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 March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 1-7945
DELUXE CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0216800
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3680 Victoria St., N. St. Paul, Minnesota 55126-2966
(Address of principal executive offices) (Zip Code)
(612) 483-7111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
The number of shares outstanding of registrant's common stock, par value $1.00
per share, at May 6, 1998 was 80,826,968.
ITEM I. FINANCIAL STATEMENTS
PART I. FINANCIAL INFORMATION
DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
March 31, 1998 December 31,
(Unaudited) 1997
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 153,459 $ 171,438
Marketable securities 13,696 8,021
Trade accounts receivable 135,640 151,201
Inventories:
Raw material 19,742 22,950
Semi-finished goods 10,817 9,132
Finished goods 17,786 23,768
Supplies 11,080 11,146
Deferred advertising 10,135 15,763
Deferred income taxes 50,351 50,345
Prepaid expenses and other current assets 51,972 48,849
----------- -----------
Total current assets 474,678 512,613
----------- -----------
LONG-TERM INVESTMENTS 51,892 52,910
PROPERTY, PLANT, AND EQUIPMENT
Land 38,349 38,832
Buildings and improvements 283,762 288,270
Machinery and equipment 557,432 562,637
Construction in progress 3,583 346
----------- -----------
Total 883,126 890,085
Less accumulated depreciation 479,511 475,077
----------- -----------
Property, plant, and equipment - net 403,615 415,008
INTANGIBLES
Cost in excess of net assets acquired - net 55,177 54,435
Internal use software - net 89,156 74,584
Other intangible assets - net 39,656 38,814
----------- -----------
Total intangibles 183,989 167,833
----------- -----------
TOTAL ASSETS $ 1,114,174 $ 1,148,364
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 76,940 $ 73,516
Accrued liabilities:
Wages, including vacation pay 63,058 62,513
Employee profit sharing and pension 9,480 40,517
Accrued income taxes 41,904 31,960
Accrued rebates 35,944 36,708
Other 122,693 129,263
Long-term debt due within one year 6,724 7,078
----------- -----------
Total current liabilities 356,743 381,555
----------- -----------
LONG-TERM DEBT 111,008 109,986
DEFERRED INCOME TAXES 6,353 6,040
OTHER LONG-TERM LIABILITIES 39,554 40,535
SHAREHOLDERS' EQUITY
Common shares - $1 par value (authorized 500,000,000 shares; issued: 1998 - 80,614 81,326
80,613,944 shares; 1997 - 81,325,925 shares)
Additional paid-in capital 4,758
Retained earnings 520,744 525,302
Unearned compensation (397) (649)
Cumulative translation adjustment (445) (489)
----------- -----------
Total shareholders' equity 600,516 610,248
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,114,174 $ 1,148,364
=========== ===========
See Notes to Consolidated Financial Statements
DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except per Share Amounts)
(Unaudited)
QUARTER ENDED MARCH 31,
1998 1997
--------- ---------
NET SALES $ 488,970 $ 490,104
OPERATING EXPENSES
Cost of sales 223,612 227,195
Selling, general and administrative 193,841 196,767
--------- ---------
Total 417,453 423,962
--------- ---------
INCOME FROM OPERATIONS 71,517 66,142
OTHER INCOME (EXPENSE)
Other income 3,312 5,632
Interest expense (2,223) (2,385)
--------- ---------
INCOME BEFORE INCOME TAXES 72,606 69,389
PROVISION FOR INCOME TAXES 29,035 27,964
--------- ---------
NET INCOME $ 43,571 $ 41,425
========= =========
NET INCOME PER COMMON SHARE - Basic and Diluted $ 0.54 $ 0.50
CASH DIVIDENDS PER COMMON SHARE $ 0.37 $ 0.37
See Notes to Consolidated Financial Statements
DELUXE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Quarter Ended March 31, 1998 and 1997
(Dollars in Thousands)
(Unaudited)
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 43,571 $ 41,425
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 15,150 14,120
Amortization of intangibles 5,393 6,920
Stock purchase discount 1,620 1,735
Net loss (gain) on sales of businesses 558 (3,500)
Changes in assets and liabilities, net of effects from
discontinued operations and sales of businesses:
Trade accounts receivable 15,051 (10,804)
Inventories 6,168 7,309
Accounts payable 3,666 (1,688)
Other assets and liabilities (29,339) (272)
--------- ---------
Net cash provided by continuing operations 61,838 55,245
Net cash used by discontinued operations (206)
--------- ---------
Net cash provided by operating activities 61,838 55,039
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of marketable securities with maturities of 8,000
more than 3 months
Purchases of marketable securities with maturities of more than 3 (13,674) (8,000)
months
Purchases of capital assets (24,652) (21,510)
Net proceeds from sales of businesses and discontinued operations,
net of cash sold 1,284 797
Other 5,798 (308)
--------- ---------
Net cash used in investing activities (23,244) (29,021)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 292
Payments on long-term debt (1,709) (1,643)
Payments to retire common stock (32,087) (4,899)
Proceeds from issuing stock under employee plans 7,096 5,674
Net payments on short-term debt (15,950)
Cash dividends paid to shareholders (30,165) (30,423)
--------- ---------
Net cash used in financing activities (56,573) (47,241)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (17,979) (21,223)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 171,438 142,571
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 153,459 $ 121,348
========= =========
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated balance sheet as of March 31, 1998 and the
consolidated statements of income and the consolidated statements of cash flows
for the quarters ended March 31, 1998 and 1997 are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of such financial
statements are included. Other than those discussed in the notes below, such
adjustments consist only of normal recurring items. Interim results are not
necessarily indicative of results for a full year.
The consolidated financial statements and notes are presented in accordance with
instructions for Form 10-Q, and do not contain certain information included in
the Company's consolidated annual financial statements and notes.
2. As of March 31, 1998, the Company had uncommitted bank lines of
credit of $170 million available at variable interest rates. As of that date,
there were no amounts drawn on those lines. The Company also had a $150 million
committed line of credit available for borrowing and as support for commercial
paper. As of March 31, 1998, the Company had no commercial paper outstanding and
no indebtedness outstanding under its committed line of credit. Additionally,
the Company had a shelf registration in place for the issuance of up to $300
million in medium-term notes. Such notes could be used for general corporate
purposes, including working capital, capital expenditures, possible acquisitions
and repayment or repurchase of outstanding indebtedness and other securities of
the Company. As of March 31, 1998, no such notes were issued or outstanding.
3. During April 1998, the Company announced that it had reached an
agreement to sell PaperDirect, Inc. ("PaperDirect") and the Social Expressions
component ("Social Expressions") of Current, Inc. The closing is currently
expected to take place in the second quarter. The Company does not expect to
report any material gain or loss on the sale. These businesses, along with the
international component of Deluxe Electronic Payment Systems, are currently held
for sale and are accounted for in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". These businesses
contributed revenue of approximately $72 million and $67 million in the first
quarters of 1998 and 1997, respectively. They contributed no material operating
profit or loss in the first quarter of 1998 and contributed operating profit of
approximately $3.6 million in the first quarter of 1997. The direct mail check
printing business of Current is not part of the sale agreement and will remain
with Deluxe. The sale of PaperDirect and Social Expressions is subject to
certain contingencies. See "Part II, Item 5 - Other Information - Sales of
Businesses."
4. Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
requires disclosure of comprehensive income and its components in the Company's
financial statements. The Company's total comprehensive income for the quarters
ended March 31, 1998 and 1997 was $43.6 million and $40.9 million, respectively.
The Company's comprehensive income consists of net income, unrealized holding
gains and losses on securities and foreign currency translation adjustments.
5. During 1998, the Company will adopt Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which requires the disclosure of financial and descriptive
information about the reportable operating segments of the Company. The Company
will also adopt Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" during 1998, which
revises employers' disclosures about pensions and other postretirement benefit
plans.
6. The following table reflects the calculation of basic and diluted
earnings per share (dollars and shares outstanding in thousands, except per
share amounts).
- ------------------------------------------------------------------------------
Three Months Ended March 31,
1998 1997
- ------------------------------------------------------------------------------
Net income per share-basic:
Net income $43,571 $41,425
Weighted average shares outstanding 80,967 82,125
Net income per share-basic $.54 $.50
==============================================================================
Net income per share-diluted:
Net income $43,571 $41,425
- ------------------------------------------------------------------------------
Weighted average shares outstanding 80,967 82,125
Dilutive impact of options 191 80
Shares contingently issuable 3 6
- ------------------------------------------------------------------------------
Weighted average shares and potential dilutive
shares outstanding 81,161 82,211
- ------------------------------------------------------------------------------
Net income per share-diluted $.54 $.50
==============================================================================
7. The Company's balance sheets reflect restructuring accruals of $32.2
million and $39.5 million as of March 31, 1998 and December 31, 1997,
respectively, for employee severance costs, and $3.7 million as of both dates
for estimated losses on asset dispositions. The majority of the severance costs
are expected to be paid in 1998 and early 1999 with cash generated from the
Company's operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Company Profile
The Company has organized its many business units into three reporting segments,
Deluxe Financial Services, Deluxe Electronic Payment Systems and Deluxe Direct.
Through Deluxe Financial Services, the Company provides check printing, direct
marketing assistance, business forms and related services to financial
institutions and their customers in the United States and Canada and payment
systems protection services, including check authorization, account
verification, and collection services to financial institutions and retailers.
Through Deluxe Electronic Payment Systems, the Company provides electronic funds
transfer and other software services to financial institutions and electronic
benefit transfer services to state governments. Through Deluxe Direct, the
Company provides specialty papers to small businesses and direct mail greeting
cards, gift wrap, and related products to households.
Results of Operations - Quarter Ended March 31, 1998 Compared to the Quarter
Ended March 31, 1997
Net sales were $489 million for the first quarter of 1998, relatively even with
the first quarter of 1997, when sales were $490.1 million. Deluxe Financial
Services' revenue decreased slightly from the first quarter of 1997 due to
decreased volume in the check printing and database marketing businesses. These
decreases were partially offset by increased volume in the payment protection
businesses, increased prices in the check printing business, and revenue from a
new practice of charging check printing customers for placing orders via
telephone as opposed to electronic channels. Deluxe Electronic Payment Systems'
revenue increased over 20% from the first quarter of 1997 due to increased
volume in a variety of product lines. Deluxe Direct's revenue decreased
approximately 7% from the first quarter of 1997 due primarily to lower volume
and sales of businesses.
Cost of sales decreased $3.6 million, or 1.6%, from the first quarter of 1997.
Deluxe Financial Services' costs of sales decreased approximately 4% from the
first quarter of 1997 due primarily to decreased volume in the check printing
and database marketing businesses, a more profitable product mix and
productivity improvements within the check printing business. Deluxe Electronic
Payment Systems' cost of sales increased just over 18% from the first quarter of
1997 primarily due to increased sales volume. Deluxe Direct's cost of sales
decreased approximately 6%, consistent with the reduced sales.
Selling, general and administrative expense decreased $2.9 million or 1.5% from
the first quarter of 1997. Deluxe Financial
Services' selling, general and administrative expense decreased slightly from
the first quarter of 1997 due mainly to a decrease in marketing expenses. Deluxe
Electronic Payment Systems' selling, general and administrative expense
increased 13% over 1997 due to increased marketing and selling expenses and
costs of correcting its computer systems to address the Year 2000 problem.
Deluxe Direct's selling, general and administrative expense decreased
approximately 3% from 1997, due to sales of businesses.
Net income for the first quarter of 1998 increased 5.2% to $43.6 million,
compared to net income of $41.4 million for the first quarter of 1997. This
increase in net income is primarily the result of the changes discussed above
offset somewhat by a $3.5 million non-operating pretax gain recognized in 1997
for the sale of a business.
Financial Condition - Liquidity
Cash provided by operations was $61.8 million for the first quarter of 1998,
compared with $55.0 million for the first quarter of 1997. Cash from operations
represents the Company's primary source of working capital for financing capital
expenditures and paying cash dividends. The Company's working capital on March
31, 1998 was $117.9 million compared to $131.1 million on December 31, 1997. The
Company's current ratio on both March 31, 1998 and December 31, 1997 was 1.3 to
1.
Financial Condition - Capital Resources
Purchases of capital assets totaled $24.7 million for the first quarter of 1998
compared to $21.5 million during the comparable period one year ago. As of March
31, 1998, the Company had uncommitted bank lines of credit of $170 million
available at variable interest rates. As of that date, there were no amounts
drawn on those lines. The Company also had a $150 million committed line of
credit available for borrowing and as support for commercial paper. As of March
31, 1998, the Company had no commercial paper outstanding and no indebtedness
outstanding under its committed line of credit. Additionally, the Company had a
shelf registration in place for the issuance of up to $300 million in
medium-term notes. Such notes could be used for general corporate purposes,
including working capital, capital expenditures, possible acquisitions and
repayment or repurchase of outstanding indebtedness and other securities of the
Company. As of March 31, 1998, no such notes were issued or outstanding. Cash
dividends totaled $30.2 million in the first three months of 1998 compared to
$30.4 million in the first three months of 1997.
Year 2000
In 1996, the Company initiated a companywide program to prepare its computer
systems and applications for the year 2000. During 1997, the Company identified
the systems affected, determined a resolution strategy for each affected system,
and began executing these resolution strategies. The Company expects either to
modify or upgrade existing systems or replace some systems through other
development projects. The Company expects to incur expense of approximately $17
million over the next two years, consisting of both internal staff costs and
consulting expenses, as it continues to implement its resolution strategy.
Because of the nature of the Company's business, the Year 2000 issue would, if
unaddressed, pose a significant business risk for the Company. The Company
presently believes that with the planned modifications to existing systems and
the replacement of other systems, the Year 2000 compliance issue will be
resolved in a timely manner and will not pose significant operational problems
for the Company. Additionally, the Company has communicated with its suppliers
and customers to determine their year 2000 readiness and the extent to which the
Company is vulnerable to any third party Year 2000 issues. However, there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be converted in a timely manner or in a manner that is compatible with
the Company's systems. A failure by such a company to convert their systems in a
timely manner or a conversion that renders such systems incompatible with those
of the Company could have a material adverse effect on the Company.
Outlook
In 1998, the Company will continue its efforts to reduce costs and improve
productivity throughout the organization. At the same time, the Company will
continue to invest in major infrastructure improvements. The Company also
expects to complete its divestiture program by selling its remaining
non-strategic businesses.
The Company's ongoing changes related to organizational improvements and growth
opportunities may require additional charges to earnings. These charges, should,
however, lessen as the Company completes its reorganization and focuses on its
growth opportunities.
PART II - OTHER INFORMATION
Item 5. Other Information
RISK FACTORS AND CAUTIONARY STATEMENTS.
When used in this Quarterly Report on Form 10-Q and in future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases and in oral statements made with the approval of an authorized
executive officer, the words or phrases "should result," "are expected to,"
"will continue," "will approximate," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements are necessarily subject to certain risks and uncertainties, including
those discussed below, that could cause actual results to differ materially from
the Company's historical experience and its present expectations or projections.
Caution should be taken not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The factors listed below could
affect the Company's financial performance and could cause the Company's actual
results for future periods to differ from any opinions or statements expressed
with respect thereto. Such differences could be material and adverse.
The Company will not undertake and specifically declines any obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances occurring after
the date of such statements or to reflect the occurrence of anticipated or
unanticipated events. This discussion supersedes the discussion in Exhibit 99.1
to the Company's Annual Report on Form 10-K for the year ended December 31,
1997.
Earnings Estimates. From time to time, the authorized representatives of the
Company may make predictions or forecasts regarding the Company's future
results, including estimated earnings or earnings from operations. Any forecast,
including the Company's current statement that it expects to achieve at least 3
to 6 percent annual growth in revenues and 5 to 9 percent annual growth in
earnings in 1998, regarding the Company's future performance reflects various
assumptions. These assumptions are subject to significant uncertainties and, as
a matter of course, many of them will prove to be incorrect. Further, the
achievement of any forecast depends on numerous factors (including those
described in this discussion), many of which are beyond the Company's control.
As a result, there can be no assurance that the Company's performance will be
consistent with any management forecasts and the variation from such forecasts
may be material and adverse. Investors are cautioned not to base their entire
analysis of the Company's business and prospects upon isolated predictions, but
instead are encouraged to utilize the entire available mix of historical and
forward-looking information made available by the Company and other information
affecting the Company and its products when evaluating the Company's prospective
results of operations.
In addition, authorized representatives of the Company may occasionally comment
on the perceived reasonableness of published reports by independent analysts
regarding the Company's projected future performance. Such comments should not
be interpreted as an endorsement or adoption of any given estimate or range of
estimates or the assumptions and methodologies upon which such estimates are
based. Generally speaking, the Company does not make public its own internal
projections, budgets or estimates. Undue reliance should not be placed on any
comments regarding the conformity, or lack thereof, of any independent estimates
with the Company's own present expectations regarding its future results of
operations.
The methodologies employed by the Company in arriving at its own internal
projections and the approaches taken by independent analysts in making their
estimates are likely different in many significant respects. Although the
Company may presently perceive a given estimate to be reasonable, changes in the
Company's business, market conditions or the general economic climate may have
varying effects on the results obtained through the use of differing analyses
and
assumptions. The Company expressly disclaims any continuing responsibility to
advise analysts or the public markets of its view regarding the current accuracy
of the published estimates of outside analysts. Persons relying on such
estimates should pursue their own independent investigation and analysis of
their accuracy and the reasonableness of the assumptions on which they are
based.
Sales of Businesses. The Company has a continuing intention to divest the
remaining businesses comprising its Deluxe Direct segment. Although the Company
has entered into a divestiture agreement for the sale of PaperDirect and the
Social Expressions business with a potential buyer, that agreement is currently
terminable by either of the parties due to the failure of the buyer to provide
the necessary assurances of its ability to fund the purchase of these businesses
prior to an agreed-upon date. The possibility exists that the potential buyer
will not obtain the needed financing in a timely manner, or at all. In addition,
either party could elect to abandon the proposed transaction at any time. The
occurrence of either of these events would materially delay the anticipated sale
and could result in further write-offs by the Company, some of which could be
significant. In addition, delays in the execution of these sales could cause the
Company to incur continued operating losses from the businesses sought to be
divested or make unanticipated investments in those businesses. Any such delay
would also postpone the receipt and use by the Company of the proceeds expected
to be generated thereby.
Other Dispositions and Acquisitions. In connection with its ongoing
restructuring, the Company may also consider divesting or discontinuing the
operations of various business units and assets and the Company may undertake
one or more significant acquisitions. Any such divestiture or discontinuance
could result in write-offs by the Company, some or all of which could be
significant. In addition, a significant acquisition could result in future
earnings dilution for the Company's shareholders.
Effect of Financial Institution Consolidation. There is an ongoing trend towards
increasing consolidation within the banking industry that has resulted in
increased competition and pressure on check prices. This concentration greatly
increases the importance to the Company of retaining its major customers and
attracting significant additional customers in an increasingly competitive
environment. Although the Company devotes considerable efforts towards the
development of a competitively priced, high quality suite of products for the
financial services and retail industries, there can be no assurance that
significant customers will not be lost nor that any such loss can be
counterbalanced through the addition of new customers or by expanded sales to
the Company's remaining customers.
Raw Material Postage Costs and Delivery Costs. Increases in the price of paper
and the cost of postage can adversely affect the profitability of the Company's
printing and mail order businesses. Events such as the 1997 UPS strike can also
adversely impact the Company's margins by imposing higher delivery costs.
Competitive pressures and overall trends in the marketplace may have the effect
of inhibiting the Company's ability to reflect increased costs of production in
the retail prices of its products.
Competition. Although the Company believes it is the leading check printer in
the United States, it faces considerable competition from other smaller
companies in both its traditional marketing channel to financial institutions
and from direct mail marketers of checks. From time to time, one or more of
these competitors reduce the prices of their products in an attempt to gain
market share. The corresponding pricing pressure placed on the Company has
resulted in reduced profit margins in the past and there can be no assurance
that similar pressures will not be exerted in the future.
Check printing is, and is expected to continue to be, an essential part of the
Company's business and the principal source of its operating income for at least
the next several years. A wide variety of alternative payment delivery systems,
including credit cards, debit cards, smart cards, ATM machines, direct deposit
and bill paying services, home banking applications and Internet-based retail
services, are in various stages of maturity or development and additional
systems will likely be introduced. Although the Company expects that there will
continue to be a substantial market for checks for the foreseeable future, the
rate and the extent to which these alternative systems will achieve consumer
acceptance and replace checks cannot be predicted. A surge in the popularity of
any of these alternative payment methods could have a material, adverse effect
on the demand for the Company's primary products and its account verification,
payment protection and collection services. The creation of these alternative
payment methodologies has also resulted in an increased interest in transaction
processing as a source of revenue, which has led to increased competition for
the Company's transaction processing businesses.
HCL Joint Venture. There can be no assurance that the software, transaction
processing services and products and software development services proposed to
be offered by the Company's joint venture with HCL Corporation of New Delhi,
India will achieve market acceptance in either the United States or India. In
addition, the Company has no operational experience in India and only limited
international exposure to date. Operations in foreign countries are subject to
numerous potential obstacles including, among other things, cultural
differences, political unrest, export controls, governmental interference or
regulation (both domestic and foreign), currency fluctuations, personnel issues
and varying competitive conditions. In addition, it is possible that the United
States government may impose economic or trade sanctions upon India that may
affect the joint venture as a result of India's recent nuclear tests.
There can be no assurance that one or more of these factors, or additional
causes or influences, many of which are likely to have been unanticipated and
beyond the ability of the Company to control, will not operate to inhibit the
success of the venture. As a result, there can be no assurance that the HCL
joint venture will generate significant revenues or profits or provide an
adequate return on any investment by the Company.
Debit Bureau. The Company has recently announced an alliance with several
entities that is intended to offer decision support tools for retailers and
financial institutions that offer or accept direct debit-based products, such as
checking accounts, ATM cards and debit cards. To date, this effort has primarily
been directed towards the creation of the supporting data warehouse and research
regarding the utility and value of the data available to the Company for use in
this area. There can be no assurance that this effort will result in the
introduction of a significant number of new products or the generation of
incremental revenues in material amounts. In any event, the continued
development of the debit bureau is expected to require a significant level of
investment by the Company.
Timing and Amount of Anticipated Cost Reductions. With regard to the results of
the Company's ongoing cost reduction efforts, there can be no assurance that the
anticipated cost savings will be fully realized or will be achieved within the
time periods expected. The implementation of the printing plant closures is, in
large part, dependent upon the successful development of the software needed to
streamline the check ordering process and redistribute the resultant order flow
among the Company's remaining printing plants. Because of the complexities
inherent in the development of software products as sophisticated as those
needed to accomplish this task, there can be no assurance that unanticipated
development or conversion delays will not occur or that the prior delays
experienced by the Company in connection with such development and the
conversion will not recur. Any such event could adversely affect the planned
consolidation of the Company's printing facilities and delay the realization or
reduce the amount of the anticipated expense reductions.
In addition, the achievement of the expected level of cost savings is dependent
upon the successful execution of a variety of other cost reduction strategies.
These additional efforts include the consolidation of the Company's purchasing
process, the disposition of unprofitable or low-margin businesses and other
efforts. The optimum means of realizing many of these strategies is, in some
cases, still being evaluated by the Company. Unexpected delays, complicating
factors and other hindrances are common in these types of endeavors and can
arise from a variety of sources, some of which are likely to have been
unanticipated. A failure to timely achieve one or more of the Company's primary
cost reduction objectives could materially reduce the benefit to the Company of
its cost savings programs and strategies or substantially delay the full
realization of their expected benefits.
Further, there can be no assurance that increased expenses attributable to other
areas of the Company's operations or to increases in raw material, labor,
equipment or other costs will not offset some or all of the savings expected to
be achieved through the cost reduction efforts. Competitive pressures and other
market factors may also require the Company to share the benefit of some or all
of any savings with its customers or otherwise adversely affect the prices it
receives or the market for its products. As a result, even if the expected cost
reductions are fully achieved in a timely manner, such reductions are not likely
to be fully reflected by commensurate gains in the Company's net income, cash
position, dividend rate or the price of its Common Stock.
Limited Source of Supply. The Company's check printing business utilizes a paper
printing plate material that is available from only a limited number of sources.
The Company believes it has a reliable source of supply for this material and
that it maintains an inventory sufficient to avoid any production disruptions in
the event of an interruption of its supply. In the event, however, that the
Company's current supplier becomes unwilling or unable to supply the required
printing plate material at an acceptable price and the Company is unable to
locate a suitable alternative source within a reasonable time
frame, the Company would be forced to convert its facilities to an alternative
printing process. Any such conversion would require the unanticipated investment
of significant sums and there can be no assurance that the conversion could be
accomplished without production delays.
Seasonality. A significant portion of the revenues and earnings of the Company's
Deluxe Direct segment is dependent upon its results of operations during the
fourth quarter. As a result, the results reported for this division during the
first three quarters of any given year are not necessarily indicative of those
which may be expected for the entire year.
Year 2000. In 1996, the Company initiated a companywide program to prepare its
computer systems and applications for the year 2000. During 1997, the Company
identified the systems affected, determined a resolution strategy for each
affected system, and began executing these resolution strategies. The Company
expects either to modify or upgrade existing systems or replace some systems
through other development projects. The Company expects to incur expenses of $17
million over the next two years, consisting of both internal staff costs and
consulting expenses, as it continues to implement its resolution strategy.
Because of the nature of the Company's business, the year 2000 issue would, if
it is not successfully resolved, pose a significant business risk for the
Company. The Company presently believes that with the planned modifications to
existing systems and the replacement of other systems, the year 2000 compliance
issue will be resolved in a timely manner and will not pose significant
operational problems for the Company, but the Company's ultimate success in this
endeavor cannot be assured. Additionally, the Company has communicated with its
suppliers and customers to determine their year 2000 readiness and the extent to
which the Company is vulnerable to any third party year 2000 issues. However,
there can be no assurances that the systems of other companies on which the
Company's systems rely will be converted in a timely manner or in a manner that
is compatible with the Company's systems. A failure by such a company to convert
their systems in a timely manner or a conversion that renders such systems
incompatible with those of the Company could have a material adverse effect on
the Company.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
10.1 Separation Agreement, effective as of April 6, 1998, by and between Filed herewith
Deluxe Corporation ("Deluxe") and Gregory J. Bjorndahl
10.2 Separation Agreement, effective as of April 23, 1998 between Deluxe and Filed herewith
Gregory J. Bjorndahl
10.3 Executive Retention Agreement, dated as of January 9, 1998, by and Filed herewith
between Deluxe and John A. Blanchard III
10.4 Executive Retention Agreement, dated as of January 9, 1998, by and Filed herewith
between Deluxe and Gregory J. Bjorndahl
10.5 Executive Retention Agreement, dated as of January 9, 1998, by and Filed herewith
between Deluxe and Ronald E. Eilers
10.6 Executive Retention Agreement, dated as of January 9, 1998, by and Filed herewith
between Deluxe and John H. LeFevre
10.7 Executive Retention Agreement, dated as of January 9, 1998, by and Fled herewith
between Deluxe and Lawrence J. Mosner
10.8 Schedule identifying other Executive Retention Agreements omitted for Filed herewith
this Report on Form 10-Q and the differences between such Agreements and
those filed herewith
12.1 Computation of Ratio of Earnings to Fixed Charges Filed herewith
27.1 Financial Data Schedule Filed herewith
(b) The registrant did not, and was not required to, file any reports
on form 8-K during the quarter for which this report is filed.
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 May 15, 1998 /s/ J.A. Blanchard III
J.A. Blanchard III, President
and Chief Executive Officer
(Principal Executive Officer)
Date May 15, 1998 /s/ Thomas W. VanHimbergen
Thomas W. VanHimbergen, Senior
Vice President
and Chief Financial Officer
(Principal Financial Officer)
INDEX TO EXHIBITS
Exhibit No. Description Page Number
- ----------- ----------- -----------
10.1 Separation Agreement, effective as of April 6, 1998, by and between
Deluxe Corporation ("Deluxe") and Gregory J. Bjorndahl
10.2 Separation Agreement, effective as of April 23, 1998 between Deluxe and
Gregory J. Bjorndahl
10.3 Executive Retention Agreement, dated as of January 9, 1998, by and
between Deluxe and John A. Blanchard III
10.4 Executive Retention Agreement, dated as of January 9, 1998, by and
between Deluxe and Gregory J. Bjorndahl
10.5 Executive Retention Agreement, dated as of January 9, 1998, by and
between Deluxe and Ronald E. Eilers
10.6 Executive Retention Agreement, dated as of January 9, 1998, by and
between Deluxe and John H. LeFevre
10.7 Executive Retention Agreement, dated as of January 9, 1998, by and
between Deluxe and Lawrence J. Mosner
10.8 Schedule identifying other Executive Retention Agreements
omitted for this Report on Form 10-Q and the differences
between such Agreements and those filed herewith
12.1 Computation of Ratio of Earnings to Fixed Charges
27.1 Financial Data Schedule