Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

August 6, 2001

Documents

10-Q: Quarterly report pursuant to Section 13 or 15(d)

Published on August 6, 2001

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


(Mark one)

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934


For quarterly period ending June 30, 2001
----------------------------------------------------

or

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ________________ to _______________

Commission file number: 1-7945
------------------------

DELUXE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

MINNESOTA 41-0216800
- ------------------------------------------ ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

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

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

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


The number of shares outstanding of registrant's common stock, par value $1.00
per share, at July 20, 2001 was 67,654,431.



Item I. Financial Statements

PART I. FINANCIAL INFORMATION

DELUXE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS



UNAUDITED
JUNE 30, DECEMBER 31,
2001 2000
---- ----
(DOLLARS IN THOUSANDS)

Current Assets:
Cash and cash equivalents ....................................... $ 6,141 $ 80,732
Marketable securities ........................................... 10,608 18,458
Trade accounts receivable (net of allowances for doubtful
accounts of $1,448 and $1,415, respectively) ................. 46,718 46,332
Inventories ..................................................... 10,486 10,560
Supplies ........................................................ 12,128 12,578
Deferred advertising ............................................ 17,453 17,089
Deferred income taxes ........................................... 6,828 6,877
Prepaid expenses ................................................ 24,948 20,115
Other current assets ............................................ 7,930 6,997
---------- ----------
Total current assets .......................................... 143,240 219,738
Investments .......................................................... 39,116 35,555
Property, plant, and equipment (net of accumulated depreciation of
$307,776 and $295,812, respectively) .............................. 161,010 173,956
Intangibles (net of accumulated amortization of $96,513 and
$75,355, respectively) ............................................ 212,566 222,798
Other long-term assets ............................................... 30,093 8,392
---------- ----------
Total assets .................................................. $ 586,025 $ 660,439
========== ==========

Current Liabilities:
Accounts payable .................................................. $ 44,320 $ 43,161
Accrued liabilities:
Wages and vacation pay .......................................... 33,685 36,191
Employee profit sharing and pension ............................. 13,596 21,872
Accrued income taxes ............................................ 32,369 27,065
Accrued rebates ................................................. 23,663 24,968
Other ........................................................... 56,962 62,214
Short-term debt ................................................... 116,200 --
Long-term debt due within one year ................................ 1,342 100,672
---------- ----------
Total current liabilities ..................................... 322,137 316,143
Long-term debt ....................................................... 10,799 10,201
Deferred income taxes ................................................ 60,712 60,712
Other long-term liabilities .......................................... 7,513 10,575
Shareholders' Equity:
Common shares $1 par value (authorized:
500,000,000 shares; issued: 2001 - 68,205,946; 2000 -
72,555,474) .................................................... 68,206 72,555
Additional paid-in capital ........................................ -- 44,243
Retained earnings ................................................. 116,795 146,243
Unearned compensation ............................................. (55) (60)
Accumulated other comprehensive income ............................ (82) (173)
---------- ----------
Total shareholders' equity .................................... 184,864 262,808
---------- ----------
Total liabilities and shareholders' equity .................. $ 586,025 $ 660,439
========== ==========


See Notes to Unaudited Consolidated Financial Statements


2


DELUXE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME



UNAUDITED UNAUDITED
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Revenue ................................................... $ 317,780 $ 322,250 $ 633,574 $ 643,828
Cost of goods sold ..................................... 112,428 112,695 228,911 228,065
---------- ---------- ---------- ----------
Gross Profit .............................................. 205,352 209,555 404,663 415,763

Selling, general and administrative expense ............ 132,367 137,262 264,136 274,416
---------- ---------- ---------- ----------
Operating Income .......................................... 72,985 72,293 140,527 141,347

Other (expense) income ................................. (912) (1,179) 369 (1,741)
---------- ---------- ---------- ----------
Income from Continuing Operations Before Interest and
Taxes .................................................. 72,073 71,114 140,896 139,606

Interest expense ....................................... (791) (3,294) (2,230) (6,718)
Investment (loss) income ............................... (316) 238 289 1,995
---------- ---------- ---------- ----------
Income from Continuing Operations Before Income
Taxes .................................................. 70,966 68,058 138,955 134,883

Provision for income taxes ............................. 26,654 25,414 52,164 50,215
---------- ---------- ---------- ----------
Income from Continuing Operations ......................... 44,312 42,644 86,791 84,668

Loss from Discontinued Operations ......................... -- (7,803) -- (5,505)
---------- ---------- ---------- ----------

Net Income ................................................ $ 44,312 $ 34,841 $ 86,791 $ 79,163
========== ========== ========== ==========

Basic Net Income per Share:
Income from continuing operations ...................... $ .64 $ .59 $ 1.23 $ 1.17
Loss from discontinued operations ...................... -- (.11) -- (.07)
---------- ---------- ---------- ----------
Basic Net Income per Share ................................ $ .64 $ .48 $ 1.23 $ 1.10
========== ========== ========== ==========

Diluted Net Income per Share:
Income from continuing operations ...................... $ .63 $ .59 $ 1.22 $ 1.17
Loss from discontinued operations ...................... -- (.11) -- (.07)
---------- ---------- ---------- ----------
Diluted Net Income per Share .............................. $ .63 $ .48 $ 1.22 $ 1.10
========== ========== ========== ==========

Cash Dividends per Share .................................. $ .37 $ .37 $ .74 $ .74

Total Comprehensive Income ................................ $ 44,293 $ 34,611 $ 86,882 $ 78,798


See Notes to Unaudited Consolidated Financial Statements


3


DELUXE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS



UNAUDITED
SIX MONTHS ENDED JUNE 30,
-------------------------
2001 2000
---- ----
(DOLLARS IN THOUSANDS)

Cash Flows from Operating Activities:
Net income ................................................................... $ 86,791 $ 79,163
Adjustments to reconcile net income to net cash provided by operating
activities of continuing operations:
Loss from discontinued operations ......................................... -- 5,505
Depreciation .............................................................. 16,841 15,981
Amortization of intangibles ............................................... 22,977 15,377
Share purchase discount ................................................... 619 1,075
Deferred income taxes ..................................................... -- (1,388)
Changes in assets and liabilities, net of effects from acquisitions and
discontinued operations:
Trade accounts receivable ............................................ (831) (2,393)
Inventories .......................................................... 74 1,134
Accounts payable ..................................................... 3,566 (10,315)
Accrued wages, employee profit sharing and pension ................... (9,928) (13,665)
Restructuring accruals ............................................... (1,609) (7,583)
Other assets and liabilities ......................................... (27,179) 18,119
---------- ----------
Net cash provided by operating activities of continuing operations ........... 91,321 101,010
---------- ----------

Cash Flows from Investing Activities:
Proceeds from sales of marketable securities ................................. 37,990 7,627
Purchases of marketable securities ........................................... (30,000) --
Purchases of capital assets .................................................. (17,102) (26,769)
Payments for acquisitions, net of cash acquired .............................. -- (95,991)
Proceeds from sales of capital assets ........................................ 1,435 2,482
Loan to others ............................................................... -- 32,500
Other ........................................................................ (4,571) (6,870)
---------- ----------
Net cash used by investing activities of continuing operations ............... (12,248) (87,021)
---------- ----------

Cash Flows from Financing Activities:
Net borrowings (payments) on short-term debt ................................. 116,200 (45,000)
Payments on long-term debt ................................................... (100,675) (314)
Change in book overdrafts .................................................... (2,407) 5,016
Payments to retire shares .................................................... (122,487) --
Proceeds from issuing shares under employee plans ............................ 8,268 4,746
Cash dividends paid to shareholders .......................................... (52,563) (53,471)
---------- ----------
Net cash used by financing activities of continuing operations ............... (153,664) (89,023)
---------- ----------

Net Cash Used by Discontinued Operations ........................................ -- (26,687)
---------- ----------

Net Decrease in Cash and Cash Equivalents ....................................... (74,591) (101,721)
Cash and Cash Equivalents at Beginning of Period ................................ 80,732 124,435
---------- ----------
Cash and Cash Equivalents at End of Period ...................................... $ 6,141 $ 22,714
========== ==========


See Notes to Unaudited Consolidated Financial Statements


4


DELUXE CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




1. The condensed consolidated balance sheet as of June 30, 2001, the
condensed consolidated statements of income for the quarters and six months
ended June 30, 2001 and 2000, and the consolidated statements of cash flows for
the six months ended June 30, 2001 and 2000, are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of the Company's
consolidated financial statements are included. Other than those discussed in
the notes below, such adjustments consist only of normal recurring items.
Interim results are not necessarily indicative of results for a full year. The
consolidated financial statements and notes are presented in accordance with
instructions for Form 10-Q, and do not contain certain information included in
the Company's consolidated annual financial statements and notes. The
consolidated financial statements and notes appearing in this Report should be
read in conjunction with the Company's consolidated audited financial statements
and related notes included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.

2. On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (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. Adoption of this
standard did not have an impact on the Company's reported operating results or
financial position.

3. In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, BUSINESS COMBINATIONS, which addresses accounting and financial
reporting for business combinations. This statement is effective in its entirety
for the Company on January 1, 2002. The Company has not yet determined the
impact this statement will have on its results of operations or financial
position.

4. In June 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, which addresses accounting and financial reporting for
goodwill and intangible assets. Under this new statement, goodwill and
intangible assets with indefinite lives are no longer amortized, but are subject
to impairment testing on at least an annual basis. This statement is effective
in its entirety for the Company on January 1, 2002. As of June 30, 2001, the net
book value of the Company's goodwill was $85.3 million, and goodwill
amortization expense for the first six months of 2001 was $3.1 million. The
Company has not yet determined the impact this statement will have on its
results of operations or financial position.


5


5. The following table reflects the calculation of basic and diluted
earnings per share from continuing operations (dollars and shares in thousands,
except per share amounts):



QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------- --------
2001 2000 2001 2000
---- ---- ---- ----

Income from continuing operations per
share-basic:
Income from continuing operations ......... $ 44,312 $ 42,644 $ 86,791 $ 84,668
Weighted average shares outstanding ....... 69,605 72,275 70,644 72,203
-------- -------- -------- --------
Income from continuing operations per
share-basic ................................. $ .64 $ .59 $ 1.23 $ 1.17
======== ======== ======== ========

Income from continuing operations per
share-diluted:
Income from continuing operations ......... $ 44,312 $ 42,644 $ 86,791 $ 84,668
Weighted average shares outstanding ....... 69,605 72,275 70,644 72,203
Dilutive impact of options ................ 506 81 336 77
Shares contingently issuable .............. 36 6 24 4
-------- -------- -------- --------
Weighted average shares and potential
dilutive shares outstanding ............. 70,147 72,362 71,004 72,284
-------- -------- -------- --------
Income from continuing operations per
share-diluted ............................... $ .63 $ .59 $ 1.22 $ 1.17
======== ======== ======== ========


During the first six months of 2001 and 2000, options to purchase a
weighted-average of 2.7 million and 5.4 million common shares, respectively,
were outstanding but were not included in the computation of diluted earnings
per share. The exercise prices of the excluded options were greater than the
average market price of the Company's common shares during the respective
periods.

6. Certain amounts reported in 2000 have been reclassified to conform with
the 2001 presentation. These changes had no impact on previously reported net
income or shareholders' equity.

7. Inventories were comprised of the following (dollars in thousands):

JUNE 30, DECEMBER 31,
2001 2000
---- ----
Raw materials ................... $ 2,668 $ 2,879
Semi-finished goods ............. 6,662 6,504
Finished goods .................. 1,156 1,177
------- -------
Total ......................... $10,486 $10,560
======= =======

8. As of June 30, 2001, the Company had committed lines of credit for
$450.0 million available for borrowing and as support for its $300.0 million
commercial paper program. No amounts were drawn on these lines during the first
six months of 2001. The average amount drawn on these lines during 2000 was
$18.8 million at a weighted-average interest rate of 6.26%. As of June 30, 2001
and December 31, 2000, no amounts were outstanding under these lines of credit.
The average amount of commercial paper outstanding during the first six months
of 2001 was $59.1 million at a weighted-average interest rate of 4.64%. As of
June 30, 2001, $116.2 million was outstanding at a weighted-average interest
rate of 4.28%. 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 outstanding as of December 31, 2000.

The Company had uncommitted bank lines of credit for $60.0 million
available at variable interest rates. No amounts were


6


drawn on these lines of credit during the first six months of 2001. The average
amount drawn on these lines of credit during 2000 was $33,000 at a
weighted-average interest rate of 6.38%. As of June 30, 2001 and December 31,
2000, no amounts were outstanding under these lines of credit.

The Company has a shelf registration in place for the issuance of up to
$300.0 million in medium-term notes. Such notes could be used for general
corporate purposes, including working capital, capital expenditures, possible
acquisitions and repayment or repurchase of outstanding indebtedness and other
securities of the Company. As of June 30, 2001 and December 31, 2000, no such
notes were issued or outstanding.

9. The Company's consolidated balance sheets reflect restructuring accruals
of $1.5 million and $3.1 million as of June 30, 2001 and December 31, 2000,
respectively, for employee severance costs. The status of these restructuring
accruals as of June 30, 2001 was as follows (dollars in millions):



CHECK PRINTING PLANT
CLOSINGS/OTHER(1) SG&A REDUCTIONS(2) PLAIDMOON(3) DIRECT CHECKS(4) TOTAL
-----------------------------------------------------------------------------------------------------
NO. OF NO. OF NO. OF NO. OF NO. OF
EMPLOYEES EMPLOYEES EMPLOYEES EMPLOYEES EMPLOYEES
AMOUNT AFFECTED AMOUNT AFFECTED AMOUNT AFFECTED AMOUNT AFFECTED AMOUNT AFFECTED
-----------------------------------------------------------------------------------------------------

Balance, December 31, 2000 $ 0.8 70 $ 1.5 40 $ 0.8 35 $ -- -- $ 3.1 145
Severance paid .......... (0.3) (15) (0.3) -- (0.2) (18) -- -- (0.8) (33)
-----------------------------------------------------------------------------------------------------
Balance, March 31, 2001 ... 0.5 55 1.2 40 0.6 17 -- -- 2.3 112
Restructuring charges ... -- -- -- -- -- -- 0.6 46 0.6 46
Severance paid .......... (0.2) (20) (0.6) (25) (0.4) (16) (0.2) (33) (1.4) (94)
-----------------------------------------------------------------------------------------------------
Balance, June 30, 2001 .... $ 0.3 35 $ 0.6 15 $ 0.2 1 $ 0.4 13 $ 1.5 64
=====================================================================================================


(1) Includes charges related to implementing a new order processing and
customer service system.
(2) Includes charges related to the Company's initiative to reduce selling,
general and administrative (SG&A) expense.
(3) Includes charges recorded in 2000 relating to the scaling-back and
repositioning of PlaidMoon.
(4) Includes charges recorded in 2001 relating to Direct Checks' reductions.

During the second quarter of 2001, the Company recorded restructuring
accruals of $0.6 million for employee severance related to reductions within the
Company's Direct Checks segment. These reductions are expected to be completed
in the third quarter of 2001 and affect 46 employees. These restructuring
charges are reflected in SG&A expense in the Company's consolidated statements
of income for the quarter and six months ended June 30, 2001.

During the second quarter of 2000, the Company recorded restructuring
accruals of $1.0 million within continuing operations as a result of the
outsourcing of certain data entry functions. This outsourcing affected
approximately 155 employees and was completed during 2000. Additionally, the
Company reversed $3.0 million of restructuring accruals within continuing
operations relating to the Company's initiative to reduce 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 current severance
practices, employees are provided some period of advance 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 an additional amount for wages
which would have been received during the notice period. In this situation,
management subsequently decided to keep employees working for the notice period
and thus, a reduction in the restructuring reserves was required since this pay
was no longer severance, but an operating expense. These new restructuring
charges and reversals are reflected in SG&A expense in the Company's
consolidated statements of income for the quarter and six months ended June 30,
2000.

10. During 2000, the Company operated two business segments: Paper Payment
Systems and eFunds. On December 29, 2000, the Company disposed of the eFunds
segment via a spin-off transaction. For 2001, the Company has re-organized its
remaining businesses into three business segments: FI Checks, Direct Checks and
Business Forms. FI Checks sells checks and related products and services through
financial institutions. Direct Checks sells checks and related products directly
to consumers through direct mail and the Internet. Business Forms sells checks,
forms and related products to small businesses through financial institutions
and directly to customers via direct mail and the Internet. All three segments
operate only in the United States. Prior year segment information has been
revised to reflect this new organization.


7


The accounting policies of the segments are the same as those described in
the summary of significant accounting policies as presented in the Company's
notes to the consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000. Corporate expenses
have been allocated to the segments based on segment revenues. This allocation
includes expenses for various support functions such as executive management,
human resources and finance and includes depreciation and amortization expense
related to corporate assets. The corresponding corporate asset balances have not
been allocated to the segments. Corporate assets consist primarily of cash,
investments and deferred tax assets relating to corporate activities.

The Company is an integrated enterprise, characterized by substantial
intersegment cooperation, cost allocations and the sharing of assets. Therefore,
the Company does not represent that these segments, if operated independently,
would report the operating income and other financial information shown. The
following is the Company's segment information for the second quarter and first
six months of 2001 and 2000 (dollars in thousands):


Quarters Ended June 30, 2001 and 2000
- -------------------------------------



CORPORATE AND
FI CHECKS DIRECT CHECKS BUSINESS FORMS UNALLOCATED CONSOLIDATED
--------- ------------- -------------- ------------- ------------

Revenue:
2001 $193,197 $ 74,997 $ 49,586 $ -- $317,780
2000 205,140 71,696 45,414 -- 322,250
Operating income:
2001 41,248 16,351 15,386 -- 72,985
2000 45,424 14,270 12,599 -- 72,293
Depreciation and
amortization expense:
2001 16,029 4,172 1,629 -- 21,830
2000 11,668 3,230 1,113 -- 16,011
Total assets:
2001 302,492 145,567 37,184 100,782 586,025
2000 335,187 153,768 43,396 416,954 949,305
Purchases of capital
assets:
2001 4,949 1,835 546 82 7,412
2000 9,001 1,403 236 4,025 14,665



8


Six Months Ended June 30, 2001 and 2000
- ---------------------------------------



CORPORATE AND
FI CHECKS DIRECT CHECKS BUSINESS FORMS UNALLOCATED CONSOLIDATED
--------- ------------- -------------- ------------- ------------

Revenue:
2001 $379,366 $155,138 $ 99,070 $ -- $633,574
2000 410,418 141,405 92,005 -- 643,828
Operating income:
2001 72,701 36,806 31,020 -- 140,527
2000 88,616 26,161 26,570 -- 141,347
Depreciation and
amortization expense:
2001 29,201 7,819 2,798 -- 39,818
2000 23,592 5,502 2,264 -- 31,358
Total assets:
2001 302,492 145,567 37,184 100,782 586,025
2000 335,187 153,768 43,396 416,954 949,305
Purchases of capital
assets:
2001 12,018 3,629 1,343 112 17,102
2000 16,197 3,042 723 6,807 26,769


Corporate and Unallocated assets as of June 30, 2000, includes net assets
of discontinued operations of $286.5 million. Corporate and Unallocated
purchases of capital assets includes activity related to the Company's PlaidMoon
project, which was scaled-back and repositioned into the other segments in the
fourth quarter of 2000.

11. Discontinued operations represents the results of the Company's eFunds
segment, which was disposed of via a spin-off transaction on December 29, 2000.
Revenue and loss from discontinued operations for the quarter and six months
ended June 30, 2000, were as follows (dollars in thousands):



QUARTER ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 2000
------------- -------------

Revenue from external customers .................... $ 86,169 $ 170,783

Pre-tax loss from operations of discontinued
operations before measurement date ............... (4,979) (770)
Pre-tax costs of spin-off .......................... (7,318) (7,453)
Income tax benefit ................................. (4,494) (2,718)
---------- ----------
Loss from discontinued operations ................ $ (7,803) $ (5,505)
========== ==========


During the second quarter of 2000, the Company's discontinued operations
recorded net charges of $9.7 million for expected future losses on the long-term
service contracts of its electronic benefits transfer (EBT) business. In April
2000, the Company completed negotiations with the prime contractor for a state
coalition for which the Company's discontinued operations provided EBT services.
Prior to this, the Company and the prime contractor were operating without a
binding 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. Partially 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.

In June 2000, the Company's eFunds segment 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 via a tax-free spin-off transaction in December 2000.


9



In conjunction with the spin-off of eFunds, the Company has agreed to
indemnify eFunds for future losses arising from any litigation based on the
conduct of eFunds' EBT and medical eligibility verification businesses prior to
eFunds' IPO in June 2000, and from certain future losses on identified loss
contracts. The contractual maximum amount of litigation and contract losses for
which the Company will indemnify eFunds is $14.6 million. Through June 30, 2001,
no amounts have been paid or claimed under this indemnification agreement.


Item 2. 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. On December 29, 2000, we disposed of the eFunds segment via a spin-off
transaction. For 2001, we have re-organized our remaining businesses into three
business segments: FI Checks, Direct Checks and Business Forms. FI Checks sells
checks and related products and services through financial institutions. Direct
Checks sells checks and related products directly to consumers through direct
mail and the Internet. Business Forms sells checks, forms and related products
to small businesses through financial institutions and directly to customers via
direct mail and the Internet. All three segments operate only in the United
States.


RESULTS OF OPERATIONS - QUARTER AND SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO
THE QUARTER AND SIX MONTHS ENDED JUNE 30, 2000

The following table presents, for the periods indicated, selected statement
of income data (dollars in thousands):



Quarter Ended June 30, Six Months Ended June 30,
2001 2000 2001 2000
---- ---- ---- ----
% of % of % of % of
$ Revenue $ Revenue $ Revenue $ Revenue
------------------------------------------- -------------------------------------------

Revenue ................... $317,780 -- $322,250 -- $633,574 -- $643,828 --
Gross profit .............. 205,352 64.6% 209,555 65.0% 404,663 63.9% 415,763 64.6%
Selling, general and
administrative expense .. 132,367 41.7% 137,262 42.6% 264,136 41.7% 274,416 42.6%
Operating income .......... 72,985 23.0% 72,293 22.4% 140,527 22.2% 141,347 22.0%


REVENUE - Revenue decreased $4.5 million, or 1.4%, to $317.8 million in the
second quarter of 2001 from $322.3 million in the second quarter of 2000, and
decreased $10.2 million, or 1.6%, to $633.6 million in the first six months of
2001 from $643.8 million in the first six months of 2000. Units for the second
quarter were down 2.7% as compared to 2000, while revenue per unit was up 1.3%.
Units for the first six months of 2001 were down 3.3% as compared to 2000, while
revenue per unit was up 1.8%. The decreases in revenue were primarily due to
continued competitive pricing pressure within the FI Checks business, as well as
the resulting volume decline due to lost financial institution customers.
Additionally, client mix has shifted toward larger financial institutions which,
due to their volumes, generally pay lower average prices per unit than smaller
accounts. Partially offsetting the FI Checks decrease was growth within our
other two segments. Direct Checks revenue increased due to a price increase and
growth in units per order primarily due to a channel shift to the Internet.
Additionally, for the first six months of the year, Direct Checks volume
increased as compared to last year due to the acquisition of Designer Checks in
February 2000. Business Forms volume increased as this business continued to
benefit from financial institution referrals. Additionally, a third quarter 2000
price increase contributed to this business' increased revenue.

We anticipate that 2001 revenue will be flat compared to 2000. We plan to
offset volume declines and pricing pressures by expanding product offerings and
increasing our customer base through promotional spending.


10


GROSS PROFIT - Gross profit decreased $4.2 million to $205.4 million in the
second quarter of 2001 from $209.6 million in the second quarter of 2000 and
decreased $11.1 million to $404.7 million in the first six months of 2001 from
$415.8 million in the first six months of 2000. As a percentage of revenue,
gross margin decreased to 64.6% in the second quarter of 2001 from 65.0% in the
second quarter of 2000 and decreased to 63.9% in the first six months of 2001
from 64.6% in the first six months of 2000. The decreases were due primarily to
a decrease in FI Checks revenue per unit due to continued pricing pressures.
Additionally, for the first six months of the year, higher delivery costs for
this business contributed to the decrease in gross margin. The price increases
within Direct Checks and Business Forms partially offset these declines.

We expect our 2001 gross margin percentage to be flat as compared to 2000.
We plan to continue process improvements in 2001, although the large reductions
in cost of goods sold seen in previous years are not anticipated.

SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE - SG&A expense decreased
$4.9 million, or 3.6%, to $132.4 million in the second quarter of 2001 from
$137.3 million in the second quarter of 2000 and decreased $10.3 million, or
3.7%, to $264.1 million in the first six months of 2001 from $274.4 million in
the first six months of 2000. As a percentage of revenue, SG&A expense decreased
to 41.7% in the second quarter and first six months of 2001 from 42.6% in the
second quarter and first six months of 2000. The improvement was primarily due
to reduced corporate spending resulting from on-going cost management efforts
and administrative cost reductions due to the spin-off of eFunds on December 29,
2000. Partially offsetting these decreased expenses were restructuring charges
of $0.6 million recorded in the second quarter of 2001 related to reductions
within the Direct Checks segment. These reductions, which affected 46 employees,
are expected to be completed in the third quarter of 2001. By comparison, the
second quarter of 2000 included net restructuring reversals of $2.0 million
within the FI Checks segment, consisting of a $1.0 million charge for the
outsourcing of certain data entry functions, offset by reversals of $3.0 million
relating to our initiative to reduce SG&A expense. The outsourcing of data entry
functions was completed in 2000 and affected approximately 155 employees. The
restructuring reversals resulted from higher than anticipated attrition and the
reversal of "early termination" payments to a group of employees. Under our
current severance practices, employees are provided some period of advance
notice prior to being terminated. In certain situations, we ask the employees to
leave immediately because they may have access to crucial infrastructure or
information. In these cases, severance includes an additional amount for wages
which would have been received during the notice period. In this situation,
management subsequently decided to keep employees working for the notice period
and thus, a reduction in the restructuring reserves was required since this pay
was no longer severance, but an operating expense.

Excluding the asset impairment charges of $9.7 million which we recorded in
the fourth quarter of 2000, we expect to see a slight decrease in SG&A expense
in 2001 as compared to last year. We will continue to enhance our e-commerce
capabilities and increase promotional spending to obtain new customers in our
direct-to-consumer businesses.

INTEREST EXPENSE - Interest expense decreased $2.5 million to $0.8 million
in the second quarter of 2001 from $3.3 million in the second quarter of 2000
and decreased $4.5 million to $2.2 million in the first six months of 2001 from
$6.7 million in the first six months of 2000. The decreases were due to our
lower debt levels and interest rates. During the first six months of 2001, we
had weighted-average debt outstanding of $84.0 million at a weighted-average
interest rate of 5.80%. During the first six months of 2000, we had
weighted-average debt outstanding of $140.0 million at a weighted-average
interest rate of 7.93%. In February 2001, we paid off our $100.0 million of
unsecured and unsubordinated notes which carried interest at 8.55%.

PROVISION FOR INCOME TAXES - Our effective tax rate in the second quarter
of 2001 was 37.6% compared to 37.3% in the second quarter of 2000. Our effective
tax rate in the first six months of 2001 was 37.5% compared to 37.2% in the
first six months of 2000.

INCOME FROM CONTINUING OPERATIONS - Income from continuing operations in
the second quarter of 2001 increased $1.7 million, or 3.9%, to $44.3 million
from $42.6 million in the second quarter of 2000. The improvement was due to
increased operating income and decreased interest expense. Income from
continuing operations increased $2.1 million, or 2.5%, to $86.8 million in the
first six months of 2001 from $84.7 million in the first six months of 2000. The
slight decrease in operating income was more than offset by lower interest
expense.

DISCONTINUED OPERATIONS - Loss from discontinued operations was $7.8
million in the second quarter of 2000 and $5.5 million in the first six months
of 2000. This represents the results of our eFunds segment, which was disposed
of via a spin-off transaction on December 29, 2000, as well as the costs of the
spin-off.


11


The results of discontinued operations for both the second quarter and
first six months of 2000 included net charges of $9.7 million for expected
future losses on the long-term service contracts of eFunds' electronic benefits
transfer (EBT) business. In April 2000, eFunds completed negotiations with the
prime contractor for a state coalition for which it provided EBT services. Prior
to this, eFunds and the prime contractor were operating without a binding
contract. eFunds 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. Partially 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. Loss from
discontinued operations for both the second quarter and the first six months of
2000 also included charges of $7.2 million for payments due under executive
employment agreements due to the spin-off of eFunds.


LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

As of June 30, 2001, we had cash and cash equivalents of $6.1 million, as
well as marketable securities of $10.6 million. Our working capital on June 30,
2001 was negative $178.9 million compared to negative $96.4 million on December
31, 2000. The current ratio on June 30, 2001 and December 31, 2000 was 0.4 to 1
and 0.7 to 1, respectively. The decrease in working capital was primarily due to
our uses of cash during the first six months of 2001. The following table shows
our cash flow activity for the first six months of 2001 and 2000 and should be
read in conjunction with our consolidated statements of cash flows (dollars in
thousands):



SIX MONTHS ENDED JUNE 30,
-------------------------
2001 2000
---- ----

Continuing operations:
Cash provided by operating activities .......... $ 91,321 $ 101,010
Cash used by investing activities .............. (12,248) (87,021)
Cash used by financing activities .............. (153,664) (89,023)
---------- ----------
Cash used by continuing operations ......... (74,591) (75,034)
Cash used by discontinued operations .............. -- (26,687)
---------- ----------
Net decrease in cash and cash equivalents .... $ (74,591) $ (101,721)
========== ==========


Cash provided by operating activities represents our primary source of
working capital and the source for financing capital expenditures and paying
cash dividends. We believe that cash provided by operating activities, 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.

During the first six months of 2001, earnings before interest, taxes,
depreciation and amortization (EBITDA) were $180.7 million. These operating cash
inflows were utilized primarily to make 2000 employee profit sharing and pension
contributions, to fund FI Checks contract acquisition costs, to pre-fund our
trust for employee medical costs and to make income tax payments.

Cash on hand at year-end, cash provided by operating activities during the
first six months of 2001 and the net issuance of $116.2 million of commercial
paper enabled us to make payments on long-term debt of $100.7 million, make
share repurchases of $122.5 million, pay dividends of $52.6 million and purchase
$17.1 million of capital assets during the first six months of 2001.

As of June 30, 2001, we had committed lines of credit for $450.0 million
available for borrowing and as support for our $300.0 million commercial paper
program. No amounts were drawn on these lines during the first six months of
2001. The average amount drawn on these lines during 2000 was $18.8 million at a
weighted-average interest rate of 6.26%. As of June 30, 2001 and December 31,
2000, no amounts were outstanding under these lines of credit. The average
amount of commercial paper outstanding during the first six months of 2001 was
$59.1 million at a weighted-average interest rate of 4.64%. As of June 30, 2001,
$116.2 million was outstanding at a weighted-average interest rate of 4.28%. 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 outstanding as
of December 31, 2000.

We had uncommitted bank lines of credit for $60.0 million available at
variable interest rates. No amounts were drawn on these lines of credit during
the first six months of 2001. The average amount drawn on these lines of credit
during 2000 was $33,000 at a weighted-average interest rate of 6.38%. As of June
30, 2001 and December 31, 2000, no amounts were outstanding under these lines of
credit.


12


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. As
of June 30, 2001 and December 31, 2000, no such notes were issued or
outstanding.

In conjunction with the spin-off of eFunds, we have agreed to indemnify
eFunds for future losses arising from any litigation based on the conduct of
eFunds' EBT and medical eligibility verification businesses prior to eFunds'
initial public offering in June 2000, and from certain future losses on
identified loss contracts. The contractual maximum amount of litigation and
contract losses for which we will indemnify eFunds is $14.6 million. Through
June 30, 2001, no amounts have been paid or claimed under this indemnification
agreement.


RECENT DEVELOPMENTS

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. In May 2001 we adopted a plan under Rule 10b5-1 under the
Securities Exchange Act of 1934, as amended. This plan permits us to purchase
shares at times when we ordinarily would not be in the market because of
self-imposed trading blackout periods, such as the days or weeks immediately
preceding our quarterly earnings releases. Our Rule 10b5-1 plan authorizes our
securities brokers to purchase up to 4 million shares in aggregate during our
black-out periods for the 2001 fiscal year reporting period and is part of the
14 million share repurchase program. We also expect to continue to make open
market purchases during our normal trading windows.

Under the share repurchase program, we have repurchased a total of 4.8
million shares through June 30, 2001. These share repurchases resulted in a
$0.03 increase in diluted income from continuing operations per share for both
the second quarter and first six months of 2001 as compared to 2000. We funded
these repurchases by utilizing cash generated from operations and by issuing
commercial paper. As of June 30, 2001, $116.2 million of commercial paper was
outstanding.

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, BUSINESS
COMBINATIONS, which addresses accounting and financial reporting for business
combinations. This statement is effective for us in its entirety on January 1,
2002. We have not yet determined the impact this statement will have on our
results of operations or financial position.

In June 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS, which addresses accounting and financial reporting for goodwill and
intangible assets. Under this new statement, goodwill and intangible assets with
indefinite lives are no longer amortized, but are subject to impairment testing
on at least an annual basis. This statement is effective for us in its entirety
on January 1, 2002. As of June 30, 2001, the net book value of our goodwill was
$85.3 million, and goodwill amortization expense for the first six months of
2001 was $3.1 million. We have not yet determined the impact this statement will
have on our results of operations or financial position.


OUTLOOK

As of yet, the slowing United States economy has had little impact on our
results of operations. The economic slow-down has had an impact on how we
acquire new customers in our Direct Checks segment. Some of our traditional
means of customer acquisition have not been available to us, causing us to
evaluate other options. While these options may be effective, they may come at
an initial higher cost. However, our financial strength allows us to be flexible
and acquire some circulation avenues that were lost by other direct marketing
companies. We do not expect to see an impact on our results of operations in the
second half of the year, assuming no further deterioration in the economy.

We continue to take steps throughout the company that are directly related
to our business strategy. Our strategy is:

- We will leverage our core competencies of personalization, direct
marketing and e-commerce to expand the opportunities in our existing
businesses.


13


- We will invest in our existing businesses by adding services and
expanding product offerings.

- We will consider acquisitions that leverage our core competencies and
that are accretive to earnings and cash flow per share.

- We will invest in technology and processes that will lower our cost
structure and enhance our revenue opportunities.

In line with this strategy, we expanded our product offerings by
introducing a new line of Disney check packages. Additionally, both Direct
Checks and Business Forms have had success in leveraging our e-commerce
capabilities. Internet orders for these segments in the first half of 2001 more
than doubled from the same period last year.

We continue to invest in our businesses, particularly as it relates to our
use of the Internet. We currently are developing a browser application-based
solution to allow clients to inquire and purchase our check products from their
desktops. We will provide software modifications, upgrades, fixes, etc. to our
financial institution clients remotely, allowing our customers ease of use.
Additionally, we are continuing to build an electronic order processing
capability for multiple channels. We also continue to invest in areas of the
business where we can increase productivity and reduce costs. We anticipate
total capital purchases of $40.0 million to $45.0 million in 2001.

While the check printing industry is mature, our existing leadership
position in the marketplace contributes to our financial strength. Although we
don't anticipate significant growth in operating income in 2001, we believe that
our business strategy will enable us to increase shareholder value.


Item 3. Quantitative and Qualitative Disclosure About Market Risk

We are exposed to changes in interest rates primarily as a result of the
borrowing and investing activities used to maintain liquidity and fund business
operations. We do not engage in speculative or leveraged transactions, nor do we
hold or issue financial instruments for trading purposes. We continue to utilize
commercial paper to fund working capital requirements and share repurchases. We
also have various lines of credit available, as well as a shelf registration for
the issuance of up to $300.0 million in medium-term notes. The nature and amount
of debt outstanding can be expected to vary as a result of future business
requirements, market conditions and other factors. As of June 30, 2001, we had
$116.2 million of commercial paper outstanding at a weighted-average interest
rate of 4.28%. The carrying value of this debt approximates its fair value due
to its short-term duration. Other than capital lease obligations, we had no
long-term debt outstanding as of June 30, 2001.

As of June 30, 2001, we had an investment portfolio of fixed income
securities of $10.6 million. These securities, like all fixed income
instruments, are subject to interest rate risk and will decline in value if
market interest rates increase. However, we have the ability to hold these fixed
income investments until maturity and therefore would not expect to recognize an
adverse impact on income or cash flows.



PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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


14


Item 4. Submission of Matters to a Vote of Security Holders

The Company held its annual shareholders' meeting on May 8, 2001.

61,161,534 shares were represented (86.57% of the 70,646,880 shares
outstanding and entitled to vote at the meeting). Two items were considered at
the meeting and the results of the voting were as follows:

1. Election of Directors:

The nominees listed in the proxy statement were: Lawrence J. Mosner,
Ronald E. Eilers, Calvin W. Aurand, Jr., Daniel D. Granger, Barbara B.
Grogan, Charles A. Haggerty, Donald R. Hollis, Cheryl E. Mayberry,
Stephen P. Nachtsheim, Robert C. Salipante. The results were as
follows:

Election of Directors For Withhold
--------------------- --- --------

Lawrence J. Mosner 60,812,380 349,154

Ronald E. Eilers 60,816,772 344,762

Calvin W. Aurand, Jr. 60,747,666 413,868

Daniel D. Granger 60,803,638 357,896

Barbara B. Grogan 60,775,917 385,617

Charles A. Haggerty 60,804,264 357,270

Donald R. Hollis 60,771,301 390,233

Cheryl E. Mayberry 60,788,890 372,644

Stephen P. Nachtsheim 60,694,046 467,488

Robert C. Salipante 60,820,474 341,060

2. Ratification of the selection of PricewaterhouseCoopers LLP as
independent auditors:

For: 60,695,343

Against: 146,715

Abstain: 319,476


Item 5. Other Information

CAUTIONARY STATEMENTS

The Private Securities Litigation Reform Act of 1995 ("the Reform Act")
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information. We are filing this cautionary statement in
connection with the Reform Act. When we use the words or phrases "should
result," "believe", "intend", "plan", "are expected to," "targeted," "will
continue," "will approximate," "is anticipated," "estimate," "project" or
similar expressions in this Quarterly Report on Form 10-Q, in future filings
with the Securities and Exchange Commission ("the Commission"), in our press
releases and in oral statements made by our representatives, they indicate
forward-looking statements within the meaning of the Reform Act.

We want to caution you that any forward-looking statements made by us or on
our behalf are subject to uncertainties and other factors that could cause them
to be wrong. Some of these uncertainties and other factors are listed under the
caption "Risk Factors" below (many of which have been discussed in prior filings
with the Commission). Although we have attempted to compile a


15


comprehensive list of these important factors, we want to caution you that other
factors may prove to be important in affecting future operating results. New
factors emerge from time to time, and it is not possible for us to predict all
of these factors, nor can we assess the impact each factor or combination of
factors may have on our business.

You are further cautioned not to place undue reliance on those
forward-looking statements because they speak only of our views as of the date
the statements were made. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.

RISK FACTORS

THE PAPER CHECK INDUSTRY OVERALL IS A MATURE INDUSTRY AND IF THE INDUSTRY
DECLINES FASTER THAN EXPECTED, OUR BUSINESS COULD BE HARMED.

Check printing is, and is expected to continue to be, an essential part of
our business and the principal source of our operating income. We primarily sell
checks for personal and small business use and believe that there will continue
to be a substantial demand for these checks for the foreseeable future. However,
according to our estimates, growth in total checks written by individuals and
small businesses declined slightly in 2000 compared to 1999, and the total
number of personal, business and government checks written in the United States
has been in decline since 1997. We believe that checks written by individuals
and small businesses will continue to decline due to the increasing use of
alternative payment methods, including credit cards, debit cards, smart cards,
automated teller machines, direct deposit, electronic and other bill paying
services, home banking applications and Internet-based payment services.
However, the rate and the extent to which alternative payment methods will
achieve consumer acceptance and replace checks cannot be predicted with
certainty. A surge in the popularity of any of these alternative payment methods
could have a material, adverse effect on the demand for checks and a material,
adverse effect on our business, results of operations and prospects.

WE FACE INTENSE COMPETITION IN ALL AREAS OF OUR BUSINESS.

Although we believe we are the leading check printer in the United States,
we face considerable competition. In addition to competition from alternative
payment systems, we also face considerable competition from other check printers
in our traditional sales channel through financial institutions, from direct
mail sellers of checks and from sellers of business checks and forms.
Additionally, we face competition from check printing software vendors, and
increasingly, from Internet-based sellers of checks to individuals and small
businesses. From time to time, some of our competitors have reduced the prices
of their products in an attempt to gain volume. The corresponding pricing
pressure placed on us has resulted in reduced profit margins in the past and
similar pressures can reasonably be expected in the future. We cannot assure you
that we will be able to compete effectively against current and future
competitors. Continued competition could result in price reductions, reduced
margins and loss of customers.

CONSOLIDATION AMONG FINANCIAL INSTITUTIONS MAY ADVERSELY AFFECT OUR ABILITY
TO SELL OUR PRODUCTS.

Financial institutions have been undergoing large-scale consolidation,
causing the number of financial institutions to decline. Margin pressures arise
from this consolidation when merged entities seek not only the most favorable
prices formerly offered to the predecessor institutions, but also additional
discounts due to the greater volume represented by the combined entity. This
concentration greatly increases the importance of retaining our major customers
and attracting significant additional customers in an increasingly competitive
environment. Although we devote considerable efforts towards the development of
a competitively priced, high quality suite of products and services for the
financial services industry, there can be no assurance that significant
customers will not be lost or that any such loss can be counterbalanced through
the addition of new customers or by expanded sales to our remaining customers.

FORECASTS INVOLVING FUTURE RESULTS REFLECT VARIOUS ASSUMPTIONS THAT MAY
PROVE TO BE INCORRECT.

From time to time, our representatives make predictions or forecasts
regarding our future results, including but not limited to, forecasts regarding
estimated revenues, earnings or earnings per share. Any forecast regarding our
future performance reflects various assumptions which are subject to significant
uncertainties, and, as a matter of course, may prove to be incorrect. Further,
the achievement of any forecast depends on numerous factors which are beyond our
control. As a result, we cannot assure you that our performance will be
consistent with any management forecasts or that the variation from such
forecasts will not be material and adverse. You are cautioned not to base your
entire analysis of our business and prospects upon isolated predictions, and are


16


encouraged to use the entire available mix of historical and forward-looking
information made available by us, and other information affecting us and our
products and services, including the risk factors discussed here.

In addition, our representatives may occasionally comment publicly on the
perceived reasonableness of published reports by independent analysts regarding
our projected future performance. Such comments should not be interpreted as an
endorsement or adoption of any given estimate or range of estimates or the
assumptions and methodologies upon which such estimates are based. The
methodologies we employ in arriving at our own internal projections and the
approaches taken by independent analysts in making their estimates are likely
different in many significant respects. We expressly disclaim any responsibility
to advise analysts or the public markets of our views regarding the current
accuracy of the published estimates of outside analysts. If you are relying on
these estimates, you should pursue your own independent investigation and
analysis of their accuracy and the reasonableness of the assumptions on which
they are based.

UNCERTAINTIES EXIST REGARDING OUR SHARE REPURCHASE PROGRAM.

In January 2001, we announced that our board of directors had approved the
repurchase of up to 14 million shares of our common stock. At that time, we
indicated that we expected to be able to complete these purchases over a 12- to
18-month period. Stock repurchase activities are subject to certain pricing
restrictions, stock market forces, management discretion and various regulatory
requirements. As a result, there can be no assurance as to the timing and/or
amount of shares that we may repurchase under this share repurchase program.

INCREASED PRODUCTION AND DELIVERY COSTS COULD ADVERSELY AFFECT OUR
OPERATING RESULTS.

Increases in production costs such as labor, paper and delivery could
adversely affect our profitability. In addition, events such as the 1997 United
Parcel Services strike can also adversely impact our margins by imposing higher
delivery costs. Competitive pressures in the check printing industry may inhibit
our ability to reflect any of these increased costs in the prices of our
products.

OUR STRATEGIC INITIATIVES MAY COST MORE THAN ANTICIPATED AND MAY NOT BE
SUCCESSFUL.

We are developing and evaluating plans and launching initiatives for future
growth, including the development of additional products and services and the
expansion of Internet commerce capabilities. These plans and initiatives will
involve increased levels of investment. There can be no assurance that the
amount of this investment will not exceed our expectations and result in
materially increased levels of expense.

The new products and services we develop may not meet acceptance in the
marketplace. Also, Internet commerce initiatives involve new technologies and
business methods and serve new or developing markets. There is no assurance that
these initiatives will achieve targeted revenue, profit or cash flow levels or
result in positive returns on our investment. Internet commerce is also a
relatively recent phenomenon and may not continue to expand as a medium of
commerce.

WE MAY EXPERIENCE SOFTWARE DEFECTS THAT COULD HARM OUR BUSINESS AND
REPUTATION.

We use sophisticated software and computing systems. We may experience
difficulties in installing or integrating our technologies on platforms used by
our customers or in new environments, such as the Internet. Errors or delays in
the processing of check orders or other difficulties could result in lost
customers, delay in market acceptance, additional development costs, diversion
of technical and other resources, negative publicity or exposure to liability
claims.

ECONOMIC CONDITIONS WITHIN THE UNITED STATES COULD HAVE AN ADVERSE EFFECT
ON OUR RESULTS OF OPERATIONS.

Although the recent slow-down in the United States economy has had little
impact on our results of operations thus far, a prolonged general slow-down in
the economy could negatively affect our business. Such a slow-down could reduce
consumers' use of check products and business forms, resulting in revenue
shortfalls. To mitigate any such shortfalls, we may have to increase our
marketing and sales efforts, which would result in increased expense. We may
also have to take steps to further decrease our cost structure. We can provide
no assurance that we would be able to sustain our current levels of
profitability in such a situation.


17


THE SPIN-OFF OF eFUNDS CORPORATION MAY NOT RESULT IN INCREASED SHAREHOLDER
VALUE IN THE LONG-TERM.

In December 2000, we completed the spin-off of eFunds Corporation (eFunds).
There can be no assurance that the spin-off of eFunds will result in increased
value to our shareholders in the long-term for many reasons or that the
separation will achieve the desired levels of efficiency or cost savings in our
operations.

WE FACE UNCERTAINTY WITH RESPECT TO FUTURE ACQUISITIONS.

We have acquired complementary businesses in the past as part of our
business strategy and may pursue acquisitions of complementary businesses in the
future. We cannot predict whether suitable acquisition candidates can be
acquired on acceptable terms or whether any acquired products, technologies or
businesses will contribute to our revenues or earnings to any material extent. A
significant acquisition could result in the potentially dilutive issuance of
equity securities, the incurrence of contingent liabilities or debt, or
additional amortization expense relating to acquired intangible assets, and
thus, could adversely affect our business, results of operations and financial
condition. Additionally, the success of any acquisition would depend upon our
ability to effectively integrate the acquired businesses into ours. The process
of integrating acquired businesses may involve numerous risks, including among
others, difficulties in assimilating operations and products, diversion of
management's attention from other business concerns, risks of operating
businesses in which we have limited or no direct prior experience, potential
loss of our key employees or key employees of acquired businesses, potential
exposure to unknown liabilities and possible loss of our customers or customers
of the acquired businesses.

WE FACE RESTRICTIONS ON OUR ABILITY TO ACQUIRE OR ISSUE DELUXE SHARES.

Under Section 355(e) of the Internal Revenue Code, the spin-off of eFunds
could be taxable if 50% or more of our shares are acquired as part of a plan or
series of transactions that include the spin-off. For this purpose, any
acquisitions of our shares within two years before or after the spin-off are
presumed to be part of such a plan, although we may be able to rebut that
presumption. As a result of the possible adverse U.S. federal income tax
consequences, we may be restricted in our ability to affect certain
acquisitions, to issue our shares or to execute other transactions that would
result in a change of control of Deluxe. Section 355(e) of the Internal Revenue
Code is not expected to place limitations on the stock repurchase program we
announced in January 2001.

WE DEPEND ON A LIMITED SOURCE OF SUPPLY FOR OUR PRINTING PLATE MATERIAL AND
THE UNAVAILABILITY OF THIS MATERIAL COULD HAVE AN ADVERSE EFFECT ON OUR RESULTS
OF OPERATIONS.

Our check printing operations utilize a paper printing plate material that
is available from only a limited number of sources. We believe we have a
reliable source of supply for this material and that we maintain an inventory
sufficient to avoid any production disruptions in the event of an interruption
of its supply. In the event, however, that our current supplier becomes
unwilling or unable to supply the required printing plate material at an
acceptable price and we are unable to locate a suitable alternative source
within a reasonable time frame, we would be forced to convert our facilities to
an alternative printing process. Any such conversion would require the
unanticipated investment of significant sums and could result in production
delays and loss of business.

WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY.

Despite our efforts to protect our intellectual property, third parties may
infringe or misappropriate our intellectual property or otherwise independently
develop substantially equivalent products and services. The loss of intellectual
property protection or the inability to secure or enforce intellectual property
protection could harm our business and ability to compete. We rely on a
combination of trademark and copyright laws, trade secret protection and
confidentiality and license agreements to protect our trademarks, software and
know-how. We may be required to spend significant resources to protect our trade
secrets and monitor and police our intellectual property rights.

Third parties may assert infringement claims against us in the future. In
particular, there has been a substantial increase in the issuance of patents for
Internet-related systems and business methods, which may have broad implications
for all participants in Internet commerce. Claims for infringement of these
patents are increasingly becoming a subject of litigation. If we become subject
to an infringement claim, we may be required to modify our products, services
and technologies or obtain a license to permit our continued use of those
rights. We may not be able to do either of these things in a timely manner or
upon reasonable


18


terms and conditions. Failure to do so could seriously harm our business,
operating results and prospects as a result of lost business, increased expense
or being barred from offering our products or implementing our systems or other
business methods. In addition, future litigation relating to infringement claims
could result in substantial costs and a diversion of management resources.
Adverse determinations in any litigation or proceeding could also subject us to
significant liabilities and could prevent us from using or offering some of our
products, services or technologies.

WE ARE DEPENDENT UPON eFUNDS FOR CERTAIN SIGNIFICANT INFORMATION TECHNOLOGY
NEEDS.

We have entered into an agreement with eFunds for the provision of software
development, maintenance and support services through March 31, 2005. In the
event that eFunds is not able to provide adequate information technology
services, we would be adversely affected. Although we believe that information
technology services are available from numerous sources, a failure to perform by
eFunds could cause a disruption in our business while we obtain an alternative
source of supply.

LEGISLATION RELATING TO CONSUMER PRIVACY PROTECTION COULD HARM OUR
BUSINESS.

Effective July 2001, we are subject to regulations implementing the privacy
requirements of a new federal financial modernization law known as The
Gramm-Leach-Bliley Act ("the Act"). The Act requires us to develop and implement
policies to protect the security and confidentiality of consumers' nonpublic
personal information and to disclose these policies to consumers before a
customer relationship is established and annually thereafter. These new
regulations could have the effect of increasing our expenses and otherwise
foreclosing future business initiatives.

The Act does not prohibit state legislation or regulations that are more
restrictive on the collection and use of data. More restrictive legislation or
regulations have been introduced in the past and could be introduced in the
future in Congress and the states. We are unable to predict whether more
restrictive legislation or regulations will be adopted in the future. Any future
legislation or regulations could have a negative impact on our business, results
of operations or prospects.

Laws and regulations may be adopted in the future with respect to the
Internet or e-commerce covering issues such as user privacy. New laws or
regulations may impede the growth of the Internet. This could decrease traffic
to our websites and decrease the demand for our products and services.
Additionally, the applicability to the Internet of existing laws governing
property ownership, taxation, libel and personal privacy is uncertain and may
remain uncertain for a considerable length of time.

THE INTERNAL REVENUE SERVICE (IRS) MAY TREAT THE SPIN-OFF OF eFUNDS AS
TAXABLE TO US AND TO OUR SHAREHOLDERS IF REPRESENTATIONS MADE TO THE IRS WERE
INACCURATE OR IF UNDERTAKINGS MADE TO THE IRS OR THE REQUIREMENTS OF THE
INTERNAL REVENUE CODE ARE NOT FULFILLED.

We have received confirmation from the IRS that, for U.S. federal income
tax purposes, the spin-off of eFunds is tax-free to us and to our shareholders,
except to the extent that cash was received in lieu of fractional shares. This
confirmation is premised on a number of representations and undertakings made by
us and by eFunds to the IRS, including representations with respect to each
company's intention not to engage in certain transactions in the future. The
spin-off may be held to be taxable to us and to our shareholders who received
eFunds shares if the IRS determines that any of the representations made are
incorrect or untrue in any respect, or if any undertakings made are not complied
with. If the spin-off is held to be taxable, both Deluxe and our shareholders
who received eFunds shares could be subject to a material amount of taxes.
eFunds will be liable to us for any such taxes incurred to the extent such taxes
are attributable to specific actions or failures to act by eFunds, or to
specific transactions involving eFunds following the spin-off. In addition,
eFunds will be liable to us for a portion of any taxes incurred if the spin-off
fails to qualify as tax-free as a result of a retroactive change of law or other
reason unrelated to the action or inaction of either us or eFunds. eFunds may
not, however, have adequate funds to perform its indemnification obligations and
such indemnification obligations are only for the benefit of Deluxe and not
individual shareholders.

WE MAY BE SUBJECT TO ENVIRONMENTAL RISKS.

Our check printing plants are subject to many existing and proposed federal
and state regulations designed to protect the environment. In some instances, we
owned and operated our check printing plants before the environmental
regulations came into existence. We have sold former check printing plants to
third parties and in most instances have agreed to indemnify the current owner
of the facility for on-site environmental liabilities. Although we are not aware
of any fact or circumstance which would


19


require the future expenditure of material amounts for environmental compliance,
if environmental liabilities are discovered at our check printing plants, we
could be required to spend material amounts for environmental compliance in the
future.

WE MAY BE SUBJECT TO SALES AND OTHER TAXES WHICH COULD HAVE ADVERSE EFFECTS
ON OUR BUSINESS.

In accordance with current federal, state and local tax laws, and the
constitutional limitations thereon, we currently collect sales, use or other
similar taxes in state and local jurisdictions where our direct-to-consumer
businesses have a physical presence. One or more state or local jurisdictions
may seek to impose sales tax collection obligations on us and other out-of-state
companies which engage in remote or online commerce. Further, tax law and the
interpretation of constitutional limitations thereon, are subject to change. In
addition, any new operations of these businesses in states where they do not
presently have a physical presence could subject shipments of goods by these
businesses into such states to sales tax under current or future laws. If one or
more state or local jurisdictions successfully asserts that we must collect
sales or other taxes beyond our current practices, it could have a material,
adverse affect on our business.


Item 6. Exhibits and Reports on Form 8-K

(a) The following exhibits are filed as part of this report:

Exhibit Method of
Number Description Filing
------- ----------- ------

3.1 Articles of Incorporation (incorporated by reference *
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1990).

3.2 Bylaws (incorporated by reference to Exhibit 3.2 to *
the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999 ("the September
1999 10-Q")).

4.1 Amended and Restated Rights Agreement, dated as of *
January 31, 1997, by and between the Company and
Norwest Bank Minnesota, National Association, as
Rights Agent, which includes as Exhibit A thereto,
the form of Rights Certificate (incorporated by
reference to Exhibit 4.1 to the Company's Amendment
No. 1 on Form 8-A/A-1 (File No. 001-07945) filed
with the Commission on February 7, 1997).

4.2 Indenture, relating to up to $150,000,000 of debt
securities (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form
S-3 (33-32279) filed with the Commission on November
24, 1989).

4.3 Amended and Restated Credit Agreement, dated as of *
July 8, 1997, among the Company, Bank of America
National Trust and Savings Association, as agent,
and the other financial institutions party thereto,
related to a $150,000,000 committed line of credit
(incorporated by reference to Exhibit 4.3 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1997).

4.4 Credit Agreement, dated as of August 30, 1999 (the *
"August 30, 1999 Credit Agreement"), among the
Company, Bank of America, N.A. as the sole and
exclusive administrative agent, and the other
financial institution party thereto related to a
$500,000,000 revolving credit agreement
(incorporated by reference to Exhibit 4.4 to the
September 1999 10-Q).


20


4.5 Amendment No. 1 to Amended and Restated Rights *
Agreement, entered into as of January 21, 2000,
between the Company and Norwest Bank Minnesota,
National Association as Rights Agent (incorporated
by reference to Exhibit 4.1 to the Company's
Amendment No. 1 to its Quarterly Report on Form
10-Q for the Quarter Ended June 30, 2000).

4.6 Extension of the August 30, 1999 Credit Agreement, *
entered into as of August 14, 2000 (incorporated
by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the Quarter
Ended September 30, 2000 ("the September 2000
10-Q")).

4.7 Amendment to Amended and Restated Credit Agreement *
dated July 8, 1997, entered into as of August 14,
2000 (incorporated by reference to Exhibit 10.5 to
the September 2000 10-Q).

4.8 Second Amendment to Amended and Restated Credit *
Agreement dated July 8, 1997, entered into as of
October 5, 2000 (incorporated by reference to
Exhibit 4.8 to the Company's Report on Form 10-K
for the Year Ended December 31, 2000 ("the 2000
10-K")).

4.9 Amendment to the August 30, 1999 Credit Agreement, *
entered into as of October 5, 2000 (incorporated
by reference to Exhibit 4.9 to the 2000 10-K).

12.2 Statement re: computation of ratios. Filed
herewith

-------------------
*Incorporated by reference

(b) Reports on Form 8-K:

None.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

DELUXE CORPORATION
(Registrant)


Date: August 6, 2001 /s/ Lawrence J. Mosner
-----------------------------------
Lawrence J. Mosner, Chairman of the
Board and Chief Executive Officer
(Principal Executive Officer)


Date: August 6, 2001 /s/ Douglas J. Treff
-----------------------------------
Douglas J. Treff
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)


22


INDEX TO EXHIBITS


Exhibit No. Description Page Number
- ----------- ----------- -----------

12.2 Statement re: computation of ratios



23