Exhibit 13.1
FINANCIAL HIGHLIGHTS
DELUXE CORPORATION
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Dollars in thousands except per share amounts 1996 1995 Change
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Net sales $1,895,664 $1,857,981 2%
Income from continuing operations 65,463 94,434 (30.7%)
Return on sales 3.5% 5.1%
Per share .80 1.15 (30.4%)
Return on average shareholders' equity 8.8% 11.8%
Net income 65,463 87,021 (24.8%)
Per share .80 1.06 (24.5%)
Cash dividends paid 121,976 122,143 (0.1%)
Per share 1.48 1.48
Shareholders' equity 712,916 780,374 (8.6%)
Book value per share 8.69 9.47 (8.2%)
Average common shares outstanding (thousands) 82,311 82,420
Number of shareholders 19,495 20,843
Number of employees 19,643 19,286 1.9%
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NET SALES
(DOLLARS IN BILLIONS)
[BAR CHART OMITTED]
INCOME FROM CONTINUING OPERATIONS PER SHARE
(DOLLARS)
[BAR CHART OMITTED]
CASH DIVIDENDS PER SHARE
(DOLLARS)
[BAR CHART OMITTED]
1
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION - This discussion summarizes the significant factors that affected
the consolidated operating results and financial condition of Deluxe Corporation
during the three years ended December 31, 1996. Over this period, the Company
has engaged in a strategic reorganization process, the goal of which is to
improve profitability and provide the financial institution and retail
communities an even broader range of products and services. During this process,
the Company has recorded significant consolidation, restructuring, and other
reorganization costs, as well as gains and losses on sales of businesses.
Although these charges have had a significant impact on the operating results
and cash position of the Company, the following discussion considers them
separately when analyzing the Company's financial and operational progress. The
following analysis is based on the organization of the Company's businesses into
three operating segments (described in note 12 to the Consolidated Financial
Statements).
OVERALL SUMMARY - In 1996, the Company achieved higher sales for the 58th
consecutive year. The sales increase of 2% was the result of growth in the
Deluxe Financial Services and Deluxe Electronic Payment Systems segments,
partially offset by a planned decline in the Deluxe Direct segment. 1996 income
from continuing operations was $65.5 million, compared to $94.4 million and
$144.3 million in 1995 and 1994, respectively. Earnings per share from
continuing operations were $.80 in 1996, compared to $1.15 in 1995 and $1.75 in
1994. Return on average assets was 5.3% for 1996, compared to 7.4% and 11.5% in
1995 and 1994, respectively. Return on average shareholders' equity was 8.8% in
1996, compared to 11.8% in 1995 and 17.9% in 1994. These results include pretax
strategic reorganization charges of $142.3 million in 1996 and $62.5 million in
1995. The results for 1994 include a $10 million pretax credit to a 1993
restructuring charge.
STRATEGIC REORGANIZATION CHARGES - Over the last few years, the Company has
engaged in a strategic reorganization process. This process involved a thorough
examination of the Com pany's various lines of business, including an
examination of each business' product offerings, short-term and long-term
profitability, and strategic fit within the Company's long-term plans. This
effort has resulted in the consolidation of operating and administrative
facilities, the elimination of products and businesses, and the restructuring of
the Company's management and operating structure. These events have led to
improved operating profitability and should continue to result in cost
reductions, which will be reflected primarily in the form of reduced facility,
materials, and employee expenses in the Company's operating results. It is
expected that competitive pricing measures, increased expenses, and other
factors will offset a portion of the savings expected to be achieved through the
Company's cost reduction efforts.
During 1996, the Company sold a total of six businesses in the Deluxe
Direct segment and announced its plans to divest three others. As a result of
management's decision to hold these three businesses for sale, and in
accordance with generally accepted accounting principles, the Company recorded a
pre tax goodwill impairment charge of $111.9 million to write the businesses
down to their estimated fair values less costs to sell. Additionally, the
Company recorded net pretax charges of $30.4 million during 1996 for
restructuring, gains and losses on sales of businesses, and other reorganization
costs. These charges are reflected through out the consolidated statement of
income according to the nature of the charge, with $39.2 million in cost of
sales expense, $24.6 million in selling, general, and administrative expense and
a $33.4 million gain in other income. The December 31, 1996, balance sheet
reflects a restructuring accrual of $29.1 million for employee severance costs
and $3.8 million for estimated losses on asset dispositions. The majority of
these severance costs are expected to be paid out in 1997 from cash generated
from the Company's operations.
During the fourth quarter of 1995, the Company announced that it was
exiting its Printwise ink business, which is treated as discontinued operations
in the financial statements presented in this report. Also during 1995, the
Company recorded pretax charges of $62.5 million primarily related to exiting
unprofitable businesses, eliminating certain products, and write-offs of
non-performing assets. These costs are spread throughout the 1995 consolidated
statement of income. Of the $62.5 million in charges, $16.6 million is included
in cost of sales, $35.9 million in selling, general, and administrative expense,
and $10 million in other expense.
In 1994, a $10 million credit to a 1993 restructuring charge was recorded
to selling, general, and administrative expense.
The following table displays the Company's results of operations as
reported, compared to results with the above mentioned charges excluded.
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Results of operations - as reported and as adjusted to exclude strategic reorganization charges
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1996 1995 1994
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Reported Adjusted Reported Adjusted Reported Adjusted
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Net sales $1,895,664 $1,895,664 $1,857,981 $1,857,981 $1,747,644 $1,747,644
Gross margin 999,780 1,038,955 999,879 1,016,495 963,192 963,192
Selling, general, and administrative 728,828 704,223 737,050 701,194 631,660 641,660
Goodwill impairment charge 111,900
Employee sharing 71,943 71,943 79,045 79,045 81,701 81,701
Other net income (expense) 31,656 (1,767) (14,465) (4,459) (3,125) (3,125)
Provision for income taxes 53,302 105,000 74,885 98,600 102,453 98,470
Income from continuing operations $ 65,463 $ 156,022 $ 94,434 $ 133,197 $ 144,253 $ 138,236
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14
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Percentage of revenue (not including strategic reorganization charges) Percentage of dollar increase/(decrease)
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1996 1995 1994 1996 vs 1995 1995 vs 1994
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100% 100% 100% Net sales 2% 6.3%
54.8 54.7 55.1 Gross margin 2.2 5.5
37.1 37.7 36.7 Selling, general, and administrative .4 9.3
3.8 4.3 4.7 Employee sharing (9) (3.3)
.1 .2 .2 Other expense (net) (60.4) 42.7
5.5 5.3 5.6 Provision for income taxes 6.5 .1
8.2 7.2 7.9 Income from continuing operations 17.1 (3.6)
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RESULTS OF OPERATIONS - The table above sets forth, for the years indicated, the
percentage relationship to revenue of certain items in the Company's
consolidated statements of operations and the percentage dollar changes of such
items in comparison to the prior year. This table does not include the strategic
reorganization charges discussed above.
For discussion purposes, segment results discussed below reflect results
from continuing operations, excluding the above mentioned strategic
reorganization charges.
NET SALES - Net sales for the Company increased 2% over 1995. Net sales for the
Deluxe Financial Services segment increased 7.3% to $1,390.3 million in 1996.
The majority of the increase came from increased sales of higher priced
products in the financial institution check printing business and increased
volume from direct mail offerings. Additionally, collection service revenue
continued to increase due to acquisitions and management efforts to increase
sales volume. The Deluxe Electronic Payment Systems segment experienced a sales
increase of 4.3% to $129.9 million in 1996, mostly due to increased volumes in
financial institution ATM processing. These sales increases were partially
offset by a 14.2% decrease to $375.5 million for the Deluxe Direct segment. This
decrease was the result of actions taken to increase the profitability of the
segment, including sales of businesses within the segment, reduced catalog
circulation, and the elimination of unprofitable product lines.
In 1995, net sales for the Company increased 6.3% over 1994. Net sales for
the Deluxe Financial Services segment increased 4% from 1994 to $1,295.7
million. Order counts for the financial institution check printing business
remained flat, but continued competitive discounting resulted in a slight
reduction of revenues. This decline was more than offset by growth in the
segment's collection service business. Additionally, the Deluxe Electronic
Payment Systems segment experienced a revenue increase of 25.8% to $124.5
million. Most of this growth was attributable to an international acquisition in
August 1994. Finally, the Deluxe Direct segment recorded a revenue increase of
8.6% to $437.8 million in 1995. The majority of this growth was also the result
of acquisitions. The growth was partially offset by lower catalog response rates
for products in the segment's social expressions business.
GROSS MARGIN - Consolidated gross margin for the Company was 52.7% in 1996,
compared to 53.8% and 55.1% in 1995 and 1994, respectively. The fluctuation over
the three-year period was primarily due to the strategic reorganization charges
discussed above. With the strategic reorganization charges excluded from the
results, consolidated gross margin for the Company was 54.8% in 1996, compared
to 54.7% and 55.1% in 1995 and 1994, respectively. The Deluxe Financial Services
segment's gross margin increased to 60% in 1996 from 59.5% in 1995. Margin
improvement from the financial institution check printing business was partially
offset by declines in the collections business as a result of growth related
costs. Margins for the Deluxe Electronic Payment Systems segment decreased to
15.9% in 1996 from 36% in 1995, due primarily to higher computer equipment rent
expense, costs of infrastructure upgrades and software re-engineering, and
higher telecommunication expense. Margins for the Deluxe Direct segment
increased to 49% from 45.9% in 1995, due primarily to the sale of businesses
with poorer margins, better cost containment and inventory management, and
consolidation of products within the direct mail businesses.
The Deluxe Financial Services segment's gross margin was 59.5% in 1995 and
1994. Margin improvements from the financial institution check printing business
were offset by a decrease from the payment protection business, due to higher
processing costs and expenditures related to database enhancements. Margin
percentages for the Deluxe Electronic Payment Systems segment increased to 36%
from 32.2%, due primarily to higher sales volume and acquisitions. Margins for
the Deluxe Direct segment decreased to 45.9% from 47.2%, due to higher postage
and paper costs and acquisitions of businesses that experienced lower margins
than average for the segment.
SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general, and administrative
expenses for the Company decreased $8.2 million, or 1.1%, in 1996, primarily as
a result of the 1995 strategic reorganization charges discussed above. With the
strategic reorganization charges excluded, selling, general, and administrative
expenses increased $3 million, or .4%, in 1996. The Deluxe Financial Services
segment's expenses increased 8.6%, primarily in the financial institution check
printing business,
15
due to increased customer service call center volume and higher marketing
expenditures for new products. The Deluxe Electronic Payment Systems segment's
expenses decreased 4.6%, due to lower consulting expenses. The Deluxe Direct
segment's expenses decreased 15%, mainly due to planned catalog circulation
decreases by the segment's direct mail businesses.
In 1995, selling, general, and administrative expenses for the Com pany
increased $105.4 million, or 16.7%, in part as a result of the strategic
reorganization charges discussed above. With these charges excluded, selling,
general, and administrative expenses increased $59.5 million, or 9.3% from 1994.
The Deluxe Financial Services segment's expenses increased 6%, due to growth in
the segment's collection businesses. The Deluxe Electronic Payment Systems
segment's expenses increased by 51.2%, due mainly to an international
acquisition in August 1994 and increased salaries and consultant costs. The
Deluxe Direct segment's expenses increased 10.5%, primarily due to acquisitions
and costs associated with product development.
EMPLOYEE SHARING - A portion of employee sharing includes benefits paid to
employees that are based on the Company's profitability. Other components
fluctuate with the number of Company employees. The decrease to $71.9 million in
1996 from $79 million in 1995 and $81.7 million in 1994 resulted from a decrease
in the Company's net income over this period.
OTHER INCOME (EXPENSE) - Other income for the Company was $31.7 million in 1996,
compared to other expense of $14.5mil lion in 1995 and $3.1 million in 1994.
These changes were primarily due to the strategic reorganization charges
discussed above. With these charges removed, other expense was $1.8 million in
1996, compared to $4.5 million in 1995. The decrease is due primarily to lower
interest expense as a result of decreased borrowings. In 1995, other net expense
was $4.5 million, compared to $3.1 million in 1994. The increase is due
primarily to higher interest expense from increased borrowings and decreases in
interest income.
PROVISION FOR INCOME TAXES - The Company's effective tax rate in creased to
44.9% in 1996 and 44.2% in 1995 from 41.5% in 1994, due primarily to lower
pretax income combined with an increasing base of non-deductible expenses
consisting primarily of intangible amortization. Additionally, the 1996 rate
increased due to the non-deductible goodwill impairment charge recorded by the
Company. This was offset by tax benefits recognized for the sales of businesses
and businesses held for sale.
NET INCOME - 1996 net income decreased to $65.5 million from $87 million in
1995. The primary reason for the decrease was the additional strategic
reorganization charges discussed above. With the charges and their related tax
effects removed, the Company had income from continuing operations of $156
million and $133.2 million in 1996 and 1995, respectively. This increase
resulted from increased sales, lower interest expense, and cost savings gained
from production efficiencies and the elimination of unprofitable product lines.
1995 net income decreased to $87 million from $140.9 million in 1994,
resulting primarily from the strategic reorganization charges of $62.5 million
and increased losses from discontinued operations. With these charges removed
from the results, income from continuing operations in 1995 was $133.2 million,
compared to $138.2 million in 1994.
FINANCIAL CONDITION
LIQUIDITY - Cash provided by continuing operations was $290.6 million, compared
to $214.6 million in 1995 and $199 million in 1994. Funds provided by operations
are the Company's primary source of working capital for financing capital
expenditures and paying dividends. The increase in 1996 over 1995 is due to
better cash management and operating cost reductions. 1994 cash provided by
operations was lower than 1996 and 1995, due primarily to cash expenditures
related to the restructuring of the check printing business. Working capital was
$108.1 million as of December 31, 1996, compared to $12.3 million and $130.4
million on that date in 1995 and 1994, respectively. The year-end current ratio
for 1996 was 1.3 to 1, compared to 1 to 1 and 1.4 to 1 for 1995 and 1994,
respectively. The increase over 1995 is primarily the result of cost savings and
cash proceeds from the Company's strategic reorganization initiatives and from
lower capital expenditures. 1995's working capital and current ratio decline
from 1994 resulted primarily from acquisitions and lower profits. The Company
anticipates that approximately $24.2 million of cash will be paid out in 1997 on
1996 restructuring accruals.
CAPITAL RESOURCES - In 1996, the Company made numerous business acquisitions and
divestitures from which the Company derived $98.1 million in net cash proceeds.
In 1995, the Company made one acquisition at a cost of $38.8 million. In 1994,
the Company made several acquisitions at an aggregate cost of $53.8 million.
Purchases of property, plant, and equipment required cash outlays of $92
million in 1996, compared to $125.1 million in 1995 and $126.2 million in 1994.
The Company anticipates capital expenditures of approximately $130 million in
1997 for information technology upgrades and replacement and for expansion of
the Company's capabilities to provide enhanced product offerings to its
customers.
The Company has uncommitted bank lines of credit of $190.3 million. At
December 31, 1996, $17 million was outstanding at an interest rate of 6.5%. At
December 31, 1995, $14.2 million was outstanding at an interest rate of 6.6%.
The average amount drawn from these lines in 1996 was $14.5 million at a
weighted average interest rate of 6.29%. Also, the Company has in place a $150
million committed line of credit as support for commercial paper and as a source
of cash. The average amount of commercial
16
paper outstanding in 1996 was $13.3 million at a weighted average interest rate
of 5.63%. No commercial paper was outstanding as of December 31, 1996. As of
December 31, 1995, $34.7 million of commercial paper was issued and outstanding
at a weighted average interest rate of 6.09%. During the third quarter of 1995,
the Company filed a shelf registration for a $300 million medium-term note
program to be used for general corporate purposes, including working capital,
repayment or repurchase of outstanding indebtedness and securities of the
Company, capital expenditures, and possible acquisitions. As of December 31,
1996 and 1995, no such notes were issued or outstanding.
Cash dividends totaled $122 million in 1996, compared to $122.1 million in
1995 and $120.5 million in 1994. The payout of earnings was 186.3% in 1996,
140.4% in 1995, and 85.5% in 1994. In December 1996, the Company's board of
directors amended the Company's stock purchase plan to permit the repurchase of
up to 10 million shares of Deluxe common stock. The board authorized the
repurchase of up to 5 million shares under this plan.
OUTLOOK - The Company's declining profits over the past few years have required
management to re-evaluate all aspects of the Company's business. The results of
operations over these years and in the immediate future include significant
actions intended to position the Company for profitable growth. In 1997, the
Company expects to complete a program of divesting businesses that do not focus
on providing products and services to the financial institution and retail
markets. Additionally, the Company will continue its re-engineering efforts
throughout the organization. This is expected to result in reduced costs and
improved profitability. These changes have required, and may continue to
require, charges to earnings as evidenced by the 1996 and 1995 pretax charges to
continuing operations and the discontinuation of the Printwise ink business in
1995. While the Company may be required to record additional charges in the
future, the Company expects the amount and degree of these charges to lessen as
it completes its reorganization and begins to reap the financial and operational
benefits of its efforts.
MANAGEMENT'S RESPONSIBILITY FOR
FINANCIAL REPORTING
The accompanying consolidated financial statements and related information are
the responsibility of management. They have been prepared in conformity with
generally accepted accounting principles and include amounts that are based on
our best estimates and judgments under the existing circumstances. The financial
information contained elsewhere in this annual report is consistent with that in
the consolidated financial statements.
The Company maintains internal accounting control systems that are adequate
to provide reasonable assurance that the assets are safeguarded from material
loss or unauthorized use. These systems produce records adequate for preparation
of financial information. We believe the Company's systems are effective, and
the costs of the systems do not exceed the benefits obtained.
The audit committee of the board of directors has reviewed all financial
data included in this report. The audit committee is composed entirely of
outside directors and meets periodically with the internal auditors, management,
and the independent public accountants on financial reporting matters. The
independent public accountants have free access to meet with the audit
committee, without the presence of management, to discuss their audit results
and opinions on the quality of financial reporting.
The role of independent public accountants is to render an independent,
professional opinion on management's consolidated financial statements to the
extent required by generally accepted auditing standards.
Deluxe recognizes its responsibility for conducting its affairs according
to the highest standards of personal and corporate conduct. It has distributed
to all employees a statement of its commitment to conducting all Company
business in accordance with the highest ethical standards.
/s/ J.A. Blanchard III
J.A. Blanchard III
Chairman, President, and
Chief Executive Officer
/s/ Charles M. Osborne
Charles M. Osborne
Senior Vice President and
Chief Financial Officer
February 10, 1997
17
ELEVEN-YEAR SUMMARY
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Years ended December 31 (dollars in thousands except per share amounts)
1996 1995 1994 1993
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Net sales $1,895,664 $1,857,981 $1,747,644 $1,581,767
Salaries and wages 586,949 551,788 519,901 491,868
Employee profit sharing and pension plan expense 52,649 57,958 59,370 61,162
Employee bonus and stock purchase discount expense 19,294 21,087 22,331 20,215
Provision for income taxes 53,302 74,885 102,453 94,052
Income from continuing operations 65,463 94,434 144,253 141,861
Return on sales 3.45% 5.08% 8.25% 8.97%
Per share .80 1.15 1.75 1.71
Return on average shareholders' equity 8.77% 11.84% 17.86% 17.40%
Return on average assets 5.30% 7.40% 11.50% 11.57%
Net income 65,463 87,021 140,866 141,861
Per share .80 1.06 1.71 1.71
Cash dividends paid 121,976 122,143 120,503 117,945
Per share 1.48 1.48 1.46 1.42
Shareholders' equity 712,916 780,374 814,393 801,249
Book value per share 8.69 9.47 9.89 9.66
Additions to machinery and equipment 88,254 86,366 86,411 45,675
Additions to realty and leaseholds 3,784 38,702 39,815 16,435
Depreciation and amortization expense 106,636 103,303 85,906 72,320
Working capital increase (decrease) 95,857 (118,116) (94,086) (162,387)
Total assets 1,176,440 1,295,095 1,256,272 1,251,994
Long-term debt 108,937 110,997 110,867 110,755
Average common shares outstanding (thousands) 82,311 82,420 82,400 82,936
Number of employees 19,643 19,286 18,839 17,748
Number of production and service facilities 81 81 78 73
Facility area - square feet (thousands) 4,721 5,084 4,830 4,623
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INCOME FROM CONTINUING OPERATIONS
(DOLLARS IN MILLIONS)
[BAR CHART OMITTED]
RETURN ON AVERAGE SHAREHOLDERS' EQUITY
(PERCENT)
[BAR CHART OMITTED]
RETURN ON AVERAGE ASSETS
(PERCENT)
[BAR CHART OMITTED]
18
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1992 1991 1990 1989 1988 1987 1986
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Net sales $1,534,351 $1,474,482 $1,413,553 $1,315,828 $1,195,971 $948,010 $866,829
Salaries and wages 456,893 444,987 417,193 393,339 367,302 300,225 272,526
Employee profit sharing and pension plan expense 60,307 55,410 52,314 48,423 44,398 39,567 36,630
Employee bonus and stock purchase discount expense 25,494 22,417 20,598 17,876 13,698 13,686 12,702
Provision for income taxes 121,999 112,591 110,345 93,691 83,288 88,137 101,891
Income from continuing operations 202,784 182,902 172,161 152,631 143,354 148,512 121,109
Return on sales 13.22% 12.40% 12.18% 11.60% 11.99% 15.67% 13.97%
Per share 2.42 2.18 2.03 1.79 1.68 1.74 1.42
Return on average shareholders' equity 25.70% 25.69% 26.36% 25.47% 27.08% 32.86% 31.57%
Return on average assets 17.64% 18.08% 19.44% 18.69% 17.35% 19.45% 20.50%
Net income 202,784 182,902 172,161 152,631 143,354 148,512 121,109
Per share 2.42 2.18 2.03 1.79 1.68 1.74 1.42
Cash dividends paid 112,483 102,512 93,109 83,679 73,392 64,849 49,630
Per share 1.34 1.22 1.10 .98 .86 .76 .58
Shareholders' equity 829,808 747,976 675,792 630,643 567,731 490,820 413,132
Book value per share 9.90 8.91 8.04 7.40 6.65 5.77 4.85
Additions to machinery and equipment 52,598 48,605 49,233 55,658 59,252 45,868 27,733
Additions to realty and leaseholds 19,013 23,896 14,722 32,764 19,634 15,841 9,529
Depreciation and amortization expense 66,615 75,976 74,050 67,340 59,846 45,462 32,079
Working capital increase (decrease) 55,975 185,879 50,176 42,063 30,601 (121,582) (23,066)
Total assets 1,199,556 1,099,059 923,902 847,002 786,110 866,270 660,969
Long-term debt 115,522 110,575 11,911 10,169 10,933 12,886 14,152
Average common shares outstanding (thousands) 83,861 84,005 84,638 85,346 85,255 85,242 85,487
Number of employees 17,400 17,563 17,174 16,948 16,628 15,346 13,502
Number of production and service facilities 85 82 81 79 77 74 70
Facility area - square feet (thousands) 5,454 5,238 5,060 4,980 4,650 4,180 3,450
====================================================================================================================================
SHAREHOLDERS' EQUITY
(DOLLARS IN MILLIONS)
[BAR CHART OMITTED]
WORKING CAPITAL
(DOLLARS IN MILLIONS)
[BAR CHART OMITTED]
FACILITY AREA
(MILLIONS OF SQUARE FEET)
[BAR CHART OMITTED]
19
CONSOLIDATED BALANCE SHEETS
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December 31 (dollars in thousands) 1996 1995
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CURRENT ASSETS
Cash and cash equivalents $ 142,571 $ 13,668
Marketable securities 6,270
Trade accounts receivable 145,475 169,310
Inventories:
Raw material 20,194 22,475
Semi-finished goods 14,549 24,861
Finished goods 21,295 28,566
Supplies 11,503 11,139
Deferred advertising 14,222 20,017
Deferred income taxes 31,413 35,926
Prepaid expenses and other current assets 48,302 48,866
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Total current assets 449,524 381,098
LONG-TERM INVESTMENTS 59,138 48,147
PROPERTY, PLANT, AND EQUIPMENT
Land 42,563 43,632
Buildings and improvements 307,018 299,954
Machinery and equipment 553,955 578,922
Construction in progress 1,382 18,315
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Total 904,918 940,823
Less accumulated depreciation 458,060 446,665
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Property, plant, and equipment - net 446,858 494,158
INTANGIBLES
Cost in excess of net assets acquired - net 139,593 301,289
Other intangible assets - net 81,327 70,403
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Total intangibles 220,920 371,692
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Total assets $ 1,176,440 $ 1,295,095
==============================================================================================
CURRENT LIABILITIES
Accounts payable $ 63,810 $ 75,644
Accrued liabilities:
Wages, including vacation pay 56,471 51,549
Employee profit sharing and pension 52,879 56,906
Accrued rebates 33,975 31,373
Other 110,625 95,675
Short-term debt 17,011 48,962
Long-term debt due within one year 6,606 8,699
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Total current liabilities 341,377 368,808
LONG-TERM DEBT 108,937 110,997
DEFERRED INCOME TAXES 13,210 34,916
SHAREHOLDERS' EQUITY
Common shares $1 par value (authorized: 500,000,000 shares;
issued: 1996 - 82,056,203 shares 1995 - 82,364,378 shares) 82,056 82,364
Additional paid-in capital 1,455
Retained earnings 631,151 697,036
Unearned compensation (937) (739)
Net unrealized loss - marketable securities (242)
Cumulative translation adjustment 646 500
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Shareholders' equity 712,916 780,374
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Total liabilities and shareholders' equity $ 1,176,440 $ 1,295,095
==============================================================================================
See Notes to Consolidated Financial Statements
20
CONSOLIDATED STATEMENTS OF INCOME
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Years ended December 31 (dollars in thousands except per share amounts) 1996 1995 1994
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NET SALES $ 1,895,664 $ 1,857,981 $ 1,747,644
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OPERATING EXPENSES
Cost of sales 895,884 858,102 784,452
Selling, general, and administrative 728,828 737,050 631,660
Goodwill impairment charge 111,900
Employee profit sharing and pension 52,649 57,958 59,370
Employee bonus and stock purchase discount 19,294 21,087 22,331
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Total 1,808,555 1,674,197 1,497,813
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Income from operations 87,109 183,784 249,831
OTHER INCOME (EXPENSE)
Other income (expense) 42,305 (1,404) 6,608
Interest expense (10,649) (13,061) (9,733)
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 118,765 169,319 246,706
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PROVISION FOR INCOME TAXES 53,302 74,885 102,453
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INCOME FROM CONTINUING OPERATIONS 65,463 94,434 144,253
======================================================================================================================
DISCONTINUED OPERATIONS
Loss from operations (net of income tax benefit of $2,146 in 1995
and $2,432 in 1994) (3,098) (3,387)
Loss on disposal (net of income tax benefit of $2,985) (4,315)
- ----------------------------------------------------------------------------------------------------------------------
LOSS FROM DISCONTINUED OPERATIONS (7,413) (3,387)
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 65,463 $ 87,021 $ 140,866
======================================================================================================================
EARNINGS PER SHARE - Based on average shares outstanding
Income from continuing operations $ .80 $ 1.15 $ 1.75
Loss from discontinued operations (.09) (.04)
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ .80 $ 1.06 $ 1.71
- ----------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PER COMMON SHARE $ 1.48 $ 1.48 $ 1.46
======================================================================================================================
See Notes to Consolidated Financial Statements
21
CONSOLIDATED STATEMENTS OF CASH FLOWS
===============================================================================================================================
Years ended December 31 (dollars in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 65,463 $ 87,021 $ 140,866
Discontinued operations 7,413 3,387
- -------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 65,463 94,434 144,253
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities:
Depreciation 66,269 69,027 59,367
Amortization of intangibles 40,367 34,276 26,539
Goodwill impairment charge 111,900
Stock purchase discount 7,478 8,185 8,369
Net gain on sales of businesses (37,007)
Deferred income taxes (20,690) (9,201) 4,645
Changes in assets and liabilities, net of effects from acquisitions,
discontinued operations, and sales of businesses:
Trade accounts receivable 13,082 (24,949) (13,430)
Inventories 13,367 12,893 (17,226)
Accounts payable (11,456) 6,631 12,096
Other assets and liabilities 41,870 23,346 (25,589)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 290,643 214,642 199,024
Net cash provided by (used in) discontinued operations 60 (5,315) (5,206)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 290,703 209,327 193,818
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities with maturities of more than 3 months (13,115)
Proceeds from sales of marketable securities with maturities of more than 3 months 6,250 28,878 49,326
Net reductions of marketable securities with maturities of 3 months or less 16,000 20,000
Purchases of long-term investments (5,000)
Purchases of property, plant, and equipment (92,038) (125,068) (126,226)
Payments for acquisitions, net of cash acquired (15,098) (37,313) (53,796)
Net proceeds from sales of businesses and discontinued operations, net of cash sold 112,913
Other 11,488 (2,858) (17,933)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 23,515 (120,361) (146,744)
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (payments on) proceeds from short-term debt (32,428) 36,312 11,219
Payments on long-term debt (10,934) (8,918) (8,230)
Payments to retire common stock (48,065) (34,715) (39,638)
Proceeds from issuing stock under employee plans 28,088 25,027 25,114
Cash dividends paid to shareholders (121,976) (122,143) (120,503)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (185,315) (104,437) (132,038)
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 128,903 $ (15,471) $ (84,964)
- -------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 13,668 29,139 114,103
- -------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 142,571 $ 13,668 $ 29,139
===============================================================================================================================
Supplementary cash flow disclosure:
Interest paid $ 12,001 $ 12,519 $ 10,446
Income taxes paid 83,600 93,023 94,395
===============================================================================================================================
See Notes to Consolidated Financial Statements
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION - The consolidated financial statements include the accounts of
the Company and all wholly owned subsidiaries. All significant intercompany
accounts, transactions, and profits have been eliminated.
CASH AND CASH EQUIVALENTS - The Company considers all cash on hand, money market
funds, and other highly liquid investments with original maturities of three
months or less to be cash and cash equivalents. The carrying amounts reported in
the balance sheets for cash and cash equivalents approximate fair value.
MARKETABLE SECURITIES - Marketable securities consist of both debt and equity
securities. They are classified as available for sale and carried at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of shareholders' equity. Realized gains and losses and permanent
declines in value are included in other income. The cost of securities sold is
determined using the specific identification method.
INVENTORY - Inventory is stated at the lower of cost or market. Cost is
determined using the last-in, first-out (LIFO) method for substantially all
inventory. LIFO inventories at December 31, 1996 and 1995, were approximately
$11.6 million and $18.4 million, respectively, less than replacement cost.
PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment, including
leasehold and other improvements that extend an asset's useful life or
productive capabilities, are stated at historical cost. Buildings with 40-year
lives and machinery and equipment with lives of five to 11 years are generally
depreciated using accelerated methods. Leasehold and building improvements are
depreciated on a straight-line basis over the estimated useful life of the
property or the life of the lease, whichever is shorter.
INTANGIBLES - Intangibles are presented in the balance sheet net of accumulated
amortization. Amortization expense is determined on the straight-line basis over
periods of five to 30 years for cost in excess of net assets acquired
(goodwill), and three to five years for other intangibles. Other intangibles
consist primarily of purchased and internally developed software. Total
intangibles at December 31 were as follows (dollars in thousands):
==========================================================================
1996 1995
- --------------------------------------------------------------------------
Cost in excess of net assets acquired $ 317,315 $ 363,756
Other intangible assets 146,581 126,636
- --------------------------------------------------------------------------
Total $ 463,896 $ 490,392
Less goodwill impairment charge
(see note 3) (111,900)
Less other accumulated amortization (131,076) (118,700)
- --------------------------------------------------------------------------
Intangibles - net $ 220,920 $ 371,692
==========================================================================
LONG-TERM INVESTMENTS - Long-term investments consist principally of cash
surrender values of insurance contracts, investments with maturities in excess
of one year, and notes receivable. Such investments are carried at cost or
amortized cost which approximates their fair values.
IMPAIRMENT OF LONG-LIVED ASSETS - During 1995, the Company adopted the Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Under the
provisions of this statement, the Company has evaluated its long-lived assets
for financial impairment, and will continue to evaluate them as events or
changes in circumstances indicate that the carrying amount of such assets may
not be fully recoverable.
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 cash flows associated with them. At the time such
evaluations indicate that the future undiscounted cash flows of certain
long-lived assets are not sufficient to recover the carrying value of such
assets, the assets are adjusted to their fair values. Based on these
evaluations, there were no adjustments to the carrying value of long-lived
assets in 1996 or 1995.
The Company evaluates the recoverability of long-lived assets held for sale
by comparing the asset's carrying amount with its fair value less cost to sell.
In December 1996, the Company recorded a charge of $111.9 million as a result
of its decision to dispose of businesses within its Deluxe Direct segment (see
note 3).
INCOME TAXES - Deferred income taxes result from temporary differences between
the financial reporting basis of assets and liabilities and their respective tax
reporting bases. Future tax benefits are recognized to the extent that
realization of such benefits is more likely than not.
ACCRUED REBATES - On occasion, the Company enters into contractual agreements
with its customers for rebates on certain products it sells. The Company records
these amounts as reductions to sales and accrues them on the balance sheet as
incurred.
DEFERRED ADVERTISING - These costs consist of materials, production, postage,
and design expenditures required to produce catalogs for the Company's direct
mail businesses. Such costs are amortized over periods (generally less than 12
months) that correspond to the estimated revenue streams of the individual
catalogs. The actual timing of these revenue streams may differ from these
estimates. The total amount of deferred advertising costs charged to expense for
1996, 1995, and 1994 was $107.4 million, $126.3 million, and $130.5 million,
respectively.
TRANSLATION ADJUSTMENT - The financial position and results of operations of the
Company's international subsidiaries are measured using local currencies as the
functional currencies. Assets and liabilities of these operations were
translated at the
23
exchange rate in effect at the balance sheet date. Income statement accounts
were translated at the average exchange rate during the year. Translation
adjustments arising from the use of differing exchange rates from period to
period are included in the cumulative translation adjustment line in the
shareholders' equity section of the balance sheet. Gains and losses that result
from foreign currency transactions are included in earnings.
STOCK-BASED COMPENSATION - In October 1995, the Financial Accounting Standards
Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which was
effective for the Company on January 1, 1996. The statement requires a fair
value method of accounting for non-employee awards. It encourages (but does not
require) this method of accounting for employee awards as well. The Company has
elected not to change to the fair value method of accounting for stock-based
compensation awarded to employees and will continue to account for such
transactions in accordance with Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees" (see note 7).
RECLASSIFICATIONS - Certain prior years' amounts have been reclassified to
conform to the 1996 presentation. These reclassifications did not affect net
income or shareholders' equity.
USE OF ESTIMATES - The Company has prepared the accompanying financial
statements in conformity with generally accepted accounting principles. In this
process, it is necessary for management to make certain assumptions and related
estimates affecting the amounts reported in the financial statements and
attached notes. These estimates and assumptions are developed based upon all
information available using management's best efforts. However, actual results
can differ from assumed and estimated amounts.
NOTE 2.
RESTRUCTURING CHARGE
In the first quarter of 1996, the Company announced a plan to close an
additional 21 of its financial institution check printing plants over a two-year
period. These plant closings were made possible by advancements in the Company's
telecommunications, order processing, and printing technologies. Upon the
completion of this restructuring, the Company's 15 remaining plants will be
equipped with sufficient capacity to produce at or above current order volumes.
Also, during the first quarter of 1996, the Company announced a plan to move the
operating and administrative facilities of one of its direct mail businesses
from New Jersey to Colorado. In conjunction with these plans, the Company
recorded a pretax charge of $45.4 million in 1996. The charge consisted of
estimated costs for asset dispositions ($9 million) and employee severance
($36.4 million). This charge is reflected in cost of sales ($35.2 million) and
selling, general, and administrative expense ($10.2 million) in the 1996
statement of income. As of December 31, 1996, seven of the 21 plants had been
closed. At December 31, 1996, the remaining restructuring accrual, the majority
of which is expected to be paid out in 1997, consisted of $29.1million for
employee severance costs and $3.8 million for estimated losses on asset
dispositions.
During 1994, the Company substantially completed a 1993 restructuring plan
which closed 16 underutilized check printing plants. The plan was completed
without incurring certain costs that were included in the charge recorded in
1993. As a result, the Company recorded a $10 million credit in 1994 to reduce
its restructuring accrual. This credit is included in selling, general, and
administrative expenses on the 1994 statement of income.
NOTE 3.
GOODWILL IMPAIRMENT CHARGE
During December 1996, the Company announced its plans to divest three of the
businesses in the Deluxe Direct segment - Nelco, Inc., PaperDirect, Inc., and
the Social Expressions unit of Current, Inc. Based on fair market value
estimates, the Company recorded a charge of $111.9 million to write down the
carrying amounts of these businesses to estimated fair value less cost to sell.
This charge is included in the Company's results from operations for the year
ended December 31, 1996, as goodwill impairment charge. The Company will not
depreciate or amortize any of the long-term assets of these businesses while
they are held for disposal. The Company anticipates completing these divestiture
efforts in 1997. At December 31, 1996, the remaining carrying amount of these
businesses was $158.5 million. Together, these businesses recorded sales of
$257.4 million, $304.6 million, and $313.2 million and contributed a net loss of
$8.4 million, $34.6 million, and $5.2 million in 1996, 1995, and 1994,
respectively, excluding the goodwill impairment charge in 1996.
NOTE 4.
BUSINESS COMBINATIONS
1996 DIVESTITURES - During 1996, as part of the overall reorganization process,
the Company sold its Health Care Forms, T/Maker Company, Financial Alliance
Processing Services, Inc., U.K. forms, and internal bank forms businesses. The
aggregate sales price for these businesses was $133.3 million consisting of cash
proceeds of $116.7 million and notes receivable of $16.6 million. The resultant
aggregate net gain on these sales was $37 million. The consolidated financial
statements of the Company include the results of these businesses through their
individual sale dates. In aggregate, the financial
24
statements of the Company include revenues from these businesses of $118.1
million, $133.2 million, and $89.9 million in 1996, 1995, and 1994,
respectively. Also, they contributed net income of $2.6 million in 1996, and net
losses of $9.3 million and $3.8 million in 1995 and 1994, respectively.
1996 ACQUISITIONS - During 1996, the Company purchased a number of businesses in
the collections and database marketing fields. The aggregate amount paid for
these acquisitions was $18.6 million. Additionally, under the purchase
agreements, the Company may have to pay additional amounts up to $14.3 million
contingent on the future net earnings of some of these acquired businesses.
Each acquisition was accounted for using the purchase method. Accordingly,
the consolidated financial statements of the Company include the results of
these businesses subsequent to their purchase dates. The purchase price for each
acquisition was allocated to the assets acquired and liabilities assumed based
on their fair values at the time of purchase. The aggregate cost in excess of
net assets acquired for these acquisitions was $16.5 million, which was recorded
as goodwill and is being amortized over periods ranging from five to 25 years.
The combined effect of these acquisitions did not have a material pro forma
impact on the operations of the Company.
1996 JOINT VENTURE - During 1996, the Company entered into an agreement to form
a joint venture with HCL Corporation of India. This venture will provide payment
system products and services, as well as software services, to financial
institutions both domestically and internationally. As of December 31, 1996, the
joint venture had not yet commenced operations. Thus, it had no impact on the
Company's 1996 results of operations.
1995 ACQUISITIONS - On January 10, 1995, the Company acquired all of the
outstanding stock of Financial Alliance Processing Services, Inc., a provider of
merchant credit card processing, for $38.8 million. The acquisition was
accounted for under the purchase method. Accordingly, the purchase price was
allocated to the assets acquired based on their fair values on the date of
purchase. The total cost in excess of the fair value of the net assets acquired
of $36.6 million was recorded as goodwill and was being amortized over a 10-year
period. In December 1996, the Company sold all of its capital interest in
Financial Alliance Processing Services, Inc. The effect of this acquisition and
subsequent divestiture did not have a material pro forma impact on the Company's
operations.
1994 ACQUISITIONS - During 1994, the Company acquired all of the outstanding
stock of National Revenue Corporation, a collection services company; T/Maker
Company, a developer and publisher of image content software; The Software
Partnership Ltd. (subsequently renamed Deluxe Data International Ltd.), a United
Kingdom-based developer of open systems architecture for large financial
institutions; and the assets of Pacific Medsoft (subsequently integrated into
Deluxe Health Care Forms), a developer of software for medical professionals.
The aggregate paid for these acquisitions was $53.8 million. Each acquisition
was accounted for using the purchase method. Accordingly, the consolidated
financial statements of the Company include the results of these businesses
subsequent to their purchase dates. Additionally, the purchase price for each
acquisition was allocated to the assets acquired and liabilities assumed based
on their fair values at the time of purchase. The aggregate cost in excess of
net assets acquired for these acquisitions was $48.6 million, which was recorded
as goodwill and is being amortized over periods ranging from 10 to 25 years.
T/Maker Company and the assets acquired from Pacific Medsoft were sold during
1996. The combined effect of these acquisitions and divestitures did not have a
material pro forma impact on the operations of the Company.
NOTE 5.
MARKETABLE SECURITIES
On December 31, 1996, the Company held no marketable securities. Debt securities
held on this date of $73.3 million (included in cash and cash equivalents) are
highly liquid and have experienced no material aggregate unrealized holding gain
or loss as of December 31, 1996. On December 31, 1995, marketable securities
available for sale consisted of debt securities with a cost of $21.3 million
($15 million was included in cash and cash equivalents). In aggregate, these
securities had a fair value that was $.4 million less than cost.
Proceeds from sales of marketable securities available for sale were $6.3
million in 1996 and $54.6 million and $73.3 million in 1995 and 1994,
respectively. The Company realized net losses of $36,000 in 1996, and $1.1
million and $.5 million in 1995 and 1994, respectively, on these sales.
NOTE 6.
PROVISION FOR INCOME TAXES
The components of the provision for income taxes from continuing operations are
as follows (dollars in thousands):
====================================================================
1996 1995 1994
- --------------------------------------------------------------------
Current tax provision:
Federal $67,749 $71,884 $82,295
State 11,794 17,845 13,842
- --------------------------------------------------------------------
Total 79,543 89,729 96,137
Deferred tax (benefit) provision:
Federal (29,581) (10,587) 5,428
State 3,340 (4,257) 888
- --------------------------------------------------------------------
Total $53,302 $74,885 $102,453
====================================================================
25
The Company's effective tax rate on pretax income from continuing
operations differs from the U.S. Federal statutory tax rate of 35% as follows
(dollars in thousands):
===============================================================
1996 1995 1994
- ---------------------------------------------------------------
Income tax at Federal
statutory rate $41,568 $59,262 $86,346
State income taxes net of
Federal income tax benefit 9,837 8,832 9,574
Amortization and write-down of
non-deductible intangibles 44,170 5,978 4,077
Recognition of excess of tax
basis over book investment
in subsidiaries sold and
held for disposal (45,430)
Change in valuation allowance 7,496 4,355 3,682
Other (4,339) (3,542) (1,226)
- ---------------------------------------------------------------
Provision for income taxes $53,302 $74,885 $102,453
===============================================================
Tax effected temporary differences which give rise to a significant portion
of deferred tax assets and liabilities at December 31, 1996 and 1995, are as
follows (dollars in thousands):
=====================================================================================
1996 1995
- -------------------------------------------------------------------------------------
DEFERRED TAX DEFERRED TAX Deferred tax Deferred tax
ASSETS LIABILITIES assets liabilities
- -------------------------------------------------------------------------------------
Property, plant,
and equipment $26,879 $33,889
Deferred advertising 5,129 6,188
Employee benefit
plans $11,270 $14,154
Inventory 3,077 9,278
Intangibles 9,284 3,758
Foreign net operating
loss carryforwards 8,059 6,033
Excess of tax basis
over book invest-
ment in subsidiaries
held for disposal 30,417
Restructuring accrual 12,898 4,771
Miscellaneous
reserves and
accruals 8,868 12,293
All other 8,490 7,390 12,003 4,420
- -------------------------------------------------------------------------------------
Subtotal 83,079 48,682 58,532 48,255
- -------------------------------------------------------------------------------------
Valuation allowance (16,194) (9,267)
- -------------------------------------------------------------------------------------
Total deferred taxes $66,885 $48,682 $49,265 $48,255
=====================================================================================
In accordance with SFAS No. 109, "Accounting for Income Taxes," the Company
does not recognize deferred tax assets for the excess of tax basis over the
basis for financial reporting of investments in subsidiaries until it becomes
apparent that these temporary differences will reverse in the foreseeable
future. The tax benefit arising from the difference in tax and financial
reporting bases in subsidiaries was recognized in 1996 for those subsidiaries
sold during the year (see note 4). Additionally, in December 1996, the Company
announced its intention to sell certain businesses within its Deluxe Direct
segment. The deferred tax assets relating to the investments in these
subsidiaries were reflected in the Company's financial statements at December
31, 1996, to the extent that realization of such benefits was more likely than
not. The remainder of the valuation allowance at December 31, 1996 and 1995,
relates to the uncertainty of realizing foreign deferred tax assets.
NOTE 7.
EMPLOYEE BENEFIT AND STOCK-
BASED COMPENSATION PLANS
As of December 31, 1996, the Company has two primary stock-based compensation
plans under which a variety of stock-based awards may be granted to employees of
the Company. The Company applies APB Opinion No. 25, "Accounting for Stock
Issued to Employees," in its accounting for these plans. Accordingly, no
compensation cost has been recognized for fixed stock options issued under the
stock incentive plan. In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.123, "Accounting for
Stock-Based Compensation," which requires adoption of the disclosure provisions
and the recognition and measurement provisions for non-employee transactions no
later than fiscal year 1996. As permitted by the standard, the Company continues
to account for its employee stock-based compensation under APB Opinion No. 25.
The Company has determined that the effect of applying SFAS No.123's fair value
recognition and measurement provisions to all its employee stock-based
compensation would be insignificant to the Company's reported net income and
earnings per share for the years ended December 31, 1996 and 1995. As such, the
additional disclosures promulgated by the statement are not included in these
notes.
STOCK PURCHASE PLAN - The Company has an employee stock purchase plan that
enables eligible employees to purchase the Company's common stock at 75% of its
fair market value on the first business day following each three-month purchase
period. Compensation expense recognized for the difference between the
employees' purchase price and the fair value of the stock was $7.5 million, $8.2
million, and $8.4 million in 1996, 1995, and 1994, respectively. Under the plan,
907,424, 1,121,153, and 1,152,687 shares were issued at prices ranging from
$22.41 to $28.04, $20.07 to $24, and $19.60 to $26.35 in 1996, 1995, and 1994,
respectively.
26
STOCK INCENTIVE PLAN - Under the stock incentive plan, stock-based awards may be
issued to employees via a broad range of methods, including non-qualified or
incentive stock options, restricted stock and restricted stock units, stock
appreciation rights, and other awards based on the value of the Company's common
stock. The plan was amended in 1996 to reserve an aggregate of 7 million shares
of common stock for issuance. Through 1996, the Company has issued non-vested,
restricted shares, restricted stock units, performance stock units, and
non-qualified and incentive stock options. All options allow for the purchase of
common stock at prices equal to the market value at the date of grant. Options
become exercisable in varying amounts beginning generally one year after the
date of grant. Information regarding the options issued under the current plan,
which was adopted in 1994, and the remaining options outstanding under the
former plan adopted in 1984, is as follows:
=====================================================================
1996 1995 1994
- ---------------------------------------------------------------------
Outstanding, January 1 2,147,573 2,212,149 1,567,140
Granted 631,250 204,899 716,369
Exercised (144,039) (44,566) (7,865)
Canceled (496,225) (224,909) (63,495)
- ---------------------------------------------------------------------
Outstanding, December 31 2,138,559 2,147,573 2,212,149
- ---------------------------------------------------------------------
Exercisable, December 31 1,432,206 1,521,524 1,256,885
- ---------------------------------------------------------------------
Options were granted at prices ranging from $30 to $39.125 per share in
1996, $27.375 to $30.75 per share in 1995, and $27.125 to $37.25 per share in
1994. Options were exercised in 1996, 1995, and 1994 at average prices of
$30.71, $28.43, and $21.39, respectively. Options were outstanding at December
31, 1996, 1995, and 1994, at average prices per share of $33.92, $34.81, and
$35.04, respectively. At December 31, 1996, 5.6 million shares remain available
for issuance under the plan.
PROFIT SHARING AND PENSION PLAN - The Company maintains profit sharing plans and
a defined contribution pension plan to provide retirement for certain of its
employees. The plans cover substantially all full-time employees with at least
15 months of service. Contributions are made solely by the Company to trustees,
and benefits provided by the plans are paid from accumulated funds by the
trustees. Contributions to the pension plan equal 6% of eligible compensation.
Contributions to the profit sharing plans vary based on the Company's
performance, but are limited to 15% of eligible compensation less the amount
contributed to the pension plan. Pension expense for 1996, 1995, and 1994 was
$19.9 million, $20.8 million, and $21.1 million, respectively.
NOTE 8.
POSTRETIREMENT BENEFITS
The Company provides certain health care benefits for a large number of its
retired employees. Employees included in the plan may become eligible for such
benefits if they attain the appropriate years of service and age while working
for the Company. Effective January 1, 1994, cost sharing provisions of the plan
were amended to require retirees to pay a larger portion of their medical
insurance premiums.
The following table summarizes the funded status of the plan at December 31
(dollars in thousands):
==============================================================
1996 1995
- --------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $46,645 $49,084
Fully eligible plan participants 38 88
Other active participants 12,462 14,720
- --------------------------------------------------------------
Total 59,145 63,892
Less:
Fair value of plan assets (debt and
equity securities) 51,828 44,702
Unrecognized prior service cost 1,891 3,718
Unrecognized net (gain) loss (3,309) 3
Unrecognized transition obligation 10,872 19,386
- --------------------------------------------------------------
Portion of postretirement benefit cost
accrued in the balance sheet $(2,137) $(3,917)
==============================================================
Net postretirement benefit cost for the year ended December 31 consisted of
the following components (in thousands):
========================================================================
1996 1995 1994
- ------------------------------------------------------------------------
Service cost-benefits earned
during the year $ 899 $ 474 $ 785
Interest cost on the accumulated
postretirement benefit obligation 4,416 4,392 4,219
Actual (return) loss on plan assets (7,126) (9,897) 402
Amortization of transition obligation 1,025 1,140 1,140
Net amortization and deferral of
gains and losses 3,194 6,604 (3,559)
- ------------------------------------------------------------------------
Net postretirement benefit cost 2,408 2,713 2,987
Curtailment loss 3,019
========================================================================
Total postretirement benefit cost $ 5,427 $ 2,713 $ 2,987
========================================================================
As a result of the 1996 plan to close 21 financial institution check
printing plants (see note 2), as well as the sale of the Company's Health Care
Forms and internal bank forms businesses in 1996 (see note 4), the Company
recognized a postretirement benefit curtailment loss of $3 million in 1996.
27
In measuring the accumulated postretirement benefit obligation as of
December 31, 1996, the Company's health care inflation rate for 1997 was assumed
to be 10% for employees enrolled in an indemnity plan and 8.5% for employees
enrolled in health maintenance organizations. Inflation rates for both plans are
assumed to trend downward gradually over the next eight years to 5% for the
years 2004 and beyond. A one percentage point increase in the health care
inflation rate for each year would increase the accumulated postretirement
benefit obligation by approximately $7.8 million, and the service and interest
cost components of the net postretirement benefit cost by approximately $1
million. The discount rate used in determining the accumulated postretirement
benefit obligation as of December 31, 1996 and 1995, was 7.25%. The expected
long-term rate of return on plan assets used to determine the net periodic
postretirement benefit cost was 9.5% in 1996 and 1995.
NOTE 9.
LEASE AND DEBT COMMITMENTS
Long-term debt was as follows at December 31 (dollars in thousands):
=====================================================================
1996 1995
- ---------------------------------------------------------------------
8.55% unsecured and unsubordinated notes
due February 15, 2001 $100,000 $100,000
Other 15,543 19,696
- ---------------------------------------------------------------------
Total long-term debt 115,543 119,696
Less amount due within one year 6,606 8,699
- ---------------------------------------------------------------------
Total $108,937 $110,997
=====================================================================
In February 1991, the Company issued $100 million of 8.55% unsecured and
unsubordinated notes due February 15, 2001. The notes are not redeemable prior
to maturity. The fair values of these notes were estimated to be $107 million
and $112 million at December 31, 1996 and 1995, respectively, based on quoted
market prices.
Other long-term debt consists principally of capital leases on equipment
and payments due under non-compete agreements. The capital lease obligations
bear interest rates of 5% to 18% and are due through the year 2011. Carrying
value materially approximates fair value for these obligations.
Maturities of long-term debt for the five years ending December 31, 2001,
are $6.6 million, $5.2 million, $2.5 million, $.2 million, and $100 million, and
$1 million thereafter.
The Company has uncommitted lines of credit for $190.3 million. The average
amount drawn on those lines during 1996 was $14.5 million at a weighted average
interest rate of 6.29%. At December 31, 1996, $17 million was outstanding at an
interest rate of 6.5%. At December 31, 1995, $14.2 million was outstanding at an
interest rate of 6.6%. The Company also has in place a $150 million committed
line of credit as support for commercial paper. As of December 31, 1995, $34.7
million of commercial paper was issued and outstanding at a weighted average
interest rate of 6.09%. No commercial paper was outstanding at December 31,
1996. During the third quarter of 1995, the Company filed a shelf registration
for a $300 million medium-term note program to be used for general corporate
purposes. As of December 31, 1996 and 1995, no such notes were issued or
outstanding.
Minimum future rental payments for leased facilities and equipment for the
five years ending December 31, 2001, are $29.2 million, $21.7 million, $13.6
million, $6.5 million, and $4.5 million, and $5.9 million thereafter. Rental
expense was $40.4 million, $44.3 million, and $40.7 million for 1996, 1995, and
1994, respectively.
NOTE 10.
COMMON STOCK PURCHASE RIGHTS
On February 5, 1988, the Company declared a distribution to shareholders of
record on February 22, 1988, of one common stock purchase right for each
outstanding share of common stock. Upon the occurrence of certain events, each
right will entitle the holder to purchase one share of common stock at an
exercise price of $100. The rights become exercisable if a person acquires 20%
or more of the Company's common stock or announces a tender offer for 30% or
more of the Company's common stock. The rights, which expire in February 1998,
may be redeemed by the Company at a price of $.01 per right at any time prior to
the 30th day after a 20% position has been acquired.
If the Company is acquired in a merger or other business combination, each
right will entitle its holder to purchase common shares of the acquiring company
having a market value of twice the exercise price of each right (i.e., at a 50%
discount). If an acquirer purchases 35% of the Company's common stock or obtains
working control of the Company and engages in certain self-dealing transactions,
each right will entitle its holder to purchase a number of the Company's common
shares having a market value of twice the right's exercise price. Each right
will also entitle its holder to purchase the Company's common stock at a similar
50% discount in the event an acquirer merges into the Company and leaves the
Company's stock unchanged.
28
Effective February 1997, the Company amended the above mentioned plan. The
changes include an extension of the plan through January 31, 2007, an increase
in the initial exercise price of the rights from $100 to $150 per share, and a
decrease in the ownership threshold that triggers the exercisability of the
rights for discounted securities to 15%. The amended plan also changes the
redemption provisions applicable to the rights.
NOTE 11.
SHAREHOLDERS' EQUITY
====================================================================================================================================
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized
Additional change Cumulative
Common paid-in Retained Unearned marketable translation
shares capital earnings compensation securities adjustment
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 $82,549 $341 $ 719,046 $(687)
Net income 140,866
Cash dividends (120,503)
Common stock issued 1,167 32,399
Common stock retired (1,341) (31,046) (7,251)
Unearned compensation $(149)
Unrealized fair value adjustments, net of taxes of $1,107 $(2,054)
Translation adjustment 1,056
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 82,375 1,694 732,158 (149) (2,054) 369
Net income 87,021
Cash dividends (122,143)
Common stock issued 1,180 33,285
Common stock retired (1,191) (33,524)
Unearned compensation (590)
Unrealized fair value adjustments, net of taxes of $977 1,812
Translation adjustment 131
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 82,364 1,455 697,036 (739) (242) 500
Net income 65,463
Cash dividends (121,976)
Common stock issued 1,106 35,824
Common stock retired (1,414) (37,279) (9,372)
Unearned compensation (198)
Unrealized fair value adjustments, net of taxes of $130 242
Translation adjustment 146
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $82,056 $ 0 $ 631,151 $(937) $ 0 $646
===================================================================================================================================
NOTE 12.
BUSINESS SEGMENT INFORMATION
The Company has classified its operations into three business segments: Deluxe
Financial Services, Deluxe Electronic Payment Systems, and Deluxe Direct. Deluxe
Financial Services provides check printing, direct marketing, customer database
management, and related services to financial institutions. It also provides
checks directly to households and small businesses. It also provides payment
protection and collections services to financial institutions and the retail
market primarily in the United States. Deluxe Electronic Payment Systems
provides debit transaction processing and other electronic banking functions in
the United States and internationally. Deluxe Direct primarily sells greeting
cards, stationery, health care and tax forms, and specialty paper products
through direct mail to customers primarily in the United States. As a result of
the Company's strategic reorganization process, the Company determined that the
businesses in the Deluxe Direct segment do not fit
29
into the Company's long-term plans. During 1996, a number of these businesses
were sold and three more are expected to be sold in 1997.
For the three years ended December 31, 1996, the Company's segment
information is as follows. The costs of the Company's corporate operations have
been allocated to each segment based on the services provided to them. Prior
years' amounts have been restated to conform to the 1996 segment structure.
==============================================================================================================
Deluxe Financial Deluxe Electronic
1996 (dollars in thousands) Services Payment Systems Deluxe Direct Total
- --------------------------------------------------------------------------------------------------------------
Net sales $1,390,259 $129,920 $375,485 $1,895,664
Income from operations 251,621 (25,154) (139,358) 87,109
Identifiable assets 781,996 160,716 233,728 1,176,440
Depreciation and amortization 56,860 21,638 28,138 106,636
Capital expenditures 76,815 5,576 9,647 92,038
- --------------------------------------------------------------------------------------------------------------
1995
Net sales $1,295,697 $124,509 $437,775 $1,857,981
Income from operations 257,330 1,778 (75,324) 183,784
Identifiable assets 628,773 135,851 530,471 1,295,095
Depreciation and amortization 53,606 18,291 31,406 103,303
Capital expenditures 75,662 19,330 30,076 125,068
- --------------------------------------------------------------------------------------------------------------
1994
Net sales $1,245,552 $98,995 $403,097 $1,747,644
Income from operations 267,942 2,309 (20,420) 249,831
Identifiable assets 643,575 129,030 483,667 1,256,272
Depreciation and amortization 47,987 16,592 21,327 85,906
Capital expenditures 86,687 7,582 31,957 126,226
- --------------------------------------------------------------------------------------------------------------
NOTE 13.
DISCONTINUED OPERATIONS
On November 29, 1995, the Company adopted a plan to exit the Printwise ink
business. The Company disposed of substantially all the assets of the business
in 1996. Accordingly, Printwise is reported as a discontinued operation for the
years ended December 31, 1995 and 1994. Net assets of the discontinued operation
at December 31, 1995, consisted primarily of property, plant, and equipment. The
loss on the disposal of Printwise did not differ significantly from the
estimated loss as of December 31, 1995. Summarized results of Printwise since
inception are as follows.
===================================================================
YEARS ENDED DECEMBER 31 (dollars in thousands) 1995 1994
- -------------------------------------------------------------------
Net sales $1,124 $276
===================================================================
Loss from operations before income
tax benefit (5,244) (5,819)
Income tax benefit 2,146 2,432
- -------------------------------------------------------------------
Loss from operations (3,098) (3,387)
===================================================================
Loss on disposal before income tax benefit (7,300)
Income tax benefit 2,985
- -------------------------------------------------------------------
Loss on disposal (4,315)
===================================================================
Total loss on discontinued operations $(7,413) $(3,387)
===================================================================
30
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Deluxe Corporation:
We have audited the accompanying consolidated balance sheets of Deluxe
Corporation and its subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Deluxe Corporation and its subsidiaries at
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Minneapolis, Minnesota
February 10, 1997
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
===================================================================================================================================
1996 QUARTER ENDED (dollars in thousands except per share amounts) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales $488,088 $466,580 $460,520 $480,476
Cost of sales 250,662 211,543 209,670 224,009
Net income (loss) 18,921(1) 38,056 33,524 (25,038)(1)
Per share of common stock
Net income (loss) .23 .46 .41 (.30)
Cash dividends .37 .37 .37 .37
- -----------------------------------------------------------------------------------------------------------------------------------
===================================================================================================================================
1995 quarter ended (dollars in thousands except per share amounts) March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales $465,388 $442,266 $449,203 $501,124
Cost of sales 209,783 200,729 202,099 245,491
Income (loss) from continuing operations 34,552 30,742 30,258 (1,118)(2)
Per share of common stock
Continuing operations .42 .37 .37 (.01)
Net income (loss) .41 .36 .36 (.07)
Cash dividends .37 .37 .37 .37
- -----------------------------------------------------------------------------------------------------------------------------------
(1) 1996 first and fourth quarter results include net pretax charges of $34.8
million and $107.5 million, respectively, related to production
consolidation (see note 2), goodwill impairment (see note 3), gains and
losses on sales of businesses (see note 4), postretirement benefit
curtailment loss (see note 8), and write-offs of non-performing assets.
(2) 1995 fourth quarter results include pretax charges of $62.5 million,
primarily related to costs associated with the elimination of product lines
that were unprofitable or did not fit with the Company's long-term strategy
and write-offs of non-performing assets.
31
32
SHAREHOLDER INFORMATION
QUARTERLY STOCK DATA
The chart below shows the per-share price range of the Company's common stock
for the past two fiscal years as quoted on the New York Stock Exchange.
STOCK PRICE RANGE
(DOLLARS)
[BAR CHART OMITTED]
===============================================================
1996 QUARTER HIGH LOW CLOSE
- ---------------------------------------------------------------
1st 33 5/8 27 31 3/8
2nd 37 7/8 30 1/4 35 1/2
3rd 39 3/4 33 37 3/4
4th 39 3/8 29 3/4 32 3/4
- ---------------------------------------------------------------
===============================================================
1995 Quarter High Low Close
- ---------------------------------------------------------------
1st 29 1/8 26 1/8 28 1/2
2nd 33 5/8 28 7/8 33 1/8
3rd 33 7/8 30 1/4 33 1/8
4th 33 3/8 26 5/8 29
- ---------------------------------------------------------------
STOCK EXCHANGE
Deluxe Corporation common stock is traded on the New York Stock Exchange under
the symbol DLX.
ANNUAL MEETING
The annual meeting of the shareholders of Deluxe Corporation will be held at
6:30 p.m. on Tuesday, May 6, 1997, at the Radisson Hotel, 11 East Kellogg
Boulevard, St. Paul, Minnesota.
FORM 10-K AVAILABLE
A copy of the Company's Annual Report on Form 10-K, as filed with the Securities
and Exchange Commission by the Company, may be obtained without charge by
calling 1-888-359-6397 (1-888-DLX-NEWS) or by sending a written request to
Stuart Alexander, Deluxe Corporation, P.O. Box 64235, St. Paul, Minnesota
55164-0235.
SHAREHOLDER INQUIRIES
Please send requests for additional information to corporate headquarters to the
attention of:
Stuart Alexander, Vice President
(612) 483-7358
STOCK OWNERSHIP AND RECORD KEEPING
Norwest Bank Minnesota N.A.
Stock Transfer Department
161 N. Concord Exchange
P.O. Box 64854
St. Paul, Minnesota 55164-0854
(800) 468-9716 (612) 450-4064
E-mail: shareowner@aol.com
EXECUTIVE OFFICES
Street address:
3680 Victoria St. N.
Shoreview, Minnesota 55126-2966
Mailing address:
P.O. Box 64235
St. Paul, Minnesota 55164-0235
(612) 483-7111
TOLL-FREE SHAREHOLDER INFORMATION LINE
You may dial 1-888-359-6397 (1-888-DLX-NEWS) to listen to the latest financial
results, dividend news, and other information about Deluxe or to request copies
of our annual report, 10-K, 10-Q, proxy statement, news releases, and financial
presentation information.
PLANNED RELEASE DATES
Quarterly results: Monday, April 21, July 21, October 20, Wednesday, January 21,
1998.
Dividends are announced the second week of February, May, August, and November.
WEB SITE
Visit our Internet home page at: www.deluxe.com
FORWARD-LOOKING STATEMENTS
We use "forward-looking statements," as defined in the Private Securities Reform
Act of 1995, in this year's annual report. These statements typically address
management's present expectations about future performance and typically include
wording such as "should result," "expect," "anticipate," "estimate," or similar
expressions. Because of the unavoidable risks and uncertainties of predicting
the future, Deluxe's actual results may vary from management's current
expectations. These variations may be significant and may not always be
positive. Additional information about factors that may affect our current
estimates appears in our Form 10-K filed with the Securities and Exchange
Commission on March 31, 1997. To obtain a copy, we encourage investors to call
our shareholder information line (1-888-359-6397).
33