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

FORM 10-Q

(Mark One)

Commission file number:   1-7945

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

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).   Yes  ü    No    

The number of shares outstanding of registrant’s common stock, par value $1.00 per share, at October 25, 2004 was 50,227,262.

PART I–FINANCIAL INFORMATION

Item 1.   Financial Statements.

DELUXE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share par value)
(Unaudited)

See Notes to Unaudited Consolidated Financial Statements

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DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)

See Notes to Unaudited Consolidated Financial Statements

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DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

See Notes to Unaudited Consolidated Financial Statements

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DELUXE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1:   Consolidated financial statements

        The consolidated balance sheet as of September 30, 2004, the consolidated statements of income for the quarters and nine months ended September 30, 2004 and 2003 and the consolidated statements of cash flows for the nine months ended September 30, 2004 and 2003 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements are included. Adjustments consist only of normal recurring items, except for any discussed in the notes below. 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 our consolidated annual financial statements and notes. The consolidated financial statements and notes appearing in this report should be read in conjunction with the consolidated audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2003.

Note 2:   Financing for acquisition of New England Business Service, Inc.

        On June 25, 2004, we acquired New England Business Service, Inc. (NEBS) for $639.6 million. Further detail regarding the accounting for this acquisition can be found in Note 3, Acquisition of New England Business Service, Inc. To finance the acquisition, we utilized $475.0 million of an $800.0 million bridge financing agreement, as well as commercial paper (see Note 10). During the third quarter of 2004, we increased our commercial paper program from $500.0 million to $1.0 billion and utilized commercial paper to pay-off the bridge financing. On October 1, 2004, we issued $600.0 million of long-term debt and subsequently canceled the bridge financing agreement. The net proceeds from this debt of $595.6 million were utilized to pay outstanding commercial paper. As such, $595.6 million of commercial paper debt is presented as long-term debt in our consolidated balance sheet as of September 30, 2004. Further details concerning the long-term debt issued can be found in Note 10, Debt. On October 7, 2004, we reduced our commercial paper program back to $500.0 million.

Note 3:   Acquisition of New England Business Service, Inc.

        On June 25, 2004, we acquired via a tender offer approximately 98% of the outstanding common stock of NEBS for $44 per share. Immediately following the close of the tender offer, we completed a merger under which NEBS became a wholly-owned subsidiary and we became obligated to pay for the untendered shares at a price of $44 per share. We also agreed to redeem all outstanding NEBS stock options for $44 per option share less the option exercise price. As of September 30, 2004, a portion of the direct costs of the acquisition had not been paid and were included in accrued liabilities in our consolidated balance sheet. We anticipate that substantially all of these payments will be completed during the fourth quarter of 2004. The total purchase price for the acquisition was comprised of the following (dollars in thousands):

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        As of September 30, 2004, we had $0.8 million of restricted cash. Upon the acquisition of NEBS, we were required to place on deposit the funds required to pay the shareholders who did not tender their shares of NEBS common stock under the tender offer. These shareholders must present their stock certificates in order to receive their portion of the funds. The funds must remain on deposit for a period of nine months, after which time the funds will be returned to us, and thereafter, any remaining unclaimed funds will be remitted to the appropriate governmental authority under applicable escheat laws.

        NEBS is a leading provider of products and services to small businesses. Its offerings include checks, forms, packaging supplies, embossed foil anniversary seals, promotional products and other printed material which are marketed through direct sales, telesales, a direct sales force, dealers, dedicated distributors and the Internet. NEBS also designs, embroiders and sells specialty apparel products through distributors and independent sales representatives. We believe NEBS is a strategic fit, as we both serve small business customers, and the acquisition expands our product offerings, customer base and non-check revenue.

        NEBS operating results are included in our consolidated results of operations from the date of acquisition. Our consolidated balance sheet as of September 30, 2004 reflects the allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. This allocation is preliminary, pending the completion of detailed analyses and outside appraisals of the fair values of the assets acquired, as well as completion of management’s integration plans. Once these analyses and appraisals have been completed, the allocation of the purchase price will be finalized. We have announced our intention to utilize a shared services environment approach for both manufacturing and certain selling, general and administrative (SG&A) functions. This approach will most likely result in the exit of certain activities. However, to ensure that we continue to meet customer expectations, significant analysis is required before all such plans can be finalized. To the extent the activities to be discontinued are NEBS activities, we would adjust the preliminary purchase price allocation to reflect additional restructuring liabilities. If the discontinued activities are Deluxe activities, any restructuring accruals would be reflected in our consolidated statements of income. The preliminary allocation of the purchase price does reflect $20.5 million of restructuring accruals for those NEBS activities which we have already decided to exit. These accruals are discussed in Note 9, Restructuring charges.

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        The preliminary purchase price allocation resulted in goodwill of $445.5 million. We believe that the NEBS acquisition resulted in the recognition of goodwill primarily because of its industry position, the potential to introduce products across multiple channels and the ability to realize cost synergies. The following illustrates our preliminary allocation of the purchase price to the assets acquired and liabilities assumed (dollars in thousands):

        Our preliminary allocation of the purchase price to the assets acquired and liabilities assumed resulted in the recognition of the following intangible assets (dollars in thousands):

        Amortizable tradenames and software are being amortized on the straight-line basis. The other amortizable intangible assets are being amortized using accelerated methods. For the nine months ended September 30, 2004, we recorded amortization of NEBS intangibles of $13.1 million. The amount assigned to intangible assets acquired, as well as the related amortization periods, may change once our detailed analyses and outside asset appraisals are completed.

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        The following unaudited, pro forma financial information illustrates our estimated results of operations as if the acquisition of NEBS had occurred as of the beginning of each period presented (dollars in thousands):

        NEBS results of operations for the nine months ended September 30, 2003 included goodwill and asset impairment charges of $13.2 million related to their apparel business. These charges are reflected in the above pro forma results of operations. The pro forma results of operations are presented for comparative purposes only. They do not represent the results which would have been reported had the acquisition occurred on the dates assumed and are not necessarily indicative of future operating results.

Note 4:   Employee stock-based compensation

        On January 1, 2004, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. We are reporting this change in accounting principle using the modified prospective method of adoption described in SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure. Beginning in 2004, our results of operations reflect compensation expense for all employee stock-based compensation, including the unvested portion of previous stock options granted. This is the same amount of compensation expense which would have been recognized had the fair value recognition provisions of SFAS No. 123 been applied from its original effective date. Prior to 2004, we accounted for our employee stock-based compensation in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Under this method of accounting, no compensation expense was recognized for stock options or for our employee stock purchase plan. In accordance with the modified prospective method of transition, results for 2003 have not been restated to reflect this change in accounting principle.

        During the second quarter of 2004, we implemented changes to our long-term compensation strategy. Rather than using stock options as the exclusive form of long-term incentive, we now utilize a combination of stock options, performance shares and restricted stock. All such awards are granted under our shareholder-approved stock incentive plan. The level of shares earned under the performance share component is contingent upon the attainment of specific performance targets over a three-year period. The fair value of the performance shares granted is equal to the market price of our stock at the date of grant. Compensation expense is recorded over the three-year performance period based on our estimate of the number of shares which will be earned by the award recipients. In addition, during the second quarter of 2004, we issued 40,404 restricted shares to employees. The fair value of these awards is equal to the market price of our stock at the date of grant. Compensation expense is recorded over the three year vesting period.

        Total stock-based compensation expense was $2.9 million for the third quarter of 2004. This expense is reflected as cost of goods sold of $0.2 million and SG&A expense of $2.7 million in our consolidated statement of income for the quarter ended September 30, 2004. For the first nine months of 2004, total stock-based compensation expense was $8.7 million, with $0.7 million reflected in cost of goods sold and $8.0 million reflected in SG&A expense in our consolidated statement of income.

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        The following table illustrates the effect on net income and earnings per share as if the fair value method had been applied to all outstanding and unvested awards in each period (dollars in thousands, except per share amounts):

Note 5:   Changes in accounting estimates and principle

        During the first quarter of 2004, we revised the estimated useful lives for certain of our software and production assets, as we expect that the assets will be replaced or retired sooner than originally anticipated. The weighted-average useful life for these assets was shortened from 8.0 years to 6.8 years. This change in accounting estimate is expected to result in increased depreciation and amortization expense of $8.5 million in 2004. In the third quarter of 2004, $2.6 million of this additional expense was recorded, and during the nine months ended September 30, 2004, $6.0 million of this additional expense was recorded.

        On July 1, 2004, we changed the method of accounting for a portion of our inventories. Inventories previously accounted for under the last-in, first-out (LIFO) method will now be accounted for using the first-in, first-out (FIFO) method. This change resulted in a decrease in cost of goods sold of $2.2 million, or $0.03 per diluted share, during the third quarter of 2004, primarily in our Financial Services segment. The impact on previously reported financial statements was not significant enough to warrant restatement of those financial statements to reflect this change. We consider the FIFO method to be preferable. The effect on net income of utilizing the LIFO method is not significantly different than the results that would be obtained using the FIFO method. Thus, the administrative effort of maintaining LIFO accounting records does not result in improved reporting of our results of operations. Additionally, the recently acquired NEBS

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business (see Note 3) utilizes the FIFO method. This change results in a consistent accounting methodology across the company.

Note 6:   New accounting pronouncement

        In May 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003. This FSP outlines the appropriate accounting treatment for the effects of the new Medicare law, including the required financial statement disclosures, and supersedes the previous guidance issued by the FASB in January 2004. The new Medicare law introduces a prescription drug benefit under Medicare, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare plan. Our retiree medical plans do provide prescription drug coverage which is at least actuarially equivalent to the Medicare plan. Effective April 1, 2004, we have elected to adopt the accounting treatment required by FSP No. FAS 106-2 utilizing the retroactive application method. As a result, our post-retirement benefit expense for the second and third quarters of 2004 reflects the impact of the new Medicare law. This impact is discussed in Note 12, Post-retirement benefits.

Note 7:   Supplementary balance sheet information

        Inventories and supplies – Inventories and supplies were comprised of the following (dollars in thousands):

        Other current assets – Other current assets were comprised of the following (dollars in thousands):

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        Assets held for sale – Assets held for sale relate to three of our Financial Services check printing facilities which were closed in the first half of 2004, as well as one NEBS facility which was closed prior to our acquisition of NEBS (see Note 3). We are actively seeking buyers for these properties and expect to dispose of them within one year from the date they were closed. Based on market research and appraisal information, we believe the fair values of the assets less costs to sell exceed the carrying values of the assets. As such, no impairment loss has been recognized for these assets. Assets held for sale were comprised of the following (dollars in thousands):

        We are currently in the process of closing two additional check printing facilities located in Anniston, Alabama and Dallas, Texas, as well as one NEBS facility located in Tucker, Georgia (see Note 9). We anticipate that these facilities will be closed during the fourth quarter of 2004. The Anniston facility is leased, and thus will not be reported as an asset held for sale. The Dallas and Tucker facilities are owned, and we anticipate selling these facilities once operations at those locations cease. Based on our analysis, no impairment losses have been recognized for these facilities.

        Other non-current assets – Other non-current assets were comprised of the following (dollars in thousands):

        Changes in contract acquisition costs during the first nine months of 2004 were as follows (dollars in thousands):

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        Accrued liabilities – Accrued liabilities were comprised of the following (dollars in thousands):

Note 8:   Earnings per share

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

        During the quarter ended September 30, 2004, options to purchase 1.3 million common shares were outstanding but were not included in the computation of diluted earnings per share. During the nine months ended September 30, 2004, a weighted-average of 1.7 million options were excluded from the calculation. During the quarter and nine months ended September 30, 2003, 1.2 million outstanding options were excluded from the computation. These options were excluded from the calculation of diluted earnings per share because their effect would have been antidilutive.

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Note 9:   Restructuring charges

        2004 restructuring charges – During the third quarter of 2004, we recorded restructuring charges of $2.2 million for severance related to the planned closing of our Financial Services check printing facility located in Dallas, Texas and the previously announced closing of our Direct Checks check printing facility located in Anniston Alabama, as well as various employee reductions primarily within our Financial Services segment. The closing of the Dallas facility is primarily due to the loss of a major financial institution client whose contract expires at the end of 2004. Additionally, cost management is one of our strategic objectives, and we are continually seeking ways to lower our cost structure. We anticipate that the Dallas and Anniston facilities will be closed during the fourth quarter of 2004 and the other employee reductions will be completed during the first half of 2005. The related severance payments will be funded by cash from operations. The restructuring charges include estimated severance benefits for 162 employees. The severance benefits for employees in our Anniston facility were accrued over the second and third quarters of 2004, as they are payable under a one-time severance benefit plan. The other employee reductions are payable under our ongoing severance benefit plan and were accrued in their entirety in the third quarter of 2004. Also during the third quarter of 2004, we reversed $0.1 million of previously recorded restructuring accruals due to fewer employees receiving severance benefits than originally estimated. These restructuring charges and reversals are reflected as cost of goods sold of $1.5 million and SG&A expense of $0.6 million in our consolidated statement of income for the quarter ended September 30, 2004.

        During the first and second quarters of 2004, we recorded restructuring charges of $2.8 million for severance related to the planned closing of our Direct Checks check printing facility located in Anniston, Alabama, as well as reductions within various functional areas within our Direct Checks and Financial Services segments and our corporate support group. The restructuring charges include estimated severance benefits for 309 employees, including the employees in our Anniston, Alabama facility which is expected to close in the fourth quarter of 2004. We expect the other employee reductions to also be substantially completed by the end of the year. Also during the first and second quarters of 2004, we reversed $1.1 million of previously recorded restructuring accruals due to fewer employees receiving severance benefits than originally estimated. The restructuring charges and reversals recorded during 2004 are reflected as cost of goods sold of $1.6 million and SG&A expense of $2.2 million in our consolidated statement of income for the nine months ended September 30, 2004.

        2003 restructuring charges – During the third quarter of 2003, we recorded restructuring charges of $1.5 million for employee severance related to reductions in SG&A employees within the Financial Services segment. These reductions were the result of our continuous efforts to manage costs. The restructuring charges included estimated severance payments for 48 employees, which were payable under our on-going severance benefit plan. These severance payments were substantially completed during the first half of 2004, utilizing cash from operations. The restructuring charges are reflected as SG&A expense in our consolidated statement of income for the quarter ended September 30, 2003.

        During the second quarter of 2003, we recorded restructuring charges of $1.3 million for employee severance related to the closing of our Financial Services check printing facility located in Indianapolis, Indiana. This facility was closed during the first quarter of 2004. The restructuring charges reflected severance payments for 136 employees, which were payable under our ongoing severance benefit plan. These payments were substantially completed in the third quarter of 2004, utilizing cash from operations. The 2003 restructuring charges are reflected as cost of goods sold of $1.3 million and SG&A expense of $1.5 million in our consolidated statement of income for the nine months ended September 30, 2003.

        Acquisition-related restructuring – As a result of the NEBS acquisition on June 25, 2004 (see Note 3), we assumed restructuring accruals of $1.3 million related to NEBS facility closings which were completed prior to the acquisition. Employee severance payments related to these facility closings are expected to be substantially completed by the end of 2004, utilizing cash from operations. Additionally, as a result of the acquisition, we recorded restructuring accruals of $20.5 million related to activities of NEBS which will be exited as we combine the two companies and execute a shared services model for both manufacturing and certain SG&A functions. These accruals include severance payments for 283 employees in information services, sales, finance and human resources, as well as employees of NEBS Tucker, Georgia printing facility which we expect to close during the fourth quarter of 2004. This amount also includes payments due to certain NEBS executives under change of control provisions included in their employment agreements, as we eliminate redundancies between the two companies. The related payments are expected

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to be substantially completed by the end of 2005, utilizing cash from operations. As these accruals were included in the liabilities recorded upon acquisition, they are not reflected in our consolidated statements of income.

        Restructuring accruals for employee severance costs of $18.4 million as of September 30, 2004 and $10.7 million as of December 31, 2003 are reflected in accrued liabilities in the consolidated balance sheets. Our restructuring accruals as of December 31, 2003, related to the closing of three Financial Services check printing facilities and other employee reductions within Financial Services and our corporate support group. All three of the check printing facilities have been closed. The other employee reductions were substantially completed during the first quarter of 2004.

        Changes in the restructuring accruals during the first nine months of 2004 were as follows (dollars in thousands):

        On a cumulative basis through September 30, 2004, the status of our restructuring accruals was as follows (dollars in thousands):

        In addition to severance costs, we also incur costs related to the closing of our Financial Services and Direct Checks check printing facilities such as equipment moves, training and travel. These costs are expensed as incurred, primarily as cost of goods sold, and are expected to total approximately $2 million. Of this amount, $1.1 million was expensed in the first nine months of 2004 and $0.3 million was expensed in 2003. The majority of the remaining expenses will be recognized in the fourth quarter of 2004 as we complete the closure of these facilities.

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Note 10:   Debt

        Total debt outstanding was comprised of the following (dollars in thousands):

        Our short-term debt consisted of outstanding commercial paper. During the third quarter of 2004, we increased the amount of our commercial paper program from $500.0 million to $1.0 billion and utilized commercial paper to pay-off the bridge financing agreement put in place to complete the acquisition of NEBS (see Note 2). During October 2004, the bridge financing agreement was canceled and we reduced our commercial paper program back to $500.0 million. The daily average amount outstanding under the bridge financing agreement during the first nine months of 2004 was $83.2 million at a weighted-average interest rate of 2.07%. The daily average amount of commercial paper outstanding during the first nine months of 2004 was $361.2 million at a weighted-average interest rate of 1.45%. As of September 30, 2004, $914.3 million was outstanding at a weighted-average interest rate of 1.89%. The daily average amount of commercial paper outstanding during 2003 was $149.4 million at a weighted-average interest rate of 1.15%. As of December 31, 2003, $213.3 million was outstanding at a weighted-average interest rate of 1.11%.

        On October 1, 2004, we issued $600.0 million of long-term notes via a private placement under Rule 144A of the Securities Act of 1933. The net proceeds from this debt of $595.6 million were utilized to pay outstanding commercial paper. As such, $595.6 million of commercial paper debt is presented as long-term debt in our consolidated balance sheet as of September 30, 2004. We issued $325.0 million of senior, unsecured notes which mature on October 1, 2007 and have a coupon rate of 3.5%. We also issued $275.0 million of senior, unsecured notes which mature on October 1, 2014 and have a coupon rate of 5.125%. The notes include covenants that place restrictions on the issuance of debt that would be senior to the notes and the execution of certain sale-leaseback arrangements. We have agreed to file a registration statement with the Securities and Exchange Commission relating to an exchange offer for the notes, or under certain circumstances, to file a shelf registration statement for the notes.

        We also have committed lines of credit which primarily support our commercial paper program. We have a 364-day line of credit for $100.0 million which expires in July 2005 and carries a commitment fee of ten basis points (.10%). We also have two five-year lines of credit. One five-year line of credit is for $175.0 million and expires in August 2007. The other line of credit is for $225.0 million and expires in July 2009. Both five-year lines of credit carry commitment fees of 12.5 basis points (.125%). The credit agreements governing the lines of credit contain customary covenants regarding the ratio of earnings before interest and taxes (EBIT) to interest expense and levels of subsidiary indebtedness. No amounts were drawn on these lines of credit during the first nine months of 2004 or during 2003, and no amounts were outstanding under these lines of credit as of September 30, 2004. To the extent not needed to support outstanding commercial

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paper or letters of credit, we may borrow funds under our lines of credit. As of September 30, 2004, $131.8 million was available under our committed lines of credit for borrowing or for support of additional commercial paper.

        We also have an uncommitted bank line of credit for $50.0 million available at variable interest rates. No amounts were drawn on this line of credit during the first nine months of 2004 or during 2003, and no amounts were outstanding under this line of credit as of September 30, 2004.

        In December 2002, we issued $300.0 million of senior, unsecured notes which mature in December 2012 and have a coupon rate of 5.0%. The notes include covenants that place restrictions on the issuance of debt that would be senior to the notes and the execution of certain sale-leaseback arrangements. The fair value of these notes was estimated to be $299.2 million as of September 30, 2004, based on quoted market rates.

        On April 30, 2003, we filed a Form S-3 shelf registration statement with the Securities and Exchange Commission. This shelf registration allows for the issuance of debt securities, from time to time, up to an aggregate of $500.0 million. The shelf registration statement became effective on July 8, 2003. In September 2003, we issued $50.0 million of medium-term notes. These notes mature in September 2006 and have a coupon rate of 2.75%. The fair value of these notes was estimated to be $49.5 million as of September 30, 2004, based on quoted market rates. In November 2003, we issued $25.0 million of medium-term notes which mature in November 2005 and have an interest rate equal to the 3-month London InterBank Offered Rate (LIBOR) plus .05%. This interest rate is reset on a quarterly basis. The fair value of these notes was estimated to be $25.0 million as of September 30, 2004, based on a broker quote.

Note 11:   Derivative financial instruments

        During 2004, we entered into $450.0 million of forward starting interest rate swaps to hedge, or lock-in, the interest rate on a portion of the $600.0 million debt we issued in October 2004 (see Note 10). We terminated these agreements on September 28, 2004, yielding a deferred pre-tax loss of $23.6 million. This loss is reflected, net of tax, in accumulated other comprehensive loss in our consolidated balance sheet as of September 30, 2004 and will be reclassified ratably to our statements of income as an increase to interest expense over the term of the related debt.

Note 12:   Post-retirement and benefits

        We have historically provided certain health care benefits for a large number of retired employees. As discussed in Note 6, our retiree medical plan provides prescription drug coverage which is at least actuarially equivalent to the Medicare law enacted in December 2003. Our post-retirement benefit expense for the second and third quarters of 2004 reflects the impact of the new Medicare law, utilizing the retroactive application method outlined in FSP No. FAS 106-2. In accordance with this accounting guidance, we completed a re-measurement of our plan assets and liabilities as of December 31, 2003. The federal subsidy provided for under the new Medicare law resulted in a $9.5 million reduction in our accumulated post-retirement benefit obligation as of December 31, 2003 and resulted in a $0.7 million reduction in our post-retirement benefit expense for the nine months ended September 30, 2004.

        As discussed in Note 3, we acquired NEBS on June 25, 2004. NEBS sponsors a plan which provides post-retirement health and dental care benefits for officers and health and insurance benefits for certain employees of two NEBS subsidiaries, Safeguard Business Systems, Inc. and PremiumWear, Inc. As of the date of acquisition, the plan’s accumulated post-retirement benefit obligation was $2.7 million.

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        Our post-retirement benefit expense for the quarters and nine months ended September 30, 2004 and 2003 consisted of the following components (dollars in thousands):

        We have invested assets in a trust established under section 401(h) of the Internal Revenue Code to partially fund our post-retirement benefit obligation. We are not contractually obligated to make contributions to this trust, and we do not anticipate making any such contributions during 2004. However, we do anticipate that we will pay benefits of $9.6 million during 2004 utilizing the assets of our VEBA trust which are available to fund employee and retiree medical and severance benefits.

        NEBS has a supplemental executive retirement plan (SERP) and a pension plan which covers certain Canadian employees. As of the date of our acquisition of NEBS, the projected benefit obligation for these plans was $14.2 million. Pension expense for the quarter and nine months ended September 30, 2004 consisted of the following components (dollars in thousands):

        Prior to our acquisition of NEBS, the SERP was unfunded and the Canadian pension plan was partially funded. During the third quarter of 2004, we fully funded the SERP obligation with investments in company-owned life insurance policies. The cash surrender value of these policies is included in long-term investments in the consolidated balance sheet as of September 30, 2004 and totals $9.5 million. Also during the third quarter of 2004, we made cash contributions of $0.9 million to the Canadian plan. We plan to contribute additional cash of $0.5 million to this plan during the fourth quarter of 2004.

Note 13:   eFunds indemnification

        In connection with the spin-off of our former eFunds segment on December 29, 2000, we agreed to indemnify eFunds for future losses arising from any litigation based on the conduct of eFunds’ electronic benefits transfer and medical eligibility verification business prior to eFunds’ initial public offering in June 2000, and for certain future losses on identified loss contracts in excess of eFunds’ accrual for contract losses as of April 30, 2000. The maximum contractual amount of litigation and contract losses for which we would indemnify eFunds is $14.6 million. This agreement remains in effect until one year after the termination of the identified loss contracts or until all disputes have been settled. All identified loss contracts are scheduled to expire by 2006. Through September 30, 2004, no amounts have been paid or claimed under

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this indemnification agreement. This obligation is not reflected in the consolidated balance sheets, as it is not probable that any payment will occur.

Note 14:   Shareholders’ deficit

        Shareholders’ deficit decreased from $298.1 million as of December 31, 2003 to $213.8 million as of September 30, 2004. We are in a deficit position primarily due to our share repurchase programs. Share repurchases are reflected as reductions of shareholders’ equity in the consolidated balance sheets. Under the laws of Minnesota, our state of incorporation, shares which we repurchase are considered to be authorized and unissued shares. Thus, share repurchases are not presented as a separate treasury stock caption in our consolidated balance sheets, but are recorded as direct reductions of additional paid-in capital and retained earnings.

        In January 2001, our board of directors approved a plan to purchase up to 14 million shares of our common stock. These repurchases were completed in June 2002 at a cost of $463.8 million. In August 2002, our board of directors approved the repurchase of an additional 12 million shares. These repurchases were completed in September 2003 at a cost of $503.2 million. In August 2003, the board authorized the repurchase of up to 10 million additional shares of our common stock. Through September 30, 2004, 2.1 million of these additional shares had been repurchased at a cost of $85.0 million.

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        Changes in shareholders’ deficit during the first nine months of 2004 were as follows (dollars and shares in thousands):

Note 15:   Business segment information

        Prior to the acquisition of NEBS (see Note 3), we operated three business segments: Financial Services, Direct Checks and Business Services. Financial Services sells checks, related products and check merchandising services to financial institutions. Direct Checks sells checks and related products directly to consumers through direct mail and the Internet. Business Services sells checks, forms and related products to small businesses and home offices through financial institution referrals, business alliances and via direct mail and the Internet. All three of these segments operate only in the United States. We have not yet completed our evaluation as to how NEBS various lines of business will be incorporated into our reportable business segments. Until this evaluation is completed, we will manage and monitor NEBS as a separate segment. NEBS operates primarily in the United States, but also has operations in Canada, the United Kingdom and France.

        The accounting policies of the segments are the same as those described in the summary of significant accounting policies as presented in the notes to consolidated financial statements included in our

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Annual Report on Form 10-K for the year ended December 31, 2003. Corporate expenses are allocated to three of our segments based on segment revenues. No corporate expenses are allocated to NEBS, as their operations have not yet been integrated into our corporate functions. The corporate allocation includes expenses for various support activities such as executive management, human resources and finance and includes depreciation and amortization expense related to corporate assets. The corresponding corporate asset balances are not allocated to the segments. Corporate assets consist primarily of cash, deferred tax assets, investments and internal-use software related to corporate activities.

        We are an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations and the sharing of assets. Therefore, we do not represent that these segments, if operated independently, would report the operating income and other financial information shown.

        The following is our segment information as of and for the quarters ended September 30, 2004 and 2003 (dollars in thousands):

        The following is our segment information as of and for the nine months ended September 30, 2004 and 2003 (dollars in thousands):