 $102,739
================================================================================

The Company's effective tax rate on pre-tax income from continuing
operations differs from the U.S. federal statutory tax rate of 35% as follows:

- --------------------------------------------------------------------------------
(dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Income tax at federal statutory rate $ 95,700 $112,904 $ 89,707
State income taxes net of federal
income tax benefit 6,860 9,227 14,257
Other 1,397 (3,870) (1,225)
- --------------------------------------------------------------------------------
Provision for income taxes $103,957 $118,261 $102,739
================================================================================

Enhancing shareholder value 37

Tax effected temporary differences which give rise to a significant portion
of deferred tax assets and liabilities at December 31, 2000 and 1999 are as
follows:

- --------------------------------------------------------------------------------
(dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------
Deferred Deferred Deferred Deferred
tax tax tax tax
assets liabilities assets liabilities
- --------------------------------------------------------------------------------
Capital assets $ -- $ 75,720 $ -- $ 55,241
Capital loss carryforwards 9,249 -- 7,400 --
Deferred advertising -- 4,111 -- 4,747
Employee benefit plans 13,488 -- 10,669 --
Inventory 1,294 -- 1,062 --
Restructuring accruals 1,174 -- 5,648 --
Miscellaneous reserves
and accruals 9,674 -- 9,062 --
Prepaid services -- 14,402 -- 16,389
All other 18,341 12,822 12,267 13,947
- --------------------------------------------------------------------------------
Total deferred taxes $ 53,220 $107,055 $ 46,108 $ 90,324
================================================================================

At December 31, 2000, the Company had capital loss carryforwards of $25.0
million which expire in 2003.

NOTE 10

EMPLOYEE BENEFIT AND STOCK-BASED COMPENSATION PLANS

STOCK PURCHASE PLAN: The Company has an employee stock purchase plan that
enables eligible employees to purchase the Company's common stock at 75% of its
fair market value on the first business day following each three-month purchase
period. Compensation expense recognized in continuing operations for the
difference between the employees' purchase price and the fair value of the stock
was $1.8 million, $4.1 million and $5.2 million in 2000, 1999 and 1998,
respectively. Related compensation expense recognized in discontinued operations
was $0.9 million, $0.7 million and $0.7 million in 2000, 1999 and 1998,
respectively. Under the plan, 434,337, 568,107 and 698,830 shares were issued at
prices ranging from $16.83 to $20.58, $20.95 to $27.57 and $24.38 to $26.16 in
2000, 1999 and 1998, respectively.

STOCK INCENTIVE PLAN: Under the Company's stock incentive plan, stock-based
awards may be issued to employees via a broad range of methods, including
non-qualified or incentive stock options, restricted stock and restricted stock
units, stock appreciation rights and other awards based on the value of the
Company's common stock. Options become exercisable in varying amounts beginning
generally one year after the date of grant. The plan was amended in 1996 to
reserve an aggregate of seven million shares of common stock for issuance under
the plan. Awards for 5.4 million of these shares were granted prior to the
termination of the plan on December 31, 2000. The Company's 2000 stock incentive
plan, which is effective January 1, 2001, was approved by shareholders in August
2000. Three million shares of common stock were reserved for issuance under this
plan.
In 1998, the Company adopted the DeluxeSHARES program. Under this program,
options were awarded to substantially all employees of the Company (excluding
foreign employees and employees of businesses held for sale), allowing them,
subject to certain conditions, to purchase 100 shares of common stock at a
converted exercise price of $25.20 per share. The options became exercisable on
January 30, 2001. Options for the purchase of 1.7 million shares of common stock
were issued under this program.
All options allow for the purchase of shares of common stock at prices equal
to their market value at the date of grant. Information regarding the options
issued under the current plan, which was adopted in 1994, the remaining options
outstanding under the former plan adopted in 1984, and the DeluxeSHARES plan, is
as follows:

Weighted-
average
Number exercise
of shares price
- --------------------------------------------------------------------------------
Outstanding at January 1, 1998 2,503,352 $33.04
Granted 3,085,800 33.18
Exercised (277,848) 29.76
Canceled (689,042) 34.60
- --------------------------------------------------------------------------------
Outstanding at December 31, 1998 4,622,262 33.10
Granted 1,231,053 35.72
Exercised (481,340) 30.62
Canceled (835,418) 35.41
- --------------------------------------------------------------------------------
Outstanding at December 31, 1999 4,536,557 33.65
Granted 1,215,823 25.36
Canceled (384,932) 33.84
- --------------------------------------------------------------------------------
Outstanding at December 31, 2000 5,367,448 24.33
================================================================================

Options for the purchase of 3,271,030 shares were exercisable at December 31,
2000, 1,905,060 were exercisable at December 31, 1999 and 1,641,298 were
exercisable at December 31, 1998.

38 Deluxe Corporation * 2000 Annual Report

In connection with the spin-off of eFunds (see Note 3), options outstanding
as of the spin-off record date were converted to options of the Company and
options of eFunds. This conversion was calculated under a formula based on the
market value of the Company's and eFunds' common stock at the spin-off record
date and was designed to maintain an equivalent intrinsic value for the option
holder utilizing the criteria described in Financial Accounting Standards Board
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION. This conversion process resulted in an adjustment to the pricing
of the Company's options. The number of options and the remaining lives of the
options were not adjusted. The weighted-average exercise prices shown in the
table above, reflect the option prices on the dates the indicated events
occurred. Thus, the weighted-average exercise price of options outstanding at
December 31, 2000 reflects this pricing adjustment. The Company did not record a
compensation charge as a result of this conversion process.

For options outstanding and exercisable at December 31, 2000, the adjusted
exercise price ranges and average remaining lives were as follows:

The Company issued 72,111, 106,815 and 60,912 restricted shares and
restricted stock units at weighted-average fair values of $25.55, $34.78 and
$33.22 during 2000, 1999 and 1998, respectively. These awards generally vest
over periods ranging from one to five years.
Pro forma net income and net income per share have been determined as if the
Company had accounted for its employee stock-based compensation under the fair
value method. The fair value of options was estimated at the date of grant using
the Black-Scholes option pricing model. The following weighted-average
assumptions were used in valuing options issued:

- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Risk-free interest rate (%) 6.6 6.7 5.9
Dividend yield (%) 7.1 4.6 4.5
Expected volatility (%) 24.4 24.0 21.8
Weighted-average option life (years) 9.0 9.0 5.9
================================================================================

The weighted-average fair value of options granted in 2000, 1999 and 1998
was $3.57, $8.24 and $5.99 per share, respectively. For purposes of pro forma
disclosures, the estimated fair value of the options was recognized as expense
over the options' vesting periods. The Company's pro forma net income and net
income per share were as follows:

- --------------------------------------------------------------------------------
(dollars in thousands,
except per share amounts) 2000 1999 1998
- --------------------------------------------------------------------------------
Net income:
As reported $161,936 $203,022 $143,063
Pro forma 157,552 197,555 140,510
Net income per share - basic:
As reported $ 2.24 $ 2.65 $ 1.77
Pro forma 2.18 2.58 1.74
Net income per share - diluted:
As reported $ 2.24 $ 2.64 $ 1.77
Pro forma 2.18 2.57 1.74
================================================================================

These pro forma calculations only include the effects of grants made
subsequent to January 1, 1995. As such, these impacts are not necessarily
indicative of the pro forma effects on reported net income of future years.

Enhancing shareholder value 39

PROFIT SHARING, DEFINED CONTRIBUTION AND 401(K) PLANS: The Company maintains
profit sharing plans, a defined contribution pension plan and a plan established
under section 401(k) of the Internal Revenue Code to provide retirement benefits
for certain employees. The plans cover substantially all full-time and some
part-time employees with approximately 15 months of service. Contributions to
the profit sharing and defined contribution plans are made solely by the
Company. Employees may contribute up to the lessor of $10,500 or 10% of their
wages to the 401(k) plan. The Company will match the first 1% of wages
contributed and 50% of the next 4% of wages contributed. All contributions are
remitted to the plans' respective trustees, and benefits provided by the plans
are paid from accumulated funds of the trusts.
Contributions to the defined contribution pension plan equaled 4% of eligible
compensation in 2000, 1999 and 1998. Related expense for continuing operations
for these years was $9.5 million, $12.3 million and $11.2 million, respectively.
Related expense for discontinued operations was $4.9 million, $3.2 million and
$2.5 million in 2000, 1999 and 1998, respectively. Contributions to the profit
sharing plans vary based on the Company's performance. Expense for continuing
operations for these plans was $11.7 million, $12.8 million and $22.9 million in
2000, 1999 and 1998, respectively. Expense for discontinued operations was $3.1
million, $4.8 million and $4.6 million in 2000, 1999 and 1998, respectively.
Company contributions to the 401(k) plan for continuing operations were $4.7
million, $6.4 million and $6.3 million in 2000, 1999 and 1998, respectively.
Company contributions for discontinued operations were $2.3 million, $1.5
million and $1.5 million in 2000, 1999 and 1998, respectively.

NOTE 11

POST-RETIREMENT BENEFITS

The Company provides certain health care benefits for a large number of its
retired employees. Employees included in the plan may become eligible for such
benefits if they attain the appropriate years of service and age while working
for the Company. During 2000, the Company's plan was expanded to include certain
employees of its Checks Unlimited subsidiary who were previously not covered by
the plan.
Certain retirees' medical insurance premiums are based on the amounts paid by
active employees. Effective January 1, 1998, active employees' premiums were
reduced, thus reducing the medical premiums required to be paid by these
retirees. Additionally, for retirees who participate in the active employees'
indemnity plans, their co-payment amount was increased 5%.
The following table summarizes the change in benefit obligation and plan
assets during 2000 and 1999:

(dollars in thousands)
- --------------------------------------------------------------------------------
Benefit obligation, January 1, 1999 $ 80,639
Service cost 1,694
Interest cost 5,286
Actuarial (gains) and losses 3,383
Effect of curtailment (3,200)
Benefits paid from plan assets and general funds
of the Company (6,947)
- --------------------------------------------------------------------------------
Benefit obligation, December 31, 1999 80,855
Service cost 1,586
Interest cost 5,873
Plan amendments 3,459
Actuarial (gains) and losses 2,329
Effect of curtailment (1,837)
Benefits paid from plan assets and general funds
of the Company (6,088)
- --------------------------------------------------------------------------------
Benefit obligation, December 31, 2000 $ 86,177
================================================================================

Fair value of plan assets, January 1, 1999 $ 64,486
Actual return on plan assets 11,678
Benefits paid (3,900)
- --------------------------------------------------------------------------------
Fair value of plan assets, December 31, 1999 72,264
Actual return on plan assets 11,386
Benefits paid (4,200)
- --------------------------------------------------------------------------------
Fair value of plan assets, December 31, 2000 $ 79,450
================================================================================

The funded status of the plan was as follows at December 31:

- --------------------------------------------------------------------------------
(dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation $ 86,177 $ 80,855
Less:
Fair value of plan assets (debt and equity securities) 79,450 72,264
Unrecognized prior service cost 3,949 743
Unrecognized net loss 8,526 10,908
Unrecognized transition obligation 5,038 5,949
- --------------------------------------------------------------------------------
Prepaid post-retirement asset recognized in the
consolidated balance sheets $(10,786) $ (9,009)
================================================================================

40 Deluxe Corporation * 2000 Annual Report

Net post-retirement benefit cost for the years ended December 31 consisted
of the following components:

- --------------------------------------------------------------------------------
(dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Service cost - benefits earned
during the year $ 1,586 $ 1,694 $ 1,218
Interest cost on the accumulated
post-retirement benefit obligation 5,873 5,286 4,651
Expected return on plan assets (7,236) (6,126) (5,719)
Amortization of transition obligation 458 586 680
Amortization of prior service cost 186 257 269
Recognized net amortization of
(gains) and losses 127 290 (63)
- --------------------------------------------------------------------------------
Net post-retirement benefit cost 994 1,987 1,036
Curtailment (gain) loss (883) (1,242) 315
- --------------------------------------------------------------------------------
Total post-retirement benefit cost $ 111 $ 745 $ 1,351
================================================================================

As a result of sales of businesses (see Note 6) and a reduction in employees
as a result of the Company's cost-saving initiatives (see Note 4), the Company
recognized a net post-retirement benefit curtailment gain of $0.3 million in
2000 and $1.2 million in 1999, and a net curtailment loss of $0.3 million in
1998. Additionally, in connection with the spin-off of eFunds (see Note 3),
eFunds terminated its post-retirement medical plan. eFunds employees and
retirees who were qualified for retiree medical benefits as of the spin-off
date will continue to be eligible for these benefits from the Company. The
Company has retained an obligation of $0.1 million as of December 31, 2000 for
these employees and retirees. A net post-retirement benefit curtailment gain of
$0.6 million was recorded at the spin-off date and was included in discontinued
operations in the Company's 2000 consolidated statement of income.
In measuring the accumulated post-retirement benefit obligation as of
December 31, 2000, the Company's health care inflation rate for 2000 and beyond
was assumed to be 5%. A one percentage point increase in the health care
inflation rate for each year would increase the accumulated post-retirement
benefit obligation by approximately $12.8 million and the service and interest
cost components of the net post-retirement benefit cost by approximately $1.1
million. A one percentage point decrease in the health care inflation rate for
each year would decrease the accumulated post-retirement benefit obligation by
approximately $11.2 million and the service and interest cost components of the
net post-retirement benefit cost by approximately $1.0 million. The discount
rate used in determining the accumulated post-retirement benefit obligation as
of December 31, 2000 and 1999 was 7.5%. The expected long-term rate of return
on plan assets used to determine the net periodic post-retirement benefit cost
was 9.5% in 2000, 1999 and 1998.

NOTE 12

LEASE AND DEBT COMMITMENTS

Long-term debt was as follows:

December 31,
- --------------------------------------------------------------------------------
(dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------
8.55% unsecured and unsubordinated notes due
February 15, 2001 $100,000 $100,000
Other 10,873 14,407
- --------------------------------------------------------------------------------
Total long-term debt 110,873 114,407
Less amount due within one year 100,672 2,462
- --------------------------------------------------------------------------------
Total $ 10,201 $111,945
================================================================================

In February 1991, the Company issued $100.0 million of 8.55% unsecured and
unsubordinated notes due February 15, 2001. The notes are not redeemable prior
to maturity. The fair values of these notes were estimated to be $100.2 million
and $101.8 million at December 31, 2000 and 1999, respectively, based on quoted
market prices.
Other long-term debt as of December 31, 2000 consists of a facility capital
lease. This capital lease obligation bears interest at 10.4% and is due through
the year 2009. The Company also has entered into operating leases on certain
facilities and equipment. Future minimum lease payments under the capital
obligation and noncancelable operating leases as of December 31, 2000 are as
follows:

- --------------------------------------------------------------------------------
Capital Operating
(dollars in thousands) Lease Leases
- --------------------------------------------------------------------------------
2001 $ 1,773 $ 7,071
2002 1,804 6,041
2003 1,897 4,534
2004 1,897 3,717
2005 1,897 2,619
2006 and thereafter 7,437 3,343
- --------------------------------------------------------------------------------
Total minimum lease payments 16,705 $27,325
================================================================================
Less portion representing interest 5,832
- --------------------------------------------------------------------------------
Present value of minimum lease payments 10,873
Less current portion 672
- --------------------------------------------------------------------------------
Long-term portion of obligation $10,201
================================================================================

Enhancing shareholder value 41

Rent expense charged to continuing operations was $10.6 million, $23.2
million and $26.6 million for 2000, 1999 and 1998, respectively. Rent expense
charged to discontinued operations was $17.5 million, $20.7 million and $18.8
million for 2000, 1999 and 1998, respectively.
Depreciation of the Company's real estate asset under capital lease is
included in depreciation expense in the Company's consolidated statements of
cash flows. The balance of the leased asset was as follows:

December 31,
- --------------------------------------------------------------------------------
(dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------
Buildings and building improvements $ 11,574 $ 11,574
Less accumulated depreciation 1,933 232
- --------------------------------------------------------------------------------
Net buildings and building improvements
under capital lease $ 9,641 $ 11,342
================================================================================

As of December 31, 2000, the Company had both committed and uncommitted bank
lines of credit. These lines of credit could be withdrawn if the Company failed
to comply with the covenants established in the credit agreements. Commitment
fees on the committed lines of credit range from six and one-half to seven
basis points.
The Company's committed lines of credit for $450.0 million were available for
borrowing and as support for its $150.0 million commercial paper program. The
average amount drawn on these lines during 2000 was $18.8 million at a
weighted-average interest rate of 6.26%. As of December 31, 2000, no amounts
were outstanding under these lines of credit. The average amount drawn on these
lines during 1999 was $12.7 million at a weighted-average interest rate of
6.10%. As of December 31, 1999, $60.0 million was outstanding under these lines
of credit at an interest rate of 6.39%. The average amount of commercial paper
outstanding during 2000 was $6.2 million at a weighted-average interest rate of
6.56%. No commercial paper was issued during 1999. There was no outstanding
commercial paper at December 31, 2000 or 1999.
The Company's uncommitted bank lines of credit for $35.0 million were
available at variable interest rates. The average amount drawn on these lines
during 2000 was $33,000 at a weighted-average interest rate of 6.38%. The
average amount drawn on these lines during 1999 was $1.1 million at a
weighted-average interest rate of 5.12%. As of December 31, 2000 and 1999 there
was no outstanding balance 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 December 31, 2000 and 1999, no such notes were
issued or outstanding.
Absent certain defined events of default under a $150.0 million committed
credit facility and the indenture related to its outstanding 8.55% unsecured and
unsubordinated notes due February 15, 2001, there are no significant contractual
restrictions on the ability of the Company to pay cash dividends.

NOTE 13

COMMON STOCK PURCHASE RIGHTS

On February 5, 1988, the Company declared a distribution to shareholders of
record on February 22, 1988, of one common stock purchase right for each
outstanding share of common stock. These rights were governed by the terms and
conditions of a rights agreement entered into by the Company as of February 12,
1988. That agreement was amended and restated as of January 31, 1997 and further
amended as of January 21, 2000 (Restated Agreement).
Pursuant to the Restated Agreement, upon the occurrence of certain events,
each right will entitle the holder to purchase one share of common stock at an
exercise price of $150. In certain circumstances described in the Restated
Agreement, if (i) any person becomes the beneficial owner of 15% or more of the
Company's common stock, (ii) the Company is acquired in a merger or other
business combination or (iii) upon the occurrence of other events, each right
will entitle its holder to purchase a number of shares of common stock of the
Company, or the acquirer or the surviving entity if the Company is not the
surviving corporation in such a transaction. The number of shares purchasable
will be equal to the exercise price of the right divided by 50% of the
then-current market price of one share of common stock of the Company, or other
surviving entity (i.e., at a 50% discount), subject to adjustments provided in
the Restated Agreement. The rights expire January 31, 2007, and may be redeemed
by the Company at a price of $.01 per right at any time prior to the occurrence
of the circumstances described above.

42 Deluxe Corporation * 2000 Annual Report

NOTE 14

SHAREHOLDERS' EQUITY

(1) Prior to 2000, for purposes of consolidating a subsidiary based in India,
the Company used financial statements with a November 30 fiscal period end.
Effective January 1, 2000, this subsidiary changed its reporting dates to
coincide with the rest of the Company. The results of operations for this
subsidiary 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.
(2) In June 2000, the Company's subsidiary, eFunds, sold 5.5 million shares of
its common stock to the public. Prior to this initial public offering (IPO),
the Company owned 40 million, or 100%, of eFunds' total outstanding shares.
Subsequent to the IPO, the Company continued to own 40 million shares of
eFunds, representing 87.9% of eFunds' total outstanding shares. Proceeds
from the offering, based on the offering price of $13.00 per share, totaled
$71.5 million ($64.5 million, net of offering expenses). The difference of
$30.5 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. No tax expense or deferred tax was provided on this
amount, as the Company disposed of its ownership in eFunds in a tax-free
manner (see Note 3).

NOTE 15

BUSINESS SEGMENT INFORMATION

During 2000, the Company operated two business 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 individuals and
small businesses located in the United States. eFunds provides transaction
processing and risk management services to financial institutions, retailers,
electronic funds transfer networks, e-commerce providers and government
agencies and also offers information technology consulting and business process
management services. In December 2000, the Company disposed of its ownership in
eFunds via a spin-off transaction (see Note 3). The results of eFunds are
reflected

Enhancing shareholder value 43

as discontinued operations in the Company's consolidated financial statements
and thus, are excluded from the Company's segment information. Prior year
information for the Paper Payment Systems segment has been restated to include
unallocated corporate expenses.
During 1999 and 1998, the Company also operated NRC Holding Corporation, a
collections business. This business was sold in December 1999 (see Note 6). The
results of this business are not included in the Company's reportable segments,
but are included in the Company's reconciliations to consolidated amounts.
During 1998, the Company operated two additional segments: Direct Response
and Deluxe Direct. The sales of both of these businesses were completed in
December 1998 (see Note 6). 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.
None of the Company's reportable segments operated internationally during
2000 or 1999. The Company's Deluxe Direct segment did have operations in the
United Kingdom during 1998. These operations generated revenue of $1.2 million
during 1998. No single customer of the Company accounted for more than 10% of
revenue in 2000, 1999 or 1998.
The accounting policies of the segments are the same as those described in
Note 1. During 1998, corporate 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 corporate
assets. The corresponding corporate asset balances were allocated to the
segments. Most inter-segment sales were based on current market pricing.

44 Deluxe Corporation * 2000 Annual Report

All Others total assets as of December 31, 1999 represents the net assets of
discontinued operations (see Note 3). All Others total assets as of December 31,
1998 includes net assets of discontinued operations of $89.4 million and the
assets of the Company's collections business.
The Company's revenue by product was as follows:

- --------------------------------------------------------------------------------
(dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Checks and related services $1,126,249 $1,113,143 $1,140,236
Other printed products 21,519 23,757 25,659
Accessories 114,944 102,824 119,833
Divested businesses -- 124,074 387,987
- --------------------------------------------------------------------------------
Total revenue $1,262,712 $1,363,798 $1,673,715
================================================================================

NOTE 16

ADDITIONAL DISCONTINUED OPERATIONS DISCLOSURES

SIGNIFICANT ACCOUNTING POLICIES:

CAPITALIZATION OF SOFTWARE DEVELOPED FOR RESALE: The Company's discontinued
operations capitalized costs of software developed for licensing and resale once
technological feasibility had been established. Costs incurred prior to
establishing technological feasibility were expensed as incurred. Technological
feasibility was established upon completion of all planning, designing, coding
and testing activities that were necessary to determine that a product could be
produced to meet its design specifications, including functions, features and
technical performance requirements. Capitalization of costs ceased when the
product was available for general release to customers. Such costs were
amortized on a product-by-product basis, but no longer then five years. The
carrying value of software developed for resale was reviewed in accordance with
the Company's policy on impairment of long-lived assets and intangibles.
In some situations, customers did not take possession of the software.
Instead, it remained installed on the Company's hardware and customers accessed
it as needed. The software utilized under these arrangements was also sold to
customers. Thus, the development costs of these software products were accounted
for under the Company's policy on capitalization of software developed for
resale.

TRANSLATION ADJUSTMENT: The financial position and results of operations of
international subsidiaries were measured using local currencies as the
functional currencies. Assets and liabilities of these operations were
translated at the exchange rate in effect at the balance sheet date. Income
statement accounts were translated at the average exchange rate during the year.
Translation adjustments arising from the use of differing exchange rates from
period to period were included in accumulated other comprehensive income in the
shareholders' equity section of the consolidated balance sheets. After the
spin-off of discontinued operations in December 2000 (see Note 3), the Company
no longer operates international subsidiaries.

REVENUE RECOGNITION: Transaction processing and service fees were recognized in
the period that the service was performed. These services consisted of
processing customers' electronic debit transactions through electronic funds
transfer networks and settling the funds with the financial institutions
involved in the transaction. Additionally, these services included monitoring
automated teller machines (ATM) and point-of-sale devices to alert the
customers when potential problems occurred. These fees were charged on a per
transaction basis, depending on the contractual arrangement with the customer.
Government services fees were recognized in the period services were provided
based on monthly fees per benefits recipient.
Decision support fees were recognized as revenue in the period the services
were provided. Decision support services consisted of new account applicant and
check verification screenings to manage the risk associated with account
openings and check acceptance. Decision support fees were based on the number of
inquiries against the databases used for screening purposes or monthly fees
based on the aggregate dollar value of checks authorized by the retailer,
depending on the product and service.
Software license fees for standard software products were recognized at the
point when delivery occurred, the license fee was fixed and determinable,
collectibility was probable and evidence of the arrangement existed. License
fees were charged based on modules purchased by the customer. In some
situations, customers did not take possession of the software. Instead, it
remained installed on the Company's hardware and customers accessed it as
needed. Revenue in these situations was recognized on a fee-for-service basis.

Enhancing shareholder value 45

Software maintenance and support revenues were recognized ratably over the
term of the contract, and/or as the services were provided. Support services,
such as customization of standard software modules, were charged on a time and
materials basis and were recognized as hours were completed.
Revenue for information technology consulting and business process management
services were generally recognized under two methods, depending on contractual
terms. Under the time and materials method, revenue was based on a fee per hour
basis and was recognized as hours were completed. Under the fixed contract
method, a pre-set fee was agreed upon for a project, and revenue was recognized
proportionately to the percentage completion of the project.

LONG-TERM SERVICE CONTRACTS: Long-term service contracts are definitive
agreements to provide services over a period of time in excess of one year and
with respect to which the Company has no contractual right to adjust the prices
or terms at or on which its services are supplied during the term of the
contract. The Company's long-term service contracts were for transaction
processing and business process management services provided by discontinued
operations. Total revenues for some long-term service contracts could vary
based on the demand for services. Revenues on long-term service contracts were
recognized under the applicable revenue recognition policy outlined above.
Expenses were recognized when incurred, with the exception of installation
costs. Under the discontinued operations' long-term service contracts,
installation costs were not recovered at the time of installation. Rather, they
were factored into billing rates over the term of the contract. Accordingly,
installation costs for long-term service contracts were initially capitalized
and then amortized over the life of the contract. Any equipment and software
purchased to support a long-term service contract was capitalized and
depreciated or amortized over the life of the related contract or the life of
the asset, whichever was shorter.
In determining the profitability of a long-term service contract, only
direct and allocable indirect costs associated with the contract were included
in the calculation. The appropriateness of allocations of indirect costs
depended on the circumstances and involved the judgment of management, but such
costs could have included the costs of indirect labor, contract supervision,
tools and equipment, supplies, quality control and inspection, insurance,
repairs and maintenance, depreciation and amortization and, in some
circumstances, support costs. The method of allocating any indirect costs
included in the analysis was also dependent upon the circumstances and the
judgment of management, but the allocation method was systematic and rational.
Selling, general and administrative costs were not included in the analysis.
Provisions for estimated losses on long-term service contracts, if any, were
made in the period in which the loss first became probable and reasonably
estimable. Projected losses were based on management's best estimates of a
contract's revenue and costs. Actual losses on individual long-term service
contracts were compared to the loss projections periodically, with any changes
in the estimated total contract loss recognized as they became probable and
reasonably estimable.
Certain direct costs associated with electronic benefits transfer (EBT)
contracts were common to a number of contracts and were attributed to each
contract based on its use of the services associated with these common direct
costs. Revenues, case counts or other applicable statistics were used to
attribute these costs to individual contracts.
In the event an asset impairment loss was recognized on long-lived assets
used to support a long-term service contract, the original estimation of the
contract's costs was revised to reduce the depreciation and amortization
associated with the impaired assets accordingly.

RESULTS OF DISCONTINUED OPERATIONS:

Revenue and loss from discontinued operations were as follows:

Year Ended December 31,
- --------------------------------------------------------------------------------
(dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Revenue from external customers $358,609 $293,502 $265,934
Pre-tax income (loss) from operations
of discontinued operations before
measurement date $ 10,402 $ 2,073 $(13,390)
Pre-tax costs of spin-off (16,786) -- --
Income tax expense (benefit) 1,152 3,372 (2,887)
- --------------------------------------------------------------------------------
Net loss from discontinued operations $ (7,536) $ (1,299) $(10,503)
================================================================================

46 Deluxe Corporation * 2000 Annual Report

Pre-tax costs of the spin-off are net of pre-tax income of $2.2 million for
the results of discontinued operations subsequent to the November 30, 2000
measurement date. This is the date on which the Company's board of directors
approved the spin-off. Costs of the spin-off also include amounts due to
officers of the Company under executive employment agreements of $7.2 million,
losses of $2.9 million on disposals of infrastructure assets not usable by the
Company or by the discontinued operations, as well as legal, consulting and
accountants fees.
In connection with the spin-off, the Company and eFunds entered into various
agreements that define their relationship after the separation. The Company has
agreed to indemnify eFunds for future losses arising from any litigation based
on the conduct of the discontinued operations' EBT and medical eligibility
verification businesses prior to eFunds' initial public offering in June 2000
(see Note 14), and from certain future losses on identified loss contracts. The
maximum amount of litigation and contract losses for which the Company will
indemnify eFunds is $14.6 million. The Company has also entered into contracts
with eFunds for the purchase of application development, support and repair
services and business process management services. The Company expects to pay
eFunds approximately $50.0 million per year for these services through 2004. The
Company also agreed to provide eFunds the right, through 2001, to use the system
through which the Company's check printing customers order products in order
that eFunds may deliver its ChexSystems products. The Company will receive
approximately $3.9 million from eFunds in 2001 for providing this right.
Additionally, the two companies entered into agreements addressing such matters
as data sharing, real estate and tax sharing.

RESTRUCTURING CHARGES:

During 2000, the Company's results of discontinued operations includes
restructuring charges of $0.6 million for administrative reductions. These
charges assumed the termination of 31 employees.
During 1999, the Company's results of discontinued operations includes
reversals of restructuring charges of $2.4 million relating to the Company's
1998 initiative to reduce SG&A expense and its 1996 plan to reduce its
international workforce. The reduction in the SG&A expense initiative accrual
was due to higher than anticipated attrition, resulting in severance payments to
37 fewer employees than originally anticipated. Also, prior to 1999, the Company
was planning on divesting its international operations. In 1999, the Company
decided to retain these operations, thus, planned reductions within that
business were canceled.
During 1998, the Company's results of discontinued operations includes
restructuring charges of $3.2 million for severance associated with the
Company's initiative to reduce SG&A expense. The Company had anticipated
eliminating 76 positions in various support functions within sales, marketing,
finance, human resources and information services. Also during 1998, the results
of discontinued operations includes the reversal of $1.0 million of a 1996
restructuring charge. The 1996 charge related to planned reductions in various
international support functions. Due to higher than anticipated attrition, it
was necessary to reduce this reserve.

The following table summarizes the changes in discontinued operations
restructuring reserves during 2000, 1999 and 1998:

Enhancing shareholder value 47

IMPAIRMENT LOSSES:

During 1998, the Company's results of discontinued operations includes
impairment charges of $26.3 million to write-down the carrying value of the
long-lived assets of the EBT business. The assets consisted of point-of-sale
equipment, internal-use software and capitalized installation costs. The Company
concluded that the operating losses incurred by this business would continue.
This was primarily due to the fact that the variable costs associated with
supporting benefit recipient activity were higher than originally anticipated
and actual transaction volumes were below original expectations. In calculating
the impairment charges, the Company determined that the assets utilized by this
business had no fair market value. The point-of-sale equipment was purchased via
capital leases. The lease buy-out prices for the equipment plus the
deinstallation costs exceeded the amount equipment resellers were willing to pay
for the equipment. The utility of the internal-use software was limited to its
use in supporting the EBT business, and the installation costs could not be
resold. Thus, the long-lived assets and intangibles of this business were
reduced to a carrying value of zero.

CONTRACT LOSSES:

During 2000, 1999 and 1998, the Company's results of discontinued operations
includes charges for expected future losses on the long-term service contracts
of the EBT business.
During 2000, net contract loss charges of $9.7 million were recorded. In
April 2000, the Company completed negotiations with the prime contractor for a
state coalition for which the Company's discontinued operations 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 there was now 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.
During 1999, contract loss charges of $8.2 million were recorded. A majority
of the charges resulted from the conclusion of 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 changes in the estimates underlying the charges recorded in 1998.
During 1998, contract loss charges of $14.7 million were recorded. Due to a
continuing strong economy, record low unemployment and welfare reform, the
actual transaction volumes and expected future revenues of the EBT business were
well below original expectations. Additionally, actual and expected future
telecommunications, installation, help desk and other costs were significantly
higher than originally anticipated. These factors resulted in expected future
losses on existing EBT contracts.

BUSINESS COMBINATIONS:

2000 ACQUISITION: During March 2000, the Company paid cash of $20.0 million for
an approximately 24% interest in a limited liability company that provides ATM
management and outsourcing services to retailers and financial institutions. The
Company's share of the results of this business subsequent to its acquisition
date are included in discontinued operations in the Company's consolidated
statements of income. The difference of $20.0 million between the carrying value
of the investment and the underlying equity in the net assets of the limited
liability company was being amortized over 15 years.

48 Deluxe Corporation * 2000 Annual Report

1999 ACQUISITIONS: During February 1999, the Company acquired all of the
outstanding shares of eFunds Corporation of Tustin, California for $13.0 million
in cash. This company provides electronic check conversion and electronic funds
transfer solutions to financial services companies and retailers. The
acquisition was accounted for under the purchase method of accounting. The
results of this business subsequent to its acquisition date are included in
discontinued operations in the Company's consolidated statements of income. The
purchase price was allocated to the assets acquired and liabilities assumed
based on their fair values on the date of purchase. Total cost in excess of net
assets acquired in the amount of $15.7 million was being amortized over 10
years.
During April 1999, the Company acquired the remaining 50% ownership interest
in HCL-Deluxe, N.V. for $23.4 million in cash. The joint venture, which the
Company entered into with HCL Corporation of India in 1996, commenced operations
in September 1997. The company provides information technology consulting and
business process management services to financial services companies and to all
of the Company's businesses. The acquisition was accounted for under the
purchase method of accounting. The entire results of this business from the date
the Company acquired 100% ownership are included in discontinued operations in
the Company's consolidated statements of income. Prior to this, the Company
recorded its 50% ownership of the joint venture's results under the equity
method of accounting. These results are also included in discontinued operations
in the Company's consolidated statements of income. The purchase price was
allocated to the assets acquired and liabilities assumed based on their fair
values on the date of purchase. Total cost in excess of net assets acquired in
the amount of $24.9 million was being amortized over 15 years.

LEGAL PROCEEDINGS:

During 1997, a judgment was entered against the Company in the U.S. District
Court for the Western District of Pennsylvania. The case was brought against the
Company by Mellon Bank (Mellon) in connection with a potential bid to provide
EBT services for the Southern Alliance of States. In 1997, the Company recorded
a pre-tax 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. As a result, the Company's 1998 results of discontinued
operations includes a reversal of $4.2 million of the $40.0 million liability.
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 in 1999.

NOTE 17

SUBSEQUENT EVENTS (UNAUDITED)

In January 2001, the Company's board of directors approved a stock repurchase
plan, authorizing the repurchase of up to 14 million shares of its common stock.
In February 2001, the Company's $100.0 million of 8.55% unsecured and
unsubordinated notes became payable. The Company paid these notes by utilizing
cash on hand.
In March 2001, the Company increased the amount of its commercial paper
program to $300.0 million.

Enhancing shareholder value 49

INDEPENDENT AUDITORS' REPORT

Deluxe Corporation

We have audited the accompanying consolidated balance sheets of Deluxe
Corporation and its subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, comprehensive income, and cash flows
for each of the three years in the period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Deluxe Corporation and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America.

/s/ Deloitte & Touche LLP

Deloitte & Touche LLP

Minneapolis, Minnesota
January 25, 2001

50 Deluxe Corporation * 2000 Annual Report

SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)

(1) As a result of the spin-off of eFunds, these figures differ from those
previously reported in the Company's Quarterly Reports on Form 10-Q and the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
The results of eFunds are reflected as discontinued operations in the
Company's consolidated financial statements for all periods presented.

(2) 2000 second quarter results include charges of $9.7 million for additional
expected future losses on existing EBT contracts of discontinued operations,
charges of $7.2 million for payments due under executive employment
agreements due to the planned separation of eFunds and net restructuring
reversals of $1.6 million.

(3) 2000 fourth quarter results from continuing operations include asset
impairment charges of $9.7 million relating to a discontinued e-commerce
initiative.

(4) 2000 fourth quarter results include asset impairment charges of $9.7 million
relating to a discontinued e-commerce initiative and costs of $9.1 million
relating to the spin-off of eFunds.

(5) 1999 fourth quarter results from continuing operations include a gain of
$19.8 million on the sale of its collections businesses and the reversal of
$5.6 million of restructuring reserves.

(6) 1999 fourth quarter results include a gain of $19.8 million on the sale of
its collections businesses, the reversal of $6.0 million of restructuring
reserves and charges of $8.2 million to reserve for additional expected
future losses on existing EBT contracts of discontinued operations.

Enhancing shareholder value 51

Form: 10-K405

Documents

EXHIBIT 13 2000 ANNUAL REPORT TO SHAREHOLDERS