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 September 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
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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., Shoreview, 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 October 19, 2001 was 66,356,550.
Item I. Financial Statements
PART I. FINANCIAL INFORMATION
DELUXE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
SEPTEMBER 30, DECEMBER 31,
2001 2000
---- ----
(DOLLARS IN THOUSANDS)
Current Assets:
Cash and cash equivalents .................................... $ 5,250 $ 80,732
Marketable securities ........................................ 10,620 18,458
Trade accounts receivable (net of allowances for doubtful
accounts of $1,433 and $1,415, respectively) ............... 49,201 46,332
Inventories .................................................. 10,469 10,560
Supplies ..................................................... 11,945 12,578
Deferred advertising ......................................... 17,780 17,089
Deferred income taxes ........................................ 6,729 6,877
Prepaid expenses ............................................. 21,818 20,115
Other current assets ......................................... 5,943 6,997
---------- ----------
Total current assets ....................................... 139,755 219,738
Investments ....................................................... 37,943 35,555
Property, plant, and equipment (net of accumulated depreciation of
$313,333 and $295,812, respectively) ........................... 155,980 173,956
Intangibles (net of accumulated amortization of $107,406 and
$75,355, respectively) ........................................ 204,138 222,798
Other long-term assets ............................................ 33,187 8,392
---------- ----------
Total assets ........................................... $ 571,003 $ 660,439
========== ==========
Current Liabilities:
Accounts payable ............................................... $ 43,816 $ 43,161
Accrued liabilities:
Wages and vacation pay ....................................... 35,387 36,191
Employee profit sharing and pension .......................... 23,524 21,872
Accrued income taxes ......................................... 56,856 27,065
Accrued rebates .............................................. 24,140 24,968
Other ........................................................ 64,031 62,214
Short-term debt ................................................ 102,900 --
Long-term debt due within one year ............................. 1,353 100,672
---------- ----------
Total current liabilities ................................... 352,007 316,143
Long-term debt .................................................... 10,455 10,201
Deferred income taxes ............................................. 60,712 60,712
Other long-term liabilities ....................................... 7,011 10,575
Shareholders' Equity:
Common shares $1 par value (authorized:
500,000,000 shares; issued: 2001 - 66,187,510; 2000 -
72,555,474) ................................................. 66,188 72,555
Additional paid-in capital ..................................... -- 44,243
Retained earnings .............................................. 74,597 146,243
Unearned compensation .......................................... (69) (60)
Accumulated other comprehensive income ......................... 102 (173)
---------- ----------
Total shareholders' equity ................................. 140,818 262,808
---------- ----------
Total liabilities and shareholders' equity .............. $ 571,003 $ 660,439
========== ==========
See Notes to Unaudited Consolidated Financial Statements
2
DELUXE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED UNAUDITED
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue ............................................. $ 323,533 $ 316,084 $ 957,107 $ 959,911
Cost of goods sold ............................... 111,060 113,208 339,971 341,272
---------- ---------- ---------- ----------
Gross Profit ........................................ 212,473 202,876 617,136 618,639
Selling, general and administrative expense ..... 129,006 129,944 393,142 404,361
---------- ---------- ---------- ----------
Operating Income .................................... 83,467 72,932 223,994 214,278
Other (expense) income ........................... (160) 3,694 209 1,953
---------- ---------- ---------- ----------
Income from Continuing Operations Before Interest and
Taxes ............................................ 83,307 76,626 224,203 216,231
Interest expense ................................. (990) (2,936) (3,219) (9,654)
Investment (loss) income ......................... (601) 652 (313) 2,647
---------- ---------- ---------- ----------
Income from Continuing Operations Before Income
Taxes ............................................ 81,716 74,342 220,671 209,224
Provision for income taxes ...................... 30,654 27,378 82,818 77,593
---------- ---------- ---------- ----------
Income from Continuing Operations ................... 51,062 46,964 137,853 131,631
Income (Loss) from Discontinued Operations .......... -- 2,433 -- (3,072)
---------- ---------- ---------- ----------
Net Income .......................................... $ 51,062 $ 49,397 $ 137,853 $ 128,559
========== ========== ========== ==========
Basic Net Income per Share:
Income from continuing operations ................ $ .76 $ .65 $ 1.98 $ 1.82
Income (loss) from discontinued operations ....... -- .03 -- (.04)
---------- ---------- ---------- ----------
Basic Net Income per Share .......................... $ .76 $ .68 $ 1.98 $ 1.78
========== ========== ========== ==========
Diluted Net Income per Share:
Income from continuing operations ................ $ .75 $ 0.65 $ 1.97 $ 1.82
Income (loss) from discontinued operations ....... -- .03 -- (.04)
---------- ---------- ---------- ----------
Diluted Net Income per Share ........................ $ .75 $ .68 $ 1.97 $ 1.78
========== ========== ========== ==========
Cash Dividends per Share ............................ $ .37 $ .37 $ 1.11 $ 1.11
Total Comprehensive Income .......................... $ 51,246 $ 49,343 $ 138,128 $ 128,141
See Notes to Unaudited Consolidated Financial Statements
3
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
---- ----
(DOLLARS IN THOUSANDS)
Cash Flows from Operating Activities:
Net income .................................................................. $ 137,853 $ 128,559
Adjustments to reconcile net income to net cash provided by operating
activities of continuing operations:
Loss from discontinued operations ....................................... -- 3,072
Depreciation ............................................................ 23,840 24,338
Amortization of intangibles ............................................. 33,869 24,488
Share purchase discount ................................................. 925 1,426
Deferred income taxes ................................................... -- (1,388)
Changes in assets and liabilities, net of effects from acquisitions and
discontinued operations:
Trade accounts receivable ........................................... (3,315) (1,722)
Inventories ......................................................... 92 2,124
Accounts payable .................................................... 4,457 (14,487)
Accrued wages, employee profit sharing and pension .................. 1,676 (7,566)
Restructuring accruals .............................................. (2,076) (10,451)
Other assets and liabilities ........................................ 11,288 28,840
---------- ----------
Net cash provided by operating activities of continuing operations .......... 208,609 177,233
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of marketable securities ................................ 37,990 7,627
Purchases of marketable securities .......................................... (30,000) (25,000)
Purchases of capital assets ................................................. (22,281) (40,678)
Payments for acquisitions, net of cash acquired ............................. -- (95,991)
Proceeds from sales of capital assets ....................................... 1,452 14,434
Loan to others .............................................................. -- 32,500
Other ....................................................................... (3,807) (7,212)
---------- ----------
Net cash used by investing activities of continuing operations .............. (16,646) (114,320)
---------- ----------
Cash Flows from Financing Activities:
Net borrowings (payments) on short-term debt ................................ 102,900 (35,000)
Payments on long-term debt .................................................. (101,213) (639)
Change in book overdrafts ................................................... (3,802) (7,360)
Payments to retire shares ................................................... (231,620) --
Proceeds from issuing shares under employee plans ........................... 43,762 6,547
Cash dividends paid to shareholders ......................................... (77,472) (80,274)
---------- ----------
Net cash used by financing activities of continuing operations .............. (267,445) (116,726)
---------- ----------
Net Cash Used by Discontinued Operations ....................................... -- (35,348)
---------- ----------
Net Decrease in Cash and Cash Equivalents ...................................... (75,482) (89,161)
Cash and Cash Equivalents at Beginning of Period ............................... 80,732 124,435
---------- ----------
Cash and Cash Equivalents at End of Period ..................................... $ 5,250 $ 35,274
========== ==========
See Notes to Unaudited Consolidated Financial Statements
4
DELUXE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated balance sheet as of September 30, 2001, the
condensed consolidated statements of income for the quarters and nine months
ended September 30, 2001 and 2000, and the consolidated statements of cash flows
for the nine months ended September 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 any
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 results of operations
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 September 30, 2001,
the net book value of the Company's goodwill was $83.8 million, and goodwill
amortization expense for the first nine months of 2001 was $4.6 million. The
Company has not yet determined the impact this statement will have on its
results of operations or financial position.
5. In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which addresses accounting and
financial reporting for the impairment or disposal of long-lived assets. This
statement is effective for the Company on January 1, 2002. The Company does not
expect that adoption of this standard will have a material effect on its results
of operations or financial position.
6. The Company capitalizes certain contract acquisition costs related to
signing or renewing contracts with its financial institution clients. These
costs, which primarily consist of cash payments made to the financial
institutions, are generally amortized as a reduction of revenue on a
straight-line basis over the contract term and are included in other long-term
assets in the Company's consolidated balance sheets. The Company evaluates the
carrying value of contract acquisition costs in accordance with its impairment
of long-lived assets policy as presented in the Company's Annual Report on Form
10-K for the year ended December 31, 2000.
5
7. 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
-------- -------- -------- --------
Income from continuing operations per
share-basic:
Income from continuing operations ......... $ 51,062 $ 46,964 $137,853 $131,631
Weighted average shares outstanding ....... 67,228 72,391 69,521 72,265
-------- -------- -------- --------
Income from continuing operations per
share-basic ............................. $ 0.76 $ 0.65 $ 1.98 $ 1.82
======== ======== ======== ========
Income from continuing operations per
share-diluted:
Income from continuing operations ......... $ 51,062 $ 46,964 $137,853 $131,631
Weighted average shares outstanding ....... 67,228 72,391 69,521 72,265
Dilutive impact of options ................ 844 81 505 78
Shares contingently issuable .............. 60 12 37 7
-------- -------- -------- --------
Weighted average shares and potential
dilutive shares outstanding ............. 68,132 72,484 70,063 72,350
-------- -------- -------- --------
Income from continuing operations per
share-diluted ........................... $ 0.75 $ 0.65 $ 1.97 $ 1.82
======== ======== ======== ========
During the third quarter of 2001 and 2000, options to purchase 56,442 and
5.3 million common shares, respectively, were outstanding but were not included
in the computation of diluted earnings per share. During the first nine months
of 2001 and 2000, options to purchase a weighted-average of 1.8 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.
8. 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.
9. Inventories were comprised of the following (dollars in thousands):
SEPTEMBER 30, DECEMBER 31,
2001 2000
---- ----
Raw materials ......................... $ 2,450 $ 2,879
Semi-finished goods ................... 7,082 6,504
Finished goods ........................ 937 1,177
-------- --------
Total ............................... $ 10,469 $ 10,560
======== ========
10. As of September 30, 2001, the Company had committed lines of credit for
$350.0 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
nine 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 September 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 nine
months of 2001 was $73.6 million at a weighted-average interest rate of 4.17%.
As of September 30, 2001, $102.9 million was outstanding at a weighted-average
interest rate of 3.21%. 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 $50.0 million
available at variable interest rates. The average amount drawn on these lines of
credit during the first nine months of 2001 was $1.8 million at a
weighted-average interest rate of 4.26%.
6
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 September 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 September 30, 2001 and December 31, 2000, no
such notes were issued or outstanding.
11. The Company's consolidated balance sheets reflect restructuring
accruals of $1.0 million and $3.1 million as of September 30, 2001 and December
31, 2000, respectively, for employee severance costs. The status of these
restructuring accruals as of September 30, 2001 was as follows (dollars in
millions):
CHECK PRINTING PLANT
CLOSINGS/OTHER(1) SG&A REDUCTIONS(2) PLAIDMOON(3) 2001 REDUCTIONS(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
Restructuring charges .... -- -- -- -- -- -- 0.6 46 0.6 46
Severance paid ........... (0.5) (35) (0.9) (25) (0.6) (34) (0.2) (33) (2.2) (127)
------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 ..... 0.3 35 0.6 15 0.2 1 0.4 13 1.5 64
Restructuring charges .... -- -- -- -- -- -- 0.7 89 0.7 89
Restructuring reversals .. -- (15) (0.3) (13) (0.1) -- -- -- (0.4) (28)
Severance paid ........... (0.1) (1) (0.2) (2) (0.1) (1) (0.4) (43) (0.8) (47)
------------------------------------------------------------------------------------------------------
Balance, September 30, 2001 $ 0.2 19 $ 0.1 -- $ -- -- $ 0.7 59 $ 1.0 78
======================================================================================================
(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 reductions within all business
segments.
During the third quarter of 2001, the Company recorded restructuring
accruals of $0.7 million for employee severance primarily relating to customer
service employees within the Business Services segment and mail center employees
within the Financial Services segment. These reductions are expected to affect
approximately 89 employees and are expected to be completed during the fourth
quarter of 2001. Additionally, the Company reversed $0.4 million of previously
recorded restructuring accruals due to higher employee attrition than
anticipated. During the second quarter of 2001, the Company recorded
restructuring accruals of $0.6 million for employee severance related to various
reductions within the Direct Checks segment. These reductions were completed in
the third quarter of 2001 and affected 46 employees. These restructuring charges
and reversals are reflected in SG&A expense in the Company's consolidated
statements of income for the quarter and nine months ended September 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 statement of income for the nine months ended September 30, 2000.
12. 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: Financial Services, Direct
Checks and Business
7
Services. Financial Services 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 Services
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.
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 third quarter and first
nine months of 2001 and 2000 (dollars in thousands):
Quarters Ended September 30, 2001 and 2000
------------------------------------------
FINANCIAL DIRECT BUSINESS CORPORATE AND
SERVICES CHECKS SERVICES UNALLOCATED CONSOLIDATED
-------- ------ -------- ----------- ------------
Revenue:
2001 $197,329 $74,765 $51,439 $ -- $323,533
2000 199,417 68,953 47,714 -- 316,084
Operating income:
2001 48,474 17,481 17,512 -- 83,467
2000 40,319 17,117 15,496 -- 72,932
Depreciation and
amortization expense:
2001 12,592 3,845 1,454 -- 17,891
2000 12,897 3,447 1,124 -- 17,468
Total assets:
2001 297,794 143,473 36,089 93,647 571,003
2000 323,308 149,127 42,011 458,028 972,474
Purchases of capital
assets:
2001 3,088 1,288 577 226 5,179
2000 7,724 1,239 276 4,670 13,909
8
Nine Months Ended September 30, 2001 and 2000
---------------------------------------------
FINANCIAL DIRECT BUSINESS CORPORATE AND
SERVICES CHECKS SERVICES UNALLOCATED CONSOLIDATED
-------- ------ -------- ----------- ------------
Revenue:
2001 $576,695 $229,902 $150,510 $ -- $957,107
2000 609,835 210,358 139,718 -- 959,911
Operating income:
2001 121,176 54,287 48,531 -- 223,994
2000 128,935 43,278 42,065 -- 214,278
Depreciation and
amortization expense:
2001 41,793 11,664 4,252 -- 57,709
2000 36,489 8,949 3,388 -- 48,826
Total assets:
2001 297,794 143,473 36,089 93,647 571,003
2000 323,308 149,127 42,011 458,028 972,474
Purchases of capital
assets:
2001 15,106 4,917 1,920 338 22,281
2000 23,921 4,281 999 11,477 40,678
Corporate and Unallocated assets as of September 30, 2000, includes net assets
of discontinued operations of $299.8 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.
13. In January 2001, the Company's Board of Directors approved a plan to
purchase up to 14 million shares of the Company's common stock. At that time, it
was announced that these repurchases would be completed within a 12- to 18-month
period. Through September 30, 2001, the Company has spent $231.6 million to
repurchase 8.3 million shares. The Company's shareholders' equity declined from
$262.8 million at December 31, 2000 to $140.8 million at September 30, 2001
primarily as a result of these share repurchases and the required accounting
treatment for them. Changes in the Company's shareholders' equity through
September 30, 2001 were as follows (dollars in thousands):
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED UNEARNED COMPREHENSIVE
SHARES CAPITAL EARNINGS COMPENSATION INCOME TOTAL
------ ------- -------- ------------ ------ -----
Balance, December 31, 2000 $72,555 $ 44,243 $ 146,243 $(60) $(173) $ 262,808
Net income 137,853 137,853
Cash dividends (77,472) (77,472)
Common stock issued 1,907 47,308 49,215
Common stock repurchased (8,265) (91,328) (132,027) (231,620)
Other common stock retired (9) (223) (232)
Unearned compensation (9) (9)
Unrealized gain on
marketable securities 275 275
---------------------------------------------------------------------------------------
Balance, September 30, 2001 $66,188 $ -- $ 74,597 $(69) $ 102 $ 140,818
=======================================================================================
9
14. 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 nine months
ended September 30, 2000, were as follows (dollars in thousands):
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------------------ ------------------
Revenue from external customers ....................... $ 90,366 $261,150
Pre-tax income from operations of discontinued
operations before measurement date .................. 7,124 6,355
Pre-tax costs of spin-off ............................. (2,431) (9,885)
Income tax provision (benefit) ........................ 2,260 (458)
-------- --------
Income (loss) from discontinued operations .......... $ 2,433 $ (3,072)
======== ========
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.
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 September 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: Financial Services, Direct Checks and Business Services.
Financial Services 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 Services 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.
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RESULTS OF OPERATIONS - QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2001
COMPARED TO THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2000
The following table presents, for the periods indicated, selected statement
of income data (dollars in thousands):
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2001 2000 2001 2000
---- ---- ---- ----
% OF % OF % OF % OF
$ REVENUE $ REVENUE $ REVENUE $ REVENUE
---------------------------------------- ----------------------------------------
Revenue ..................... $323,533 -- $316,084 -- $957,107 -- $959,911 --
Gross profit ................ 212,473 65.7% 202,876 64.2% 617,136 64.5% 618,639 64.4%
Selling, general and
administrative expense .... 129,006 39.9% 129,944 41.1% 393,142 41.1% 404,361 42.1%
Operating income ............ 83,467 25.8% 72,932 23.1% 223,994 23.4% 214,278 22.3%
REVENUE - Revenue increased $7.4 million, or 2.4%, to $323.5 million in the
third quarter of 2001 from $316.1 million in the third quarter of 2000. Units
for the third quarter were up 3.9% as compared to 2000, while revenue per unit
was down 1.5%. The increase in revenue was due to growth within the Direct
Checks and Business Services segments. Direct Checks revenue increased due to
higher volume resulting from increased units per order, as well as price
increases. Business Services volume increased as this business continued to
benefit from financial institution referrals and stronger customer retention
results. Additionally, a third quarter 2001 price increase contributed to this
business' increased revenue. Partially offsetting these increases was a decrease
in revenue for the Financial Services segment. This segment continued to
experience competitive pricing pressure and a client mix shift toward larger
financial institutions which, due to their volumes, generally pay lower average
prices per unit than smaller accounts. Additionally, third quarter results
included a higher amount of conversion work for several financial institutions.
While this caused an increase in volume as compared to 2000, conversions are
a lower priced product, causing a decrease in revenue per unit.
Revenue for the first nine months of 2000 decreased $2.8 million, or 0.3%,
to $957.1 million from $959.9 million in 2000. Units for the first nine months
of 2001 were down 1.0% as compared to 2000, while revenue per unit was up 0.7%.
The decrease in revenue was primarily due to continued competitive pricing
pressure within the Financial Services segment, as well as the resulting volume
decline due to the loss of financial institution clients. Additionally, the
segment experienced a client mix shift toward larger financial institutions
which, due to their volumes, generally pay lower average prices per unit than
smaller accounts. The decrease in this segment was partially offset by growth in
our other two segments. Direct Checks revenue increased due to higher volume
resulting from increased units per order, price increases and the acquisition of
Designer Checks in February 2000. Business Services revenue increased as this
business continued to benefit from financial institution referrals and stronger
customer retention results. Additionally, price increases in the third quarter
of 2000 and 2001 contributed to this business' increased revenue.
GROSS PROFIT - Gross profit increased $9.6 million to $212.5 million in the
third quarter of 2001 from $202.9 million in the third quarter of 2000. As a
percentage of revenue, gross margin increased to 65.7% in the third quarter of
2001 from 64.2% in the third quarter of 2000. The increase was due to printing
and distribution center productivity improvements and other cost management
efforts primarily within the Financial Services segment, as well as the price
increases within the Direct Checks and Business Services segments. Partially
offsetting these increases was continued pricing pressure within the Financial
Services segment.
Gross profit decreased $1.5 million to $617.1 million in the first nine
months of 2001 from $618.6 million in 2000. As a percentage of revenue, gross
margin was 64.5% in the first nine months of 2001 as compared to 64.4% in 2000.
The effect of continued pricing pressure within the Financial Services segment,
as well as higher delivery costs for this business were offset by price
increases within the Direct Checks and Business Services segments and
productivity improvements within the Financial Services segment.
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SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE - SG&A expense decreased
$0.9 million, or 0.7%, to $129.0 million in the third quarter of 2001 from
$129.9 million in the third quarter of 2000 and decreased $11.3 million, or
2.8%, to $393.1 million in the first nine months of 2001 from $404.4 million in
the first nine months of 2000. As a percentage of revenue, SG&A expense
decreased to 39.9% in the third quarter of 2001 from 41.1% in the third quarter
of 2000, and decreased to 41.1% in the first nine months of 2001 from 42.1% in
the first nine months of 2000. The improvements were primarily due to reduced
spending resulting from on-going cost management efforts across all businesses,
reduced e-commerce spending and administrative cost reductions due to the
spin-off of eFunds on December 29, 2000. Partially offsetting these decreased
expenses were total net restructuring charges of $0.9 million recorded in the
second and third quarters of 2001 related to reductions within all segments.
These reductions are expected to affect a total of 135 employees and are
expected to be completed in the fourth quarter of 2001. By comparison, the first
nine months of 2000 included net restructuring reversals of $2.0 million within
the Financial Services 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.
INTEREST EXPENSE - Interest expense decreased $1.9 million to $1.0 million
in the third quarter of 2001 from $2.9 million in the third quarter of 2000 and
decreased $6.5 million to $3.2 million in the first nine months of 2001 from
$9.7 million in the first nine months of 2000. The decreases were due to our
lower debt levels and interest rates. During the first nine months of 2001, we
had weighted-average debt outstanding of $91.9 million at a weighted-average
interest rate of 4.96%. During the first nine months of 2000, we had
weighted-average debt outstanding of $131.2 million at a weighted-average
interest rate of 8.02%. 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 third quarter of
2001 was 37.5% compared to 36.8% in the third quarter of 2000. Our effective tax
rate in the first nine months of 2001 was 37.5% compared to 37.1% in the first
nine months of 2000.
INCOME FROM CONTINUING OPERATIONS - Income from continuing operations in
the third quarter of 2001 increased $4.1 million, or 8.7%, to $51.1 million from
$47.0 million in the third quarter of 2000. Income from continuing operations
increased $6.3 million, or 4.7%, to $137.9 million in the first nine months of
2001 from $131.6 million in the first nine months of 2000. The improvements were
due to the increases in operating income and the decrease in interest expense
discussed above.
DISCONTINUED OPERATIONS - Income from discontinued operations was $2.4
million in the third quarter of 2000. In the first nine months of 2000
discontinued operations generated a loss of $3.1 million. 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.
The results of discontinued operations for the first nine 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 the first nine 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
We believe that the most important measures of our financial strength are
the ratios of earnings before interest and taxes (EBIT) to interest expense and
free cash flow to debt. EBIT to interest expense was 69.6 and 22.4 for the first
nine months of 2001 and 2000, respectively. Free cash flow to debt on a 12-month
trailing basis through September 30, 2001 was 131.2%. For the year ended
December 31, 2000 this ratio was 88.3%. Free cash flow represents cash flow from
operating activities less purchases of capital assets and dividend payments.
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As of September 30, 2001, we had cash and cash equivalents of $5.3 million,
as well as marketable securities of $10.6 million. The following table shows our
cash flow activity for the first nine months of 2001 and 2000 and should be read
in conjunction with our consolidated statements of cash flows (dollars in
thousands):
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
---- ----
Continuing operations:
Cash provided by operating activities .............. $ 208,609 $ 177,233
Cash used by investing activities .................. (16,646) (114,320)
Cash used by financing activities .................. (267,445) (116,726)
--------- ---------
Cash used by continuing operations ................. (75,482) (53,813)
Cash used by discontinued operations ............... -- (35,348)
--------- ---------
Net decrease in cash and cash equivalents ........ $ (75,482) $ (89,161)
========= =========
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 nine months of 2001, earnings before interest, taxes,
depreciation and amortization (EBITDA) were $281.9 million. These operating cash
inflows were utilized primarily to make 2000 employee profit sharing and pension
contributions, to fund Financial Services 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 nine months of 2001, the net issuance of $102.9 million of commercial
paper and cash receipts of $43.8 million from stock issued under employee stock
purchase plans enabled us to spend $231.6 million on share repurchases, to make
payments on long-term debt of $101.2 million, to pay dividends of $77.5 million
and to purchase $22.3 million of capital assets during the first nine months of
2001.
As of September 30, 2001, we had committed lines of credit for $350.0
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 nine 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 September 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 nine months of
2001 was $73.6 million at a weighted-average interest rate of 4.17%. As of
September 30, 2001, $102.9 million was outstanding at a weighted-average
interest rate of 3.21%. 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 $50.0 million available at
variable interest rates. The average amount drawn on these lines of credit
during the first nine months of 2001 was $1.8 million at a weighted-average
interest rate of 4.26%. 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 September
30, 2001 and December 31, 2000, no amounts were outstanding under these lines of
credit.
We have a shelf registration in place for the issuance of up to $300.0
million in medium-term notes. 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 September 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
September 30, 2001, no amounts have been paid or claimed under this
indemnification agreement.
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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. At that time, we announced that we expected to complete
these repurchases over a 12- to 18- month period. 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 spent $231.6 million to
repurchase 8.3 million shares through September 30, 2001. Our shareholders'
equity declined from $262.8 million at December 31, 2000 to $140.8 million at
September 30, 2001 primarily as a result of these share repurchases and the
required accounting treatment for them. The resulting decrease in shares
outstanding resulted in a $0.07 increase in diluted income from continuing
operations per share for the third quarter of 2001 and a $0.10 per share
increase for the first nine months of 2001. We funded these repurchases by
utilizing cash generated from operations and by issuing commercial paper. As of
September 30, 2001, $102.9 million of commercial paper was outstanding. If the
remaining 5.7 million shares are purchased within the 12- to 18- month timeframe
originally anticipated, our reported shareholders' equity could move to a
negative position. The market value of the Company's shareholders' equity was
$2.3 billion as of September 30, 2001, calculated at the September 28, 2001
closing market price of $34.54 per share with 66.2 million shares 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 September 30, 2001, the net book value of our goodwill
was $83.8 million, and goodwill amortization expense for the first nine months
of 2001 was $4.6 million. We have not yet determined the impact this statement
will have on our results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS, which addresses accounting and financial
reporting for the impairment or disposal of long-lived assets. This statement is
effective for us on January 1, 2002. We do not expect that adoption of this
standard will have a material effect on our results of operations or financial
position.
As a result of the terrorist attacks of September 11, we did not suffer the
loss of any employees or assets. Our express delivery was impacted because the
country's air delivery system was shut down. As a result, some of our customers
may have experienced an interruption in delivery. Orders within our Business
Services segment slowed somewhat immediately following September 11, but they
returned to normal levels by the end of the month.
OUTLOOK
As of yet, the slowing United States economy has had little impact on our
results of operations and we do not expect to see an impact in the last quarter
of the year, assuming no further deterioration in the economy. While we cannot
predict what impact a prolonged war on terrorism will have on the United States
economy, our plan is to watch expenses, continue to invest in our business and
make capital expenditures when they will increase productivity or profitably
increase revenue. We currently expect that our fourth quarter earnings per share
will be between $.65 and $.68, excluding the impact of any further share
repurchases we might make in the fourth quarter.
14
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.
- 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 Services have had success in leveraging our e-commerce
capabilities. Internet orders for Direct Checks increased over 80% during the
first nine months of 2001 as compared to 2000, while Business Forms Internet
orders more than doubled during the same period.
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 $35.0 million to $40.0 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 September 30, 2001, we
had $102.9 million of commercial paper outstanding at a weighted-average
interest rate of 3.21%. 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 September 30, 2001.
As of September 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.
15
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 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
16
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
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.
17
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.
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.
18
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 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.
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 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
19
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 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).
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 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).
20
4.3 Indenture, relating to up to $300,000,000 of debt *
securities (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on
Form S-3 (33-62041) filed with the Commission on
August 23, 1995).
4.4 Credit Agreement dated as of August 24, 2001, Filed
among the Company, Bank One, N.A. as herewith
administrative agent, The Bank of New York as
syndication agent and the other financial
institutions party thereto, related to a
$350,000,000 revolving credit agreement.
12.3 Statement re: computation of ratios. Filed
herewith
-------------------
*Incorporated by reference
(b) Reports on Form 8-K:
None.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELUXE CORPORATION
(Registrant)
Date: October 29, 2001 /s/ Lawrence J. Mosner
-----------------------------------
Lawrence J. Mosner, Chairman of the
Board and Chief Executive Officer
(Principal Executive Officer)
Date: October 29, 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
----------- ----------- -----------
4.4 Credit Agreement dated as of August 24, 2001, among the
Company, Bank One, N.A. as administrative agent, The
Bank of New York as syndication agent and the other
financial institutions party thereto, related to a
$350,000,000 revolving credit agreement.
12.3 Statement re: computation of ratios
23