10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 16, 1999
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, 1999
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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
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DELUXE CORPORATION
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(Exact name of registrant as specified in its charter)
MINNESOTA 41-0216800
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3680 Victoria St., N. St. Paul, Minnesota 55126-2966
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(Address of principal executive offices) (Zip Code)
(651) 483-7111
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(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 August 6, 1999 was 75,817,472.
ITEM I. FINANCIAL STATEMENTS
PART I. FINANCIAL INFORMATION
DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
See Notes to Consolidated Financial Statements
2
DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except per Share Amounts)
(Unaudited)
See Notes to Consolidated Financial Statements
3
DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
See Notes to Consolidated Financial Statements
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated balance sheet as of June 30, 1999, the consolidated
statements of income for the quarters and six months ended June 30, 1999 and
1998, and the consolidated statements of cash flows for the six months ended
June 30, 1999 and 1998 are unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of such financial statements are
included. Other than those discussed in the notes below, such adjustments
consist only of normal recurring items. Interim results are not necessarily
indicative of results for a full year. The consolidated financial statements and
notes are presented in accordance with instructions for Form 10-Q, and do not
contain certain information included in the Company's consolidated annual
financial statements and notes. The consolidated financial statements and notes
appearing in this Report should be read in conjunction with the Company's
consolidated audited financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 (the
"1998 10-K").
2. The following is the Company's policy for accounting for long-term
service contracts, which 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 contract. Revenues are recognized for all
long-term service contracts when the service is performed. Total revenues for
some long-term service contracts may vary based on the demand for services.
Expenses are recognized when incurred, with the exception of installation costs.
Installation costs are capitalized and recognized ratably over the life of the
contract, which approximates the anticipated revenue recognition. Any equipment
and software purchased to support a long-term service contract is capitalized
and depreciated or amortized over the shorter of the life of the related
contract or life of the asset. In determining the profitability of a long-term
service contract, only direct and allocable indirect costs associated with the
contract are included in the calculation. The appropriateness of allocations of
indirect costs depends on the circumstances and involves the judgement of
management, but such costs may include the costs of indirect labor, contract
supervision, tools and equipment, supplies, quality control and inspection,
insurance, repairs and maintenance, depreciation and amortization and, in some
circumstances, support costs. The method of allocating any indirect costs
included in the analysis is also dependant upon the circumstances and the
judgement of management, but the allocation method must be systematic and
rational. General and administrative costs and selling costs are not included in
the analysis. Provisions for estimated losses on long-term service contracts, if
any, are made in the period in which the loss first becomes probable and
reasonably estimable. Projected losses are based on management's best estimates
of a contract's revenue and costs and actual losses on individual long-term
service contracts are compared to the loss projections periodically, with any
changes in the estimated total contract loss recognized as they become probable
and reasonably estimable.
Certain direct costs associated with the electronic benefits transfer contracts
discussed in footnote 11 are common to a number of contracts and are attributed
to each contract based on its use of the services associated with these common
direct costs. Revenues or case counts are used to attribute these costs to
individual contracts.
3. The Company evaluates the recoverability of long-lived assets not held
for sale by measuring the carrying amount of the assets against the estimated
undiscounted future net cash flows associated with them. Should the sum of the
expected future net cash flows be less than the carrying value of the long-lived
asset, an impairment loss would be recognized. The impairment loss would be
calculated as the amount by which the carrying value of the asset exceeds the
fair value of the asset.
The Company evaluates the recoverability of long-lived assets held for disposal
by comparing the asset's carrying amount with its fair value less costs to sell.
Should the fair value less costs to sell be less than the carrying value of the
long-lived asset, an impairment loss would be recognized. The impairment loss
would be calculated as the amount by which the carrying value of the asset
exceeds the fair value of the asset less costs to sell.
When the Company has recorded an estimated loss under a long-term service
contract, the assets relating to that contract are not again analyzed for
impairment under this policy.
4. As of June 30, 1999, the Company had uncommitted bank lines of credit
of $155 million available at variable interest rates. The average amount drawn
on these lines during the first six months of 1999 was $9.2 million at a
weighted average interest rate of 5.01%. As of June 30, 1999, $25 million of the
Company's $26.4 million of short-term debt related to these lines of credit and
was outstanding at an interest rate of 5.07%. No amounts were drawn on these
lines during 1998 and there was no outstanding balance at December 31, 1998. The
Company also had a $150 million committed line of
5
credit available for borrowing and as support for commercial paper. As of June
30, 1999 and December 31, 1998, the Company had no commercial paper outstanding
and no indebtedness outstanding under its committed line of credit.
Additionally, the Company had a shelf registration in place to issue up to $300
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, 1999 and December 31, 1998, no such notes were
issued or outstanding.
5. The Company's total comprehensive income for the quarters ended June
30, 1999 and 1998 was $46.2 million and $42.4 million, respectively. Total
comprehensive income for the first six months of 1999 and 1998 was $93.7 million
and $86.1 million, respectively. The Company's total comprehensive income
consists of net income, unrealized holding gains and losses on securities and
foreign currency translation adjustments.
6. The following table reflects the calculation of basic and diluted
earnings per share (dollars and shares outstanding in thousands, except per
share amounts).
7. During 1997, a judgment was entered against Deluxe Electronic Payment
Systems, Inc. (DEPS) in the U.S. District Court for the Western District of
Pennsylvania. The case was brought against DEPS by Mellon Bank (Mellon) in
connection with a potential bid to provide electronic benefit transfer services
for the Southern Alliance of States. In September 1997, the Company recorded a
pretax charge of $40 million to reserve for this judgment and other related
costs. In the third quarter of 1998, Mellon's motion for prejudgment interest
was denied by the District Court and the Company reversed $4.2 million of the
$40 million liability. At December 31, 1998, the remaining liability of $34.4
million was classified as other accrued liabilities in the consolidated balance
sheet.
In January 1999, the Company's appeal of this judgment was denied by the Third
Circuit Court of Appeals and the Company paid $32.2 million to Mellon in
February 1999. The portion of the reserve remaining after the payment of this
judgement ($2.1 million) was reversed in the first quarter of 1999 and is
reflected in other income in the consolidated statement of income for the six
months ended June 30, 1999. The Company's petition for a further review of this
judgment was denied by the United States Supreme Court in June 1999.
8. In February 1999, the Company acquired all of the outstanding shares of
eFunds Corporation for $13 million. eFunds provides electronic check conversion
and electronic funds transfer solutions for financial services companies and
retailers. This acquisition was accounted for under the purchase method of
accounting. Accordingly, the consolidated financial statements of the Company
include the results of this business subsequent to its acquisition date. This
business is included in the Deluxe Payment Protection Systems segment in
footnote 12 below. The purchase price was allocated to the assets acquired and
liabilities assumed based on their fair values on the date of purchase. The
total cost in excess of net assets acquired of $15.7 million is reflected as
goodwill and is being amortized over 10 years. The effect of this acquisition
was not material to the operations or financial position of the Company.
6
9. In April 1999, the Company acquired the remaining 50% ownership
interest in HCL-Deluxe, N.V., the joint venture which the Company entered into
with HCL Corporation of India in 1996, for $23.4 million. This company provides
information technology development and support services and business process
outsourcing services to financial services companies and to all the Company's
businesses. This acquisition was accounted for under the purchase method of
accounting. Accordingly, the consolidated financial statements of the Company
include the results of this business subsequent to its acquisition date. This
business comprises the iDLX Technology Partners segment in footnote 12 below.
The purchase price was allocated to the assets acquired and liabilities assumed
based on their fair values on the date of purchase. The total cost in excess of
net assets acquired of $24.9 million is reflected as goodwill and is being
amortized over 15 years. The effect of this acquisition was not material to the
operations or financial position of the Company.
10. The Company's consolidated balance sheets reflect restructuring
accruals of $30.2 million and $45.7 million as of June 30, 1999 and December 31,
1998, respectively, for employee severance costs, and $5.4 million and $6.8
million as of June 30, 1999 and December 31, 1998, respectively, for estimated
losses on asset dispositions.
During the second quarter of 1999, restructuring accruals of $4.2 million were
reversed. This amount related to the Company's initiatives to reduce its
selling, general and administrative expenses (SG&A) and to discontinue
production of direct mail products. The excess accrual amount occurred when the
Company determined that it was able to use in its ongoing operations a greater
portion of the assets used in the production of direct mail products than
originally anticipated, as well as changes in the SG&A reduction plans due to
the recently announced plan to reorganize the Company into four operating units.
As noted below, this reorganization plan could, however, lead to subsequent
restructuring charges in later periods. Additionally, the Company recorded a
restructuring accrual of $.8 million for employee severance and $.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 Deluxe Payment Protection Systems segment. This accrual reversal and
the new restructuring accrual are reflected as cost of sales expense of $.9
million, a reduction of $1.2 million in SG&A, and other income of $2.3 million
in the consolidated income statements for the quarter and six months ended June
30, 1999.
The status of the severance portion of the Company's restructuring accruals as
of June 30, 1999 is as follows (dollars in millions):
The majority of the remaining severance costs are expected to be paid in 1999
and early 2000 with cash generated from the Company's operations.
7
The status of the estimated loss on asset dispositions portion of the Company's
restructuring accruals as of June 30, 1999 is as follows (dollars in millions):
The check printing plant closures are expected to be completed in early 2000.
The collection center closing and reductions are expected to be completed in the
third quarter of 1999.
11. During the third quarter of 1998, the Company recorded a charge of
$36.4 million to reserve for expected future losses, extending through 2006, on
existing long-term contracts and relationships of the Deluxe Government Services
segment. In the first quarter of 1999, the Company determined that one
relationship included in the 1998 loss accrual should no longer be included
because the definitive agreement between the Company and the prime contractor
remains subject to negotiation. By not considering this relationship in the
charge for expected future losses, $4.3 million of assets dedicated to this
relationship were exposed to impairment. In accordance with the Company's policy
on impairment of long-lived assets, as outlined in footnote 3 above, an
impairment loss of an amount substantially equal to the contract loss originally
recorded with respect to this relationship resulted. In the first quarter of
1999, this reclassification between accrued contract/relationship losses and
long-lived assets was recorded and $1.9 million of contract losses were applied
against the reserve. During the second quarter of 1999, $.6 million of contract
losses were applied against this reserve.
The Company has recently been notified that the prime contractor for a number of
states and state coalitions for which the Company provides switching services
does not intend to renew its switching agreement with the Company. The Company
is currently negotiating with the contractor regarding the timing and cost of
this transition and the subsequent conversion of the switching services to a
third party. The Company will adjust the charge described above when the results
of these negotiations are reasonably estimable, but it is likely that the loss
of this contract and revenue stream will require the Company to record an
additional accrual.
12. The Company has organized its business units into seven operating
segments based on the nature of the products and services offered by each:
Deluxe Paper Payment Systems; Deluxe Payment Protection Systems; Deluxe
Electronic Payment Systems; Deluxe Government Services; iDLX Technology
Partners; Deluxe Direct Response; and Deluxe Direct. Deluxe Paper Payment
Systems provides check printing services to financial services companies and
markets checks and business forms directly to households and small businesses.
Deluxe Payment Protection Systems provides payment protection, electronic check
conversion, collection and risk management services to financial institutions
and retailers. Deluxe Electronic Payment Systems provides electronic funds
transfer processing and software services to the financial and retail
industries. Deluxe Government Services provides electronic benefits transfer
services to state governments and online medical eligibility verification
services to the State of New York. iDLX Technology Partners provides information
technology development and support services and business process outsourcing
services to financial services companies and to all the Company's businesses.
Deluxe Direct Response, which was sold in 1998, provided direct marketing,
customer database management, and related services to the financial industry and
other businesses. Deluxe Direct, which was sold in 1998, primarily sold greeting
cards, stationery, and specialty paper products through direct mail. Most
segments operate primarily in the United States. Deluxe Electronic Payment
Systems and iDLX Technology Partners also have international operations.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies as presented in the Company's notes
to the consolidated annual financial statements included in the 1998 10-K, as
well as the policies presented in footnotes 2 and 3 above. In evaluating segment
performance, management focuses on income from operations. This measurement
excludes special charges (e.g., certain restructuring charges, asset impairment
charges, charges for legal proceedings, etc.), interest expense, investment
income, income tax expense and other non-operating items, such as gains or
8
losses from asset disposals. Corporate expenses are allocated to the segments as
a fixed percentage of segment revenues. This allocation includes expenses for
various support functions such as human resources, information services and
finance and includes depreciation and amortization expense related to corporate
assets. The corresponding corporate asset balances are not allocated to the
segments. Generally, intersegment sales are based on current market pricing.
Segment information for the quarters and six months ended June 30, 1999 and 1998
is as follows (dollars in thousands):
9
Segment information reconciles to consolidated amounts as follows (dollars in
thousands):
Unallocated corporate expenses consist of charges for certain corporate
liabilities which are not allocated to the segments.
10
Unallocated corporate assets consist primarily of cash, investments, and fixed
assets and intangibles utilized by the corporate support functions.
1999 corporate capital purchases consist primarily of a new human resources
information system and various other information system enhancements. 1998
corporate capital purchases consist primarily of SAP financial software
implementation and various other information system enhancements.
Revenues are attributed to geographic areas based on the location of the assets
producing the revenues. The Company's operations by geographic area are as
follows (in thousands):
13. In April 1999, the Company announced that it will be selling National
Revenue Corporation, its collections business which is included in the Deluxe
Payment Protection Systems segment. This business contributed net sales of $32.1
million and $30.2 million for the quarters ended June 30, 1999 and 1998,
respectively, and net sales of $66.3 million and $60.7 million for the six
months ended June 30, 1999 and 1998, respectively. The sale is expected to be
completed in 1999.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Company Profile
The Company has organized its business units into seven operating segments based
on the nature of the products and services offered by each: Deluxe Paper Payment
Systems; Deluxe Payment Protection Systems; Deluxe Electronic Payment Systems;
Deluxe Government Services; iDLX Technology Partners; Deluxe Direct Response;
and Deluxe Direct. Deluxe Paper Payment Systems provides check printing services
to financial services companies and markets checks and business forms directly
to households and small businesses. Deluxe Payment Protection Systems provides
payment protection, collection, electronic check conversion and risk management
services to financial institutions and retailers. Deluxe Electronic Payment
Systems provides electronic funds transfer processing and software services to
the financial and retail industries. Deluxe Government Services provides
electronic benefits transfer services to state governments and online medical
eligibility verification services to the State of New York. iDLX Technology
Partners provides information technology development and support services and
business process outsourcing services to financial services companies and to all
the Company's businesses. Deluxe Direct Response, which was sold in 1998,
provided direct marketing, customer database management, and related services to
the financial industry and other businesses. Deluxe Direct, which was sold in
1998, primarily sold greeting cards, stationery, and specialty paper products
through direct mail. Most segments operate primarily in the United States.
Deluxe Electronic Payment Systems and iDLX Technology Partners also have
international operations.
Results of Operations - Quarter and Six Months Ended June 30, 1999 Compared to
the Quarter and Six Months Ended June 30, 1998
NET SALES - Net sales were $407.8 million for the second quarter of 1999, down
14.1% from the second quarter of 1998 when sales were $474.8 million. Net sales
were $821.9 million for the first six months of 1999, down 14.7% from the first
six months of 1998 when sales were $963.8 million. These decreases are primarily
due to discontinuing production of direct mail products and the sale of the
remaining businesses in the Deluxe Direct Response and Deluxe Direct segments in
1998. These segments contributed net sales of $54.1 million and $131.0 million
in the second quarter and the first half of 1998, respectively. Deluxe Paper
Payment Systems net sales decreased 6.3% to $303.8 million in the second quarter
of 1999, as compared to $324.3 million in the second quarter of 1998, and
decreased 4.5% to $615.9 million in the first six months of 1999. Sales in this
segment were $645.1 million during the comparable six month period in 1998.
These decreases were primarily due to lower volume in the financial institution
check printing business due to lost customers. The loss of business was due to
competitive pricing requirements that fell below the Company's revenue and
profitability per unit targets. This volume decrease was partially offset by
increased volume for both the direct check printing business and the business
forms business. Deluxe Electronic Payment Systems net sales were flat compared
to both the second quarter and the first half of 1998 ($32.4 million and $62.9
million for the quarter and six months ended June 30, 1999, respectively, versus
$32.8 million and $63.3 million, respectively, for the comparable periods in
1998). Increased volume in processing related revenues was offset by decreased
software sales due to customer reluctance to make significant software changes
prior to the turn of the century. Net sales for Deluxe Payment Protection
Systems increased 10.4% from $53.2 million in the second quarter of 1998 to
$58.7 million in the second quarter of 1999 and increased 10.7% to $119.2
million in the first six months of 1999, as compared to $107.7 million for the
first six months of 1998. These increases were due to increased volume across
all product lines and price increases within the Company's authorization
businesses. Net sales for the Deluxe Government Services segment increased
10.5%, or $1.1 million, to $11.9 million in the second quarter of 1999 from
$10.8 million during the comparable period in 1998 and increased 16%, or $3.2
million, from $20.0 million for the first six months of 1998 to $23.2 million in
the first half of 1999. These increases were due to the roll out of additional
states during the latter half of 1998 and the first six months of 1999. iDLX
Technology Partners net sales of $2.3 million in the second quarter of 1999
represents an increase over 1998, as this segment was acquired in the second
quarter of 1999.
GROSS MARGIN - Gross margin for the Company was 55.9% in the second quarter of
1999 compared to 53.8% in the second quarter of 1998. Gross margin for the
Company was 56.1% in the first half of 1999 compared to 54.0% in the first half
of 1998. A portion of the increase is due to discontinuing production of direct
mail products and the sale of the remaining businesses within the Deluxe Direct
Response and Deluxe Direct segments, which contributed gross margins of 21.6%
and 51.4%, respectively, in the first six months of 1998. Deluxe Paper Payment
Systems gross margin increased to 64.2% in the second quarter of 1999 from 61.4%
in the second quarter of 1998, and increased to 63.8% for the first half of
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1999 from 61.2% in the first half of 1998. These increases were due to cost
reductions realized from plant closings and process improvements within both the
financial institution check printing and business forms businesses and the loss
of lower margin customers within the financial institution check printing
business. Gross margin for Deluxe Government Services increased to 4.7% in the
second quarter of 1999 from 2.6% in the second quarter of 1998 and increased to
5.5% in the first half of 1999 from a negative 7.8% in the first half of 1998.
These increases are due to the application of loss contract accounting, for
which a reserve was recorded in the third quarter of 1998 (see footnote 11 to
the Notes to Consolidated Financial Statements), as well as to planned decreases
in help desk and other expenses. Gross margin for Deluxe Electronic Payment
Systems increased to 30.2% in the second quarter of 1999 from 26.7% in the
second quarter of 1998, and increased to 27.7% for the first half of 1999 from
26.5% in the first half of 1998, due to a decrease in the labor resources spent
on on-going operations. More of the segment's labor resources are being applied
to product development as opposed to on-going operations, as was the case in
1998. Deluxe Payment Protection Systems gross margin decreased to 37.4% in the
second quarter of 1999 from 44.6% in the second quarter of 1998, and decreased
to 41.4% for the first half of 1999 from 46.9% for the first half of 1998. These
decreases were primarily due to the product mix within the collections business.
iDLX Technology Partners, which was acquired in the second quarter of 1999,
contributed a gross margin of 19.1% in the second quarter.
SELLING, GENERAL AND ADMINSTRATIVE EXPENSE (SG&A) - SG&A decreased $35.6
million, or 19.0%, from the second quarter of 1998 and $73.5 million, or 19.3%,
from the first six months of 1998, primarily due to discontinuing production of
direct mail products and the sale of the remaining businesses within the Deluxe
Direct Response and Deluxe Direct segments in 1998. These businesses had $32.9
million and $78.7 million of SG&A in the second quarter and the first half of
1998, respectively. Deluxe Electronic Payment Systems' SG&A decreased 26.2% from
the second quarter of 1998 and 22.6% from the first six months of 1998 due
primarily to reductions in Corporate support SG&A expenses, which results in
lower expenses allocated to the segments. The benefit from the reduced Corporate
SG&A expenses was offset by other expense increases within the other segments.
Deluxe Paper Payment Systems SG&A increased .7% from the second quarter of 1998
and 1.1% from the first half of 1998 due primarily to increased marketing
expenses, which are reflective of an increased emphasis on new customer
acquisition at the direct check printing business. SG&A for Deluxe Payment
Protection Systems increased 23.5% from the second quarter of 1998 and 17.1%
from the first six months of 1998 due primarily to costs incurred in conjunction
with the Company's development of its Debit Bureau(SM) capabilities. SG&A for
Deluxe Government Services decreased 30.1% from the second quarter of 1998 and
30.0% from the first half of 1998 due to the fact that Corporate support
expenses were not allocated to this segment in 1999.
OTHER INCOME - Other income decreased $2.4 million from the second quarter of
1998 and $4.1 million from the first half of 1998 due primarily to gains on
building sales realized in 1998.
INCOME TAX EXPENSE - The Company's effective tax rate decreased to 38.5% for the
first six months of 1999 from 40.2% for the comparable period in 1998 due
primarily to decreased state tax expense as a result of various tax reduction
initiatives undertaken by the Company.
NET INCOME - Net income for the second quarter of 1999 increased 12.1% to $47.4
million, compared to net income of $42.3 million for the second quarter of 1998.
Net income for the first half of 1999 increased 10.7% to $95.0 million, compared
to net income of $85.8 million for the first half of 1998. The increase is due
to the improvement in the Company's operating margin from 14.5% in the first
half of 1998 to 18.7% in the first half of 1999. This improvement results from
the improvements in ongoing operations that are more specifically discussed
above, as well as from the sale of the businesses within the Deluxe Direct
Response and Deluxe Direct segments in 1998.
Financial Condition - Liquidity
Cash provided by operations was $108.6 million for the first six months of 1999,
compared with $100.1 million for the first six months of 1998. The increase is
due to improved earnings and decreased accounts receivable due to decreased
sales and an increase in Automated Clearing House (ACH) processing of cash
receipts within the Deluxe Paper Payment Systems segment. These increases were
partially offset by a payment of $32.2 million in February 1999 for a judgement
against one of the Company's subsidiaries (see footnote 7 to Notes to
Consolidated Financial Statements). Cash from operations represents the
Company's primary source of working capital for financing capital expenditures
and paying cash dividends.
13
The Company's working capital on June 30, 1999 was a negative $24.2 million
compared to a positive $167.9 million on December 31, 1998. The Company's
current ratio on June 30, 1999 was .9 to 1, compared to 1.4 to 1 on December 31,
1998. The decrease is due primarily to the use of cash and borrowings on the
Company's lines of credit during the first half of 1999 to repurchase stock of
the Company and to complete two acquisitions (see footnotes 8 and 9 to
Consolidated Financial Statements).
Financial Condition - Capital Resources
Purchases of capital assets totaled $51.6 million for the first half of 1999
compared to $60.1 million during the comparable period one year ago. As of June
30, 1999, the Company had uncommitted bank lines of credit of $155 million
available at variable interest rates. The average amount drawn on these lines
during the first six months of 1999 was $9.2 million at a weighted average
interest rate of 5.01%. As of June 30, 1999, $25 million of the Company's $26.4
million of short-term debt related to these lines of credit and was outstanding
at an interest rate of 5.07%. No amounts were drawn on these lines during 1998
and there was no outstanding balance at December 31, 1998. The Company also had
a $150 million committed line of credit available for borrowing and as support
for commercial paper. As of June 30, 1999 and December 31, 1998, the Company had
no commercial paper outstanding and no indebtedness outstanding under its
committed line of credit. Additionally, the Company had a shelf registration in
place to issue up to $300 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, 1999 and December 31, 1998,
no such notes were issued or outstanding.
Year 2000 Readiness Disclosure
GENERAL APPROACH AND STATE OF READINESS - In 1996, the Company initiated a
program to prepare its computer systems, applications and embedded chip
equipment for the year 2000 and to evaluate the readiness of its third-party
suppliers and customers for the millennium date change. The year 2000 issue
affects the Company and most of the other companies and governmental agencies in
the world. Historically, certain computer programs were written using two digits
rather than four to define the applicable year. As a result, some programs may
recognize a date which uses the two digits "00" as 1900 rather than the year
2000, which among other things may cause them to generate erroneous data, lose
data elements and possibly fail.
The Company is using a multiphase approach in conducting its year 2000
remediation efforts. These phases are: assessment; analysis and formulation of
remediation strategy; solution implementation; testing; and certification using
internally developed criteria. The Company has divided its internal readiness
review between "mission critical" systems and equipment and its other assets.
The project is organized around nine types of computerized assets: internally
developed applications; product-to-market software and systems; third-party
purchased software; data centers; networks; environmental systems; purchased
hardware (including embedded chip and desktop equipment); third-party
assessment; and external interfaces. During 1997, the Company assessed and
prioritized all affected areas, defined appropriate resolution strategies and
began execution of those strategies. The compliance strategies include
renovation, replacement and retirement of systems and equipment.
As of June 30, 1999, the overall project was approximately 98% complete and was
100% complete for mission critical areas. All areas regulated by the Federal
Financial Institution Examination Council (FFIEC) have been completed. Also
during 1999, the project focus shifted toward ongoing post-certification review
and contingency plan completion. As of June 30, 1999, contingency planning was
approximately 75% complete and was 100% complete for all areas regulated by the
FFIEC.
As part of its year 2000 review, the Company also assessed the readiness of the
embedded chip equipment in its facilities. This assessment included all plant
manufacturing equipment, HVAC systems, building security systems, personal
computers and other office equipment such as printers, faxes and copy machines.
The most frequent method of achieving compliance in this area is replacing
non-compliant systems and equipment. This effort was 100% complete as of June
30, 1999.
Another area of focus for the Company is the year 2000 readiness of its
significant suppliers and customers, both from the standpoint of technology and
product and service provision. These external organizations were contacted and
they have
14
provided responses to year 2000 assessment requests. Site visits were made and
action plans were developed as appropriate, based on the importance of the
organizations to the Company's ability to provide products and services. This
category was completed in March 1999 and will be monitored going forward through
the year 2000.
COSTS - The Company expects to incur project expenses of approximately $28.5
million over the life of its year 2000 project, consisting of both internal
staff costs and external consulting expenses, with $22.6 million having been
incurred through June 30, 1999. Funds for the initiative are provided from a
separate budget of $28.5 million for the remediation of all affected systems.
The Company's SAP software implementation costs and other capital expenditures
associated with replacing or improving affected systems are not included in
these cost estimates. The Company has not deferred any material information
technology project as a result of this initiative.
RISK AND CONTINGENCY - Because of the nature of the Company's business, the year
2000 issue would, if unaddressed, pose a material business risk for the Company.
Business operations may be at risk, as would customer information interfaces and
the provision of products and services. The risk is increased by the potential
for the Company to fall out of compliance with policies set by the FFIEC, the
National Credit Union Agency and other federal and regional regulatory bodies.
The Company believes that with the planned modifications to existing systems and
the replacement or retirement of other systems, the year 2000 compliance issue
will be resolved in a timely manner and will not pose significant operational
problems for the Company. The Company prioritized its renovation efforts to
focus first on its mission critical internal systems. The Company completed this
component of its remediation efforts as of June 30, 1999. In addition to the
planned modifications, replacements and retirements, the Company has developed
risk mitigation processes and is creating contingency plans in an effort to
limit the inherent risk of the year 2000 issue. Manual fall-back processes and
procedures are being identified and put in place, particularly in cases where
vendor equipment or services begin to demonstrate the potential to be
unavailable. The Company is also preparing plans to deploy internal teams to
repair problems as they arise when the next century begins. Ongoing audit
reviews are currently in progress and are scheduled to continue into 2000 to
ensure that compliance control processes continue to be used. In addition, the
Company is enhancing its existing business resumption plans.
Outlook
In 1999, the Company will continue its efforts to reduce costs and improve
profitability by continuing with its plans to close financial institution check
printing plants and complete the implementation of a new order processing and
customer service system and post-press production process improvements.
Additionally, the Company will continue with it plans to reduce SG&A expenses.
At the same time, the Company will continue with major infrastructure
improvements and expects to complete its year 2000 readiness project in a timely
manner.
In April 1999, the Company announced the creation of a new business unit,
eFunds. This business unit will be comprised of Deluxe Electronic Payment
Systems, Inc., Debit Bureau(SM), Chex Systems, Inc., Deluxe Payment Protection
Systems, Inc. and eFunds Corporation, which was acquired in February 1999, under
a single management group. The Company believes that combining these businesses
into a single integrated unit will provide opportunities for revenue and profit
growth in excess of what would have been generated had they continued to operate
independently. The Company also announced that it plans to reduce its Corporate
support group and will be moving some Corporate resources into the Company's
operating units in order to enable them to operate more independently. The
implementation of this initiative could lead to a restructuring charge in future
periods. The transition to this new business model is expected to be completed
by January 1, 2000. In addition, the Company has stated that it will be selling
National Revenue Corporation, the Company's collection business, as it does not
fit into the Company's new business model.
In April 1999, the Company's Board of Directors authorized the repurchase of up
to 10 million shares of the Company's Common Stock. Through June 30, 1999, the
Company purchased 4.2 million of the 10 million shares. Market conditions
permitting and depending on the amount of cash available to the Company for this
purpose and its other investment opportunities, additional share repurchases
could occur in the second half of 1999.
The Company's Government Services business has been notified that the prime
contractor for a number of states and state coalitions for which the Company's
Government Services business provides switching services does not intend to
renew its switching agreement with the Company. The Company is currently
negotiating with the contractor regarding the timing and
15
cost of this transition and the subsequent conversion of the switching services
to a third party. The Company will adjust the $36.4 million charge described in
footnote 11 to Notes to Consolidated Financial Statements when the results of
these negotiations are reasonably estimable, but it is likely that the loss of
this contract and revenue stream will require the Company to record an
additional accrual.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
As of June 30, 1999, the Company had an investment portfolio of fixed income
securities, excluding those classified as cash and cash equivalents, of $41.2
million. These securities, like all fixed income instruments, are subject to
interest rate risk and will decline in value if market interest rates increase.
However, the Company has the ability to hold its fixed income investments until
maturity and therefore would not expect to recognize an adverse impact on net
income or cash flows in such an event.
The Company operates internationally, and so it is subject to potentially
adverse movements in foreign currency rate changes. The Company does not enter
into foreign exchange forward contracts to reduce its exposure to foreign
currency rate changes on intercompany foreign currency denominated balance sheet
positions. Historically, the effect of movements in the exchange rates have not
been material to the consolidated operating results of the Company.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
During 1997, a $30 million judgment was entered against Deluxe Electronic
Payment Systems, Inc. (DEPS), in the U.S. District Court for the Western
District of Pennsylvania. The case was brought against DEPS by Mellon Bank
(Mellon) in connection with a potential bid to provide electronic benefit
transfer services for the Southern Alliance of States. In January 1999, the
Company's appeal of this judgment was denied by the Third Circuit Court of
Appeals and the Company paid $32.2 million to Mellon in February 1999. The
Company's petition for a further review of this judgement was denied by the
United States Supreme Court in June 1999.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual shareholders' meeting on May 4, 1999:
66,957,083 shares were represented (84.32% of the 79,405,544 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: John A. Blanchard III, Dr.
James J. Renier, Barbara B. Grogan, Stephen P. Nachtsheim, Calvin W. Aurand,
Jr., Donald R. Hollis, Robert C. Salipante, Jack Robinson and Hatim A. Tyabji.
The results were as follows:
Election of Directors For Withold
- --------------------- --- -------
John A. Blanchard III 66,314,199 642,884
Dr. James J. Renier 66,341,614 615,469
Barbara B. Grogan 66,350,544 606,539
Stephen P. Nachtsheim 66,353,847 603,236
Calvin W. Aurand, Jr. 66,341,540 615,543
16
Donald R. Hollis 66,352,098 604,985
Robert C. Salipante 66,334,262 622,821
Jack Robinson 66,347,965 609,118
Hatim A. Tyabji 66,342,636 614,447
2. Ratification of appointment of Deloitte & Touche LLP as Independent
auditors:
For: 66,543,579
Against: 119,019
Abstain: 294,485
Item 5. Other Information
RISK FACTORS AND CAUTIONARY STATEMENTS.
When used in this Quarterly Report on Form 10-Q and in future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases and in oral statements made by the Company's representatives, the words
or phrases "should result," "are expected to," "targeted," "will continue,"
"will approximate," "is anticipated," "estimate," "project" or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are necessarily subject to certain risks and uncertainties, including
those discussed below, that could cause actual results to differ materially from
the Company's historical experience and its present expectations or projections.
Caution should be taken not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The factors listed below could
affect the Company's financial performance and could cause the Company's actual
results for future periods to differ from any opinions or statements expressed
with respect thereto. Such differences could be material and adverse.
The Company will not undertake and specifically declines any obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances occurring after
the date of such statements or to reflect the occurrence of anticipated or
unanticipated events. This discussion supersedes the discussion in Item 5 of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
Earnings Estimates; Cost Reductions. From time to time, representatives of the
Company may make predictions or forecasts regarding the Company's future
results, including estimated earnings or earnings from operations. Any forecast,
including the Company's current statements that it expects to achieve a minimum
of 11 percent annual growth in earnings in 1999 and 2000, report record
operating earnings in 1999 and that it has a target of generating cumulative
EBITDA (earnings before interest, income taxes, depreciation and amortization)
in excess of $2.3 billion over the next five years, regarding the Company's
future performance reflects various assumptions. These assumptions are subject
to significant uncertainties, and, as a matter of course, many of them will
prove to be incorrect. Further, the achievement of any forecast depends on
numerous factors (including those described in this discussion), many of which
are beyond the Company's control. In addition, it is not expected that the
earnings growth projected for 1999 and 2000 will be representative of results
that may be achieved in subsequent years.
As a result, there can be no assurance that the Company's performance will be
consistent with any management forecasts or that the variation from such
forecasts will not be material and adverse. Investors are cautioned not to base
their entire analysis of the Company's business and prospects upon isolated
predictions, but instead are encouraged to utilize the entire available mix of
historical and forward-looking information made available by the Company, and
other information affecting the Company and its products, when evaluating the
Company's prospective results of operations.
17
In addition, representatives of the Company may occasionally comment on the
perceived reasonableness of published reports by independent analysts regarding
the Company's projected future performance. Such comments should not be
interpreted as an endorsement or adoption of any given estimate or range of
estimates or the assumptions and methodologies upon which such estimates are
based. Generally speaking the Company does not make public its own internal
projections, budgets or estimates. Undue reliance should not be placed on any
comments regarding the conformity, or lack thereof, of any independent estimates
with the Company's own present expectations regarding its future results of
operations. The methodologies employed by the Company in arriving at its own
internal projections and the approaches taken by independent analysts in making
their estimates are likely different in many significant respects. Although the
Company may presently perceive a given estimate to be reasonable, changes in the
Company's business, market conditions or the general economic climate may have
varying effects on the results obtained through the use of differing analyses
and assumptions. The Company expressly disclaims any continuing responsibility
to advise analysts or the public markets of its view regarding the current
accuracy of the published estimates of outside analysts. Persons relying on such
estimates should pursue their own independent investigation and analysis of
their accuracy and the reasonableness of the assumptions on which they are
based.
Recent Strategic Initiatives. The Company has recently announced the creation of
eFunds, a new business unit comprised of Deluxe Electronic Payment Systems,
Inc., Debit Bureau(SM), Chex Systems, Inc., Deluxe Payment Protection Systems,
Inc. and eFunds Corporation. It is hoped that combining these businesses into a
single business unit will increase their opportunities for revenue and profit
growth. The Company has also announced an intention to transfer certain
resources and responsibilities from its corporate group to its operating units
in an effort to enable them to more efficiently respond to market opportunities
and conditions. In many respects, however, the precise benefits, if any, that
may result from these initiatives cannot presently be quantified. Further,
accomplishing the goals of the reorganization is dependent upon identifying and
developing new products and services, some or all of which may be directed at
markets not now served by the Company. The successful execution of this strategy
is also dependant upon identifying and retaining personnel and third parties
with the expertise needed to develop and implement the Company's strategic
initiatives. Portions of the initiative may also involve identifying and
reaching agreements with strategic alliance partners and acquisition targets.
Unexpected delays are common in endeavors of this type and can arise from a
variety of sources, many of which will likely have been unanticipated. The
likelihood that the reorganization will achieve its goal of incrementally
increasing the revenues and profits of the businesses included in the eFunds
business unit must be considered in light of the problems, expenses,
complications and delays frequently encountered in connection with the
development and execution of new business initiatives and the competitive,
rapidly changing environment in which eFunds will operate. As a result, although
the Company has set annual revenue growth targets for its eFunds business unit
at 20 percent for the years 2000 and 2001, and hopes to achieve higher levels of
growth in subsequent years, there can be no assurance that these targets will in
fact be achieved. In addition, the implementation of these initiatives could
lead to a restructuring charge in an amount that, although not yet quantified,
may be material.
Share Repurchase Program. In April 1999, the Board of Directors of the Company
authorized the repurchase of up to 10,000,000 shares of the Company's Common
Stock. Through June 30, 1999, the Company has purchased 4.2 million of the
shares included in this authorization. The completion of this program is,
however, dependant upon market conditions, including the availability of a
sufficient number of shares at prices determined by management of the Company to
be reasonable, the amount of cash available to the Company for this purpose and
the Company's other investment opportunities. Accordingly, if appropriate
conditions or circumstances do not prevail during the planned repurchase period,
the Company will not purchase the entire allotment of shares authorized by the
Board.
Timing and Amount of Anticipated Cost Reductions. With regard to the results of
the Company's ongoing cost reduction efforts (including the Company's current
review of its SG&A expense levels), there can be no assurance that the projected
annual cost savings will be fully realized or will be achieved within the time
periods expected. The implementation of the printing plant closures upon which
some of the anticipated savings depend is, in large part, dependent upon the
successful development of the software needed to streamline the check ordering
process and redistribute the resultant order flow among the Company's remaining
printing plants. The Company has previously experienced unanticipated delays in
the planned roll-out of its on-line ordering system. Although the Company again
began converting customers to this new system in the fourth quarter of 1998 and
believes that the delays it has experienced in the past will not materially
affect its current plant closing schedule, there can be no assurances such will
be the case or that additional sources of delays will not be encountered
18
because of the complexities inherent in the development of software products as
sophisticated as those needed to accomplish this task. Any such event could
adversely affect the planned consolidation of the Company's printing facilities
and the achievement of the expected productivity improvements and delay the
realization or reduce the amount of the anticipated expense reductions.
In addition, the achievement of the targeted level of cost savings is dependent
upon the successful execution of a variety of other cost reduction strategies
throughout the Company's operations. These additional efforts include the
consolidation of the Company's purchasing process and certain administrative and
sales support organizations, headcount reductions and other efforts. The optimum
means of realizing many of these strategies is being evaluated by the Company in
view of the Company's recent efforts to transfer certain resources and
responsibilities from its corporate group to its operating units. The goodwill
amortization associated with the Company's recent acquisitions of eFunds
Corporation and the remaining 50 percent ownership interest in its joint venture
with HCL Corporation of India, as well as any future acquisitions, may also act
to offset some of the benefits sought to be achieved through this program.
Unexpected delays, complicating factors and other hindrances are common in the
implementation of these types of endeavors and can arise from a variety of
sources, some of which are likely to have been unanticipated. The Company may
also incur additional charges against its earnings in connection with future
programs. A failure to timely achieve one or more of the Company's primary cost
reduction objectives could materially reduce the benefit to the Company of its
cost savings programs and strategies or substantially delay the full realization
of their expected benefits.
Further, there can be no assurance that increased expenses attributable to other
areas of the Company's operations or to increases in raw material, labor,
equipment or other costs will not offset some or all of the savings expected to
be achieved through the cost reduction efforts. Competitive pressures and other
market factors may also require the Company to share the benefit of some or all
of any savings with its customers or otherwise adversely affect the prices it
receives or the market for its products. As a result, even if the expected cost
reductions are fully achieved in a timely manner, such reductions are not likely
to be fully reflected by commensurate gains in the Company's net income, cash
position, dividend rate or the price of its Common Stock.
Other Dispositions and Acquisitions. In connection with its ongoing
restructuring, the Company may also consider divesting or discontinuing the
operations of various business units and assets and the Company may undertake
one or more significant acquisitions. Any such divestiture or discontinuance
could result in write-offs by the Company, some or all of which could be
significant. In addition, a significant acquisition could result in future
earnings dilution for the Company's shareholders. Acquisitions accounted for as
a purchase transaction could also adversely affect the Company's reported future
earnings due to the amortization of the goodwill and other intangibles
associated with the purchase.
Competition. Although the Company believes it is the leading check printer in
the United States, it faces considerable competition from other smaller
companies in both its traditional sales channel to financial institutions and
from direct mail sellers of checks. From time to time, one or more of these
competitors reduce the prices of their products in an attempt to gain volume.
The corresponding pricing pressure placed on the Company has resulted in reduced
profit margins for the Company's check printing business in the past and similar
pressures can reasonably be expected in the future. The Company has also
experienced some loss of business due to its refusal to meet competitive prices
that fell below the Company's revenue and profitability per unit targets. The
timing and amount of reduced revenues and profits that may result from these
competitive pressures is not ascertainable.
Check printing is, and is expected to continue to be, an essential part of the
Company's business and the principal source of its operating income for at least
the next several years. A wide variety of alternative payment delivery systems,
including credit cards, debit cards, smart cards, ATM machines, direct deposit,
electronic and other bill paying services, home banking applications and
Internet-based payment services, are in various stages of maturity or
development and additional systems will likely be introduced. The Company
believes that there will continue to be a substantial market for checks for the
foreseeable future, although a reduction in the volume of checks used by
consumers is expected. The rate and the extent to which alternative payment
methods will achieve consumer acceptance and replace checks cannot, however, be
predicted with certainty. A surge in the popularity of any of these alternative
payment methods could have a material, adverse effect on the demand for the
Company's primary products and its account verification and payment protection
services. Although the Company believes that its recent acquisition of eFunds
Corporation may contribute to the continued viability of the paper
19
check as a payment mechanism by accelerating processing times and reducing
processing costs, there can be no assurance that the check conversion technology
developed by this new subsidiary and its competitors will achieve widespread
acceptance or have a measurable impact on the sales volume of the Company's
principal products.
The introduction of the alternative payment methodologies described above has
also resulted in an increased interest by third parties in transaction
processing, authorization and verification, as well as other methods of
effecting electronic payments, as a source of revenue, which has led to
increased competition for the Company's transaction processing and authorization
businesses. The payment processing industry is characterized by continuously
evolving technology and intense competition. Many participants in the industry
have substantially greater capital resources and research and development
capabilities than the Company. There can be no assurance that the Company's
competitors and potential competitors will not succeed in developing and
marketing technologies, services or products that are more accepted in the
marketplace than those offered or envisioned by the Company. Such a development
could result in the loss of significant customers by the Company's eFunds
business unit, render the Company's technology and proposed products obsolete or
noncompetitive or otherwise materially hinder the achievement of the growth
targets established for this business unit. Initiatives that may be undertaken
by the Company in connection with Internet commerce-based activities would be
particularly susceptible to these types of competitive risks and the rapid
development and deployment of Internet technologies, products and services may
present unanticipated competitive risks to the Company's current business that
may be material and adverse.
Effect of Financial Institution Consolidation. There is an ongoing trend towards
increasing consolidation within the banking industry that has resulted in
increased competition and consequent pressure on check prices. This
concentration greatly increases the importance to the Company of retaining its
major customers and attracting significant additional customers in an
increasingly competitive environment. Although the Company devotes considerable
efforts towards the development of a competitively priced, high quality suite of
products for the financial services industry, there can be no assurance that
significant customers will not be lost or that any such loss can be
counterbalanced through the addition of new customers or by expanded sales to
the Company's remaining customers.
iDLX Technology Partners. There can be no assurance that the services proposed
to be offered by the Company's iDLX Technology Partners (iDLX) business unit
will achieve market acceptance in either the United States or India. To date,
the operations of iDLX have not been profitable. In addition, the Company has
only limited operational experience in India. The successful development of iDLX
is subject to all of the risks inherent in the establishment of a new business
enterprise, including the absence of an extended operating history, reliance on
key personnel, a need to attract and retain qualified employees in a highly
competitive labor market, a competitive environment characterized by numerous
well-established and well-capitalized competitors and the risk that the
reputation of the business could be more adversely affected by any customer
service issues or problems than would be the case with a more established firm.
Further, in developing iDLX, the Company faces additional complexities arising
from the maintenance of certain of its functions in India. In addition to the
normal complications that arise in connection with the management of remote
locations, operations in foreign countries are subject to numerous potential
obstacles including, among other things, cultural differences, political unrest,
export controls, governmental interference or regulation (both domestic and
foreign), currency fluctuations, personnel issues and varying competitive
conditions. There can be no assurance that one or more of these factors, or
additional causes or influences, many of which are likely to have been
unanticipated and beyond the ability of the Company to control, will not operate
to inhibit the success of iDLX. As a result, there can be no assurance that this
business unit will achieve its announced 1999 revenue target of $25 million or
that this unit will ever generate significant revenues or profits or provide an
adequate return on the Company's investment.
Revised Analytic Approach. The Company has announced that it is applying a new
methodology for evaluating the Company's projected return on various forms of
investment. The use of this methodology represents a revised analytic approach
by the Company and the long-term benefits to be derived therefrom cannot
presently be precisely determined.
Raw Material, Postage Costs and Delivery Costs. Increases in the price of paper
and the cost of postage can adversely affect the profitability of the Company's
printing and mail order business. Events such as the 1997 UPS strike can also
adversely impact the Company's margins by imposing higher delivery costs.
Competitive pressures and overall trends in the marketplace may have the effect
of inhibiting the Company's ability to reflect increased costs of production or
delivery in the retail prices of its products.
20
Debit Bureau(SM). The Company has announced its intention to offer decision
support tools and information to retailers and financial institutions that offer
or accept direct debit-based products, such as checking accounts, ATM cards,
debit cards and Internet payments. To date, this effort has primarily been
directed towards the creation of the supporting data warehouse and research
regarding the utility and value of the data available to the Company for use in
this area. There can be no assurance that the Company's Debit Bureau(SM)
initiative will result in the introduction of a significant number of new
products or services or that any new products or services introduced by the
Company will generate revenues in material amounts. In any event, the continued
development of Debit Bureau(SM) is expected to require a significant level of
investment by the Company.
Limited Source of Supply. The Company's check printing business utilizes a paper
printing plate material that is available from only a limited number of sources.
The Company believes it has a reliable source of supply for this material and
that it maintains an inventory sufficient to avoid any production disruptions in
the event of an interruption of its supply. In the event, however, that the
Company's current supplier becomes unwilling or unable to supply the required
printing plate material at an acceptable price and the Company is unable to
locate a suitable alternative source within a reasonable time frame, the Company
would be forced to convert its facilities to an alternative printing process.
Any such conversion would require the unanticipated investment of significant
sums and there can be no assurance that the conversion could be accomplished
without production delays.
Year 2000 Readiness Disclosure. In 1996, the Company initiated a company-wide
program to prepare its computer systems, applications and embedded chip
equipment for the year 2000 and to evaluate the readiness of its third-party
suppliers/customers for the millennium date change. Although the Company
presently believes that with the planned modifications to existing systems and
the replacement or retirement of other systems, the year 2000 compliance issue
will be resolved in a timely manner and will not pose significant operational
problems for the Company, there can be no absolute assurances in this regard.
The Company's business operations, as well as its ability to provide products
and services to its customers without undue delay or interruption, could be at
risk in the event unanticipated year 2000 issues arise. In addition, there can
be no absolute assurances that unanticipated expenses related to the Company's
ongoing year 2000 compliance efforts will not be incurred. The Company has
communicated with its key suppliers and customers to determine their year 2000
readiness and the extent to which the Company is vulnerable to any third party
year 2000 issues. There can be no guarantee that the systems of other companies
on which the Company's systems rely will be converted in a timely manner or in a
manner that is compatible with the Company's systems. A failure by such a
company to convert their systems in a timely manner or a conversion that renders
such systems incompatible with those of the Company could have a material
adverse effect on the Company and there can be no assurance that any contingency
plans developed by the Company will adequately mitigate the effects of any third
party noncompliance. In addition, it is unrealistic to assume that the Company
could remain unaffected if the year 2000 issue results in a widespread economic
downturn. Also, it is possible that the Company's insurance carriers could
assert that its existing liability insurance programs do not cover liabilities
arising out of any operational problems associated with the advent of the year
2000.
21
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
Exhibit No. Description Method of Filing
----------- ----------- ----------------
3.1 Articles of Incorporation (incorporated by *
reference to Exhibit 3(A) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1990)
3.2 Bylaws Filed herewith
4.1 Amended and Restated Rights Agreement, dated as *
of January 31, 1997, by and between the Company
and Norwest Bank Minnesota, National
Association, as Rights Agent, which includes as
Exhibit A thereto, the form of Rights
Certificate (incorporated by reference to
Exhibit 4.1 to the Company's Amendment No. 1 on
Form 8-A/A-1 (File No. 001-07945) filed with
the Securities and Exchange Commission (the
"Commission") on February 7, 1997).
4.2 Indenture, relating to up to $150,000,000 of *
debt securities (incorporated by reference to
Exhibit 4.1 to the Company's Registration
Statement on Form S-3 (33-32279) filed with the
Commission on November 24, 1989).
4.3 Amended and Restated Credit Agreement, dated as *
of July 8, 1997, among the Company, Bank of
America National Trust and Savings Association,
as agent, and the other financial institutions
party thereto related to a $150,000,000
committed line of credit (incorporated by
reference to Exhibit 4.3 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1997).
12.2 Computation of Ratio of Earnings to Fixed Filed herewith
Charges
27.2 Financial Data Schedule Filed herewith
----------------------
*Incorporated by reference
22
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 16, 1999 /s/ J. A. Blanchard III
-------------------------------------
J.A. Blanchard III, President
and Chief Executive Officer
(Principal Executive Officer)
Date August 16, 1999 /s/ Thomas W. VanHimbergen
-------------------------------------
Thomas W. VanHimbergen
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
23
INDEX TO EXHIBITS
Exhibit No. Description Page Number
- ----------- ----------- -----------
3.2 Bylaws
12.2 Computation of Ratio of Earnings to Fixed Charges
27.2 Financial Data Schedule
24