DELUXE CORP - 10-Q Quarterly Report

	June 30, 2002			December 31, 2001
	Unaudited
	(dollars in thousands, except share par value)
Current Assets:
Cash and cash equivalents	$	5,195		$	9,571
Trade accounts receivable (net of allowance for doubtful accounts of $1,790 and $1,428, respectively)		48,171			37,703
Inventories		10,601			11,192
Supplies		10,710			11,071
Deferred income taxes		4,574			4,574
Prepaid expenses		20,227			3,108
Other current assets		3,684			6,753

Total current assets		103,162			83,972
Long-term Investments		41,291			37,661
Property, Plant and Equipment (net of accumulated depreciation of $291,329 and $293,413, respectively)		141,808			149,552
Property, Plant and Equipment Held for Sale (net of accumulated depreciation of $6,136)		1,517			1,517
Intangibles (net of accumulated amortization of $119,125 and $102,149, respectively)		110,221			114,856
Goodwill		82,237			82,237
Other Non-current Assets		69,795			67,926

Total assets	$	550,031		$	537,721

Current Liabilities:
Accounts payable	$	45,566		$	52,834
Accrued liabilities:
Wages, including vacation pay		28,933			26,513
Employee profit sharing and pension		14,955			29,734
Accrued income taxes		57,736			39,426
Accrued rebates		25,429			24,923
Other		40,094			42,313
Short-term debt		191,550			150,000
Long-term debt due within one year		1,503			1,381

Total current liabilities		405,766			367,124
Long-term Debt		9,296			10,084
Deferred Income Taxes		44,890			44,890
Other Long-term Liabilities		35,357			37,018
Shareholders’ Equity:
Common shares $1 par value (authorized: 500,000,000 shares; issued: 2002—62,449,131; 2001— 64,101,957)		62,449			64,102
Retained (deficit) earnings		(7,685	)		14,563
Unearned compensation		(42	)		(60	)

Total shareholders’ equity		54,722			78,605

Total liabilities and shareholders’ equity	$	550,031		$	537,721

	Unaudited Quarter Ended June 30,						Unaudited Six Months Ended June 30,
	2002			2001			2002			2001
	(dollars in thousands, except per share amounts)
Revenue	$	328,463		$	318,635		$	657,371		$	635,317
Cost of goods sold		110,560			112,991			223,655			230,177

Gross Profit		217,903			205,644			433,716			405,140
Selling, general and administrative expense		129,595			131,440			256,990			261,916
Goodwill amortization expense		—			1,547			—			3,094
Asset impairment and disposition losses (gains)		31			793			(710	)		27

Operating Income		88,277			71,864			177,436			140,103
Interest expense		(1,173	)		(1,456	)		(2,094	)		(3,073	)
Interest income		125			837			262			1,967
Other income (expense)		983			(279	)		659			(42	)

Income Before Income Taxes		88,212			70,966			176,263			138,955
Provision for income taxes		33,503			26,654			66,998			52,164

Net Income	$	54,709		$	44,312		$	109,265		$	86,791

Earnings per Share: Basic	$	0.87		$	0.64		$	1.72		$	1.23
Diluted	$	0.85		$	0.63		$	1.69		$	1.22

Cash Dividends per Share	$	0.37		$	0.37		$	0.74		$	0.74

Total Comprehensive Income	$	54,709		$	44,293		$	109,265		$	86,882

	Unaudited Six Months Ended June 30,
	2002			2001
	(dollars in thousands)
Cash Flows from Operating Activities:
Net income	$	109,265		$	86,791
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		12,251			16,841
Amortization of intangibles and goodwill		17,022			22,977
Asset impairment and disposition losses (gains)		(710	)		27
Other non-cash items, net		8,734			4,965
Changes in assets and liabilities:
Trade accounts receivable		(10,468	)		(713	)
Inventories and supplies		952			526
Prepaid expenses		(16,378	)		(527	)
Accounts payable		(2,864	)		3,979
Accrued liabilities		1,715			(14,759	)
Other assets and liabilities		1,839			(28,786	)

Net cash provided by operating activities		121,358			91,321

Cash Flows from Investing Activities:
Proceeds from sales of marketable securities		—			37,990
Purchases of marketable securities		—			(30,000	)
Proceeds from sales of capital assets		85			1,435
Purchases of capital assets		(17,199	)		(17,102	)
Other		(4,349	)		(4,571	)

Net cash used by investing activities		(21,463	)		(12,248	)

Cash Flows from Financing Activities:
Net borrowings on short-term debt		41,550			116,200
Payments on long-term debt		(667	)		(100,675	)
Change in book overdrafts		(4,404	)		(2,407	)
Payments to retire shares		(118,377	)		(122,487	)
Proceeds from issuing shares under employee plans		24,705			8,268
Cash dividends paid to shareholders		(47,078	)		(52,563	)

Net cash used by financing activities		(104,271	)		(153,664	)

Net Decrease in Cash and Cash Equivalents		(4,376	)		(74,591	)
Cash and Cash Equivalents: Beginning of Period		9,571			80,732

End of Period	$	5,195		$	6,141

1. The condensed consolidated balance sheet as of June 30, 2002, the condensed consolidated statements of income for the quarters and six months ended June 30, 2002 and 2001 and the condensed consolidated statements of cash flows for the six months ended June 30, 2002 and 2001 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements are included. Other than any discussed in the notes below, such adjustments consist only of normal recurring items. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements and notes are presented in accordance with instructions for Form 10-Q, and do not contain certain information included in the 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, 2001.

2. On January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, in its entirety. This statement addresses accounting and financial reporting for goodwill and intangible assets. Under the new statement, goodwill and intangible assets with indefinite lives are no longer amortized, but are subject to impairment testing on at least an annual basis. Other than goodwill, we have no intangible assets with indefinite lives. Adoption of this statement resulted in no goodwill impairment losses and had no impact on our financial position as of January 1, 2002. In addition, the remaining useful lives of amortizable intangible assets were reviewed and deemed appropriate. The following pro forma information reflects our results of operations as they would have appeared had we not recorded goodwill amortization and its related tax effects during 2001 (dollars in thousands, except per share amounts):

	Quarter Ended June 30, 2001		Six Months Ended June 30, 2001
Reported net income	$	44,312	$	86,791
Add back: goodwill amortization, net of tax		995		1,990

Adjusted net income	$	45,307	$	88,781

Reported basic earnings per share	$	0.64	$	1.23
Add back: goodwill amortization, net of tax		0.01		0.03

Adjusted basic earnings per share	$	0.65	$	1.26

Reported diluted earnings per share	$	0.63	$	1.22
Add back: goodwill amortization, net of tax		0.02		0.03

Adjusted diluted earnings per share	$	0.65	$	1.25

	June 30, 2002							December 31, 2001
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Internal-use software	$	223,587	$	(117,141	)	$	106,446	$	211,193	$	(100,557	)	$	110,636
Customer name list		5,050		(1,683	)		3,367		5,050		(1,323	)		3,727
Other		709		(301	)		408		762		(269	)		493

Total	$	229,346	$	(119,125	)	$	110,221	$	217,005	$	(102,149	)	$	114,856

Total amortization expense related to intangibles was $8.5 million for the quarter ended June 30, 2002, $10.5 million for the quarter ended June 30, 2001, $17.0 million for the six months ended June 30, 2002 and $19.9 million for the six months ended June 30, 2001. Based on the intangibles in service as of June 30, 2002, estimated amortization expense for each of the next five years ending December 31 is as follows (dollars in thousands):

Goodwill—The entire amount of goodwill is included in the Direct Checks segment. As of June 30, 2002 and December 31, 2001, its gross carrying amount was $96.8 million and accumulated amortization was $14.6 million, resulting in a net carrying amount of $82.2 million. Total amortization expense related to goodwill was $1.5 million for the quarter ended June 30, 2001 and $3.1 million for the six months ended June 30, 2001.

We evaluate the carrying value of goodwill on an annual basis and when events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit to which the goodwill is assigned below its carrying amount. Such circumstances could include, but are not limited to, (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, (3) a loss of key personnel, or (4) an adverse action or assessment by a regulator.

When evaluating whether goodwill is impaired, we compare the fair value of the reporting unit to which the goodwill is assigned to its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill with its carrying amount. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.

3. In July 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement addresses the financial accounting and reporting for costs associated with exit or disposal activities, including costs to terminate contracts that are not capital leases, costs to consolidate facilities or relocate employees and one-time termination benefits provided to employees who are involuntarily terminated. We must adopt this statement by January 1, 2003. The adoption of this statement will have no impact on our results of operations or financial position, as it applies only to exit or disposal activities initiated on or after the date of adoption.

	Quarter Ended June 30,				Six Months Ended June 30,
	2002		2001		2002		2001
Earnings per share-basic:
Net income	$	54,709	$	44,312	$	109,265	$	86,791
Weighted average shares outstanding		63,204		69,605		63,623		70,644

Earnings per share-basic	$	0.87	$	0.64	$	1.72	$	1.23

Earnings per share-diluted:
Net income	$	54,709	$	44,312	$	109,265	$	86,791
Weighted average shares outstanding		63,204		69,605		63,623		70,644
Dilutive impact of options		875		506		948		336
Shares contingently issuable		30		36		21		24

Weighted average shares and potential dilutive shares outstanding		64,109		70,147		64,592		71,004

Earnings per share-diluted	$	0.85	$	0.63	$	1.69	$	1.22

During the quarters ended June 30, 2002 and 2001, options to purchase 1.2 million and 1.4 million common shares, respectively, were outstanding but were not included in the computation of diluted earnings per share. During the six months ended June 30, 2002 and 2001, options to purchase a weighted-average of 1.2 million and 2.7 million common shares, respectively, were outstanding but were not included in the computation of diluted earnings per share. The exercise prices of the excluded options were greater than the average market price of Deluxe’s common shares during the respective periods.

8. Restructuring accruals for employee severance costs of $0.9 million as of June 30, 2002 and $3.2 million as of December 31, 2001 are reflected in other accrued liabilities in the consolidated balance sheets. These accruals relate to charges recorded in 2001 for various reductions across all segments. Charges of $0.6 million are reflected in selling, general and administrative expense in the consolidated statements of income for the quarter and six months ended June 30, 2001. The remaining severance payments are expected to be made in 2002. The status of these accruals as of June 30, 2002 was as follows (dollars in millions):

9. As of June 30, 2002, we had a committed line of credit for $350.0 million available for borrowing and as support for our $300.0 million commercial paper program. No amounts were drawn on this line during the first six months of 2002 or during 2001 and as of June 30, 2002 and December 31, 2001, no amounts were outstanding under this line of credit. This line of credit expires on August 22, 2002, and we are currently negotiating a replacement line or lines of credit. The average amount of commercial paper outstanding during the first six months of 2002 was $158.4 million at a weighted-average interest rate of 1.83%. As of June 30, 2002, $191.6 million was outstanding at a weighted-average interest rate of 1.89%. The average amount of commercial paper outstanding during 2001 was $90.9 million at a weighted-average interest rate of 3.37%. As of December 31, 2001, $150.0 million was outstanding at a weighted-average interest rate of 1.85%.

As of June 30, 2002, we also had an uncommitted bank line of credit for $50.0 million available at variable interest rates. No amounts were drawn on this line during the first six months of 2002. The average amount drawn on this line of credit during 2001 was $1.3 million at a weighted-average interest rate of 4.26%. As of June 30, 2002 and December 31, 2001, no amounts were outstanding under this line of credit.

10. In connection with the spin-off of eFunds Corporation (eFunds) 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. The maximum contractual amount of litigation and contract losses for which we will indemnify eFunds is $14.6 million. Through June 30, 2002, no amounts have been paid or claimed under this indemnification agreement. This obligation is not reflected in the consolidated balance sheet, as it is not probable at this time that any payment will occur.

11. In January 2001, our board of directors approved a plan to purchase up to 14 million shares of our common stock. As of June 30, 2002, all 14 million shares had been repurchased at a total cost of $463.8 million. Primarily as a result of the required accounting treatment for these share repurchases, shareholders’ equity decreased from $262.8 million as of December 31, 2000 to $54.7 million as of June 30, 2002, and we were in a retained deficit position as of June 30, 2002. Changes in shareholders’ equity during the first six months of 2002 were as follows (dollars in thousands):

	Common shares			Additional paid-in capital			Retained (deficit) earnings			Unearned compensation			Total
Balance, December 31, 2001	$	64,102		$	—		$	14,563		$	(60	)	$	78,605
Net income		—			—			109,265			—			109,265
Cash dividends		—			—			(47,078	)		—			(47,078	)
Common shares issued		1,026			24,359			—			—			25,385
Tax benefit of stock option plans		—			7,383			—			—			7,383
Common shares repurchased		(2,668	)		(31,274	)		(84,435	)		—			(118,377	)
Other common shares retired		(11	)		(468	)		—			—			(479	)
Unearned compensation		—			—			—			18			18

Balance, June 30, 2002	$	62,449		$	—		$	(7,685	)	$	(42	)	$	54,722

12. We operate three business segments: Financial Services, Direct Checks and Business Services. Financial Services sells checks and related products and services on behalf of 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 on behalf of financial institutions and directly to customers via direct mail and the Internet. All three segments operate only in the United States.

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 the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2001. Corporate expenses are allocated to the segments based on segment revenues. This allocation includes expenses for various support functions such as executive management, human resources and finance and includes depreciation and amortization expense related to corporate assets. The corresponding corporate asset balances are not allocated to the segments. Corporate assets consist primarily of cash, investments and deferred tax assets relating to corporate activities.

	Reportable Business Segments
	Financial Services		Direct Checks		Business Services		Corporate		Consolidated
Revenue from external customers:
2002	$	196,595	$	79,882	$	51,986	$	—	$	328,463
2001		194,052		74,997		49,586		—		318,635
Operating income:
2002		52,455		21,061		14,761		—		88,277
2001		42,524		16,090		13,250		—		71,864
Depreciation and amortization expense:
2002		11,535		1,974		1,111		—		14,620
2001		16,029		4,172		1,629		—		21,830
Total assets:
2002		283,816		144,770		31,910		89,535		550,031
2001		299,415		145,567		37,184		99,228		581,394
Capital purchases:
2002		5,950		1,421		461		296		8,128
2001		4,949		1,835		546		82		7,412

	Reportable Business Segments
	Financial Services		Direct Checks		Business Services		Corporate		Consolidated
Revenue from external customers:
2002	$	388,884	$	160,755	$	107,732	$	—	$	657,371
2001		381,109		155,138		99,070		—		635,317
Operating income:
2002		100,816		43,139		33,481		—		177,436
2001		76,666		36,526		26,911		—		140,103
Depreciation and amortization expense:
2002		23,159		3,858		2,256		—		29,273
2001		29,201		7,819		2,798		—		39,818
Total assets:
2002		283,816		144,770		31,910		89,535		550,031
2001		299,415		145,567		37,184		99,228		581,394
Capital purchases:
2002		13,644		2,476		712		367		17,199
2001		12,018		3,629		1,343		112		17,102

13. In August 2002, our board of directors approved a plan to repurchase up to 12 million shares of our common stock. No timeframe has been outlined for the completion of this plan. Additionally, the board approved a financial strategy intended to increase leverage. We plan to increase our debt level up to a maximum of $700 million. The additional debt would be a combination of both long-term and short-term borrowings.

We operate three business segments: Financial Services, Direct Checks and Business Services. Financial Services sells checks and related products and services on behalf of 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 on behalf of financial institutions and directly to customers via direct mail and the Internet. All three segments operate only in the United States.

	Quarter Ended June 30,
	2002				2001
	$		% of Revenue		$		% of Revenue
Revenue from external customers:
Financial Services	$	196,595	—		$	194,052	—
Direct Checks		79,882	—			74,997	—
Business Services		51,986	—			49,586	—

Total	$	328,463	—		$	318,635	—


Gross profit		217,903	66.3	%		205,644	64.5	%
Selling, general and administrative expense		129,595	39.5	%		131,440	41.3	%
Other operating expense (income)¹		31	—			2,340	0.7	%

Operating income:
Financial Services		52,455	26.7	%	$	42,524	21.9	%
Direct Checks		21,061	26.4	%		16,090	21.5	%
Business Services		14,761	28.4	%		13,250	26.7	%

Total	$	88,277	26.9	%	$	71,864	22.6	%

Revenue—Revenue increased $9.9 million, or 3.1%, to $328.5 million for the second quarter of 2002 from $318.6 million for the second quarter of 2001. Revenue per unit was up 4.5% as compared to 2001 due to a $5.0 million contract buyout for the Financial Services segment in the second quarter of 2002, price increases in all three segments plus continued strength in selling licensed designs and services. Excluding the contract buyout, revenue per unit was up 2.9% compared to 2001. Partially offsetting the increase in revenue per unit, was a 1.4% decrease in unit volume. The decline was primarily due to lower financial institution conversion activity during 2002, as bank mergers and acquisitions were down from 2001.

Gross profit—Gross profit increased $12.3 million, or 6.0%, to $217.9 million for the second quarter of 2002 from $205.6 million for the second quarter of 2001. As a percentage of revenue, gross margin increased to 66.3% for the second quarter of 2002 from 64.5% for the second quarter of 2001. The increase was due to the higher revenue per unit discussed above and continued focus on cost reductions and productivity improvements, including the conversion to lean and cellular manufacturing concepts in our Financial Services check printing plants.

Selling, general and administrative (SG&A) expense—SG&A expense decreased $1.8 million, or 1.4%, to $129.6 million for the second quarter of 2002 from $131.4 million for the second quarter of 2001. As a percentage of revenue, SG&A expense decreased to 39.5% for the second quarter of 2002 from 41.3% for the second quarter of 2001. The improvement was primarily due to increased electronic and Internet orders across all businesses, lower depreciation and amortization expense as a result of reductions in capital purchases in recent years, as well as on-going cost management efforts, including productivity improvements within our call centers. Partially offsetting these decreases was an increase in advertising costs due to lower direct mail response rates within the Direct Checks segment.

Interest expense—Interest expense decreased $0.3 million to $1.2 million for the second quarter of 2002 from $1.5 million for the second quarter of 2001. The decrease was due to lower interest rates partially offset by higher debt levels. During the second quarter of 2002, we had weighted-average debt outstanding of $179.7 million at a weighted-average interest rate of 1.82%. During the second quarter of 2001, we had weighted-average debt outstanding of $90.1 million at a weighted-average interest rate of 4.43%.

Net income—Net income increased $10.4 million, or 23.5%, to $54.7 million for the second quarter of 2002 from $44.3 million for the second quarter of 2001. The improvement was due to the increases in revenue and gross profit and the reductions in SG&A expense discussed above. The $5.0 million contract buyout discussed above contributed $3.1 million to 2002 net income. Also contributing to the improvement was the change in accounting for goodwill required under Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. Under this new statement, goodwill and intangible assets with indefinite lives are no longer amortized, but are subject to impairment testing on at least an annual basis. Adoption of this statement resulted in a $1.0 million increase in net income compared to the second quarter of 2001.

Diluted earnings per share—Diluted earnings per share increased $0.22, or 34.9%, to $0.85 for the second quarter of 2002 from $0.63 for the second quarter of 2001. In addition to the increases in net income discussed above, average shares outstanding decreased from 2001 due to our share repurchase program. In January 2001, our board of directors approved the repurchase of up to 14 million shares of our common stock. As of June 30, 2002, all 14 million shares had been repurchased. The change in average shares outstanding resulting from the share repurchases, partially offset by the impact of shares issued under employee stock purchase and incentive plans, resulted in a $0.07 increase in earnings per share for the second quarter of 2002 as compared to 2001.

As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, we continue to account for employee stock-based compensation in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, our results of operations do not include compensation expense for fixed stock options issued under our stock incentive plan. Had this expense been included in our results, diluted earnings per share would have been $0.01 lower for each of the quarters ended June 30, 2002 and 2001. This pro forma impact of stock-based compensation was calculated under a methodology consistent with that disclosed in the footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2001.

	Six Months Ended June 30,
	2002					2001
	$			% of Revenue		$		% of Revenue
Revenue from external customers:
Financial Services	$	388,884		—		$	381,109	—
Direct Checks		160,755		—			155,138	—
Business Services		107,732		—			99,070	—

Total	$	657,371		—		$	635,317	—


Gross profit		433,716		66.0	%		405,140	63.8	%
Selling, general and administrative expense		256,990		39.1	%		261,916	41.2	%
Other operating expense (income)¹		(710	)	(0.1	%)		3,121	0.5	%

Operating income:
Financial Services		100,816		25.9	%	$	76,666	20.1	%
Direct Checks		43,139		26.8	%		36,526	23.5	%
Business Services		33,481		31.1	%		26,911	27.2	%

Total	$	177,436		27.0	%	$	140,103	22.1	%

Revenue—Revenue increased $22.1 million, or 3.5%, to $657.4 million for the first six months of 2002 from $635.3 million for the first six months of 2001. Revenue per unit was up 4.0% as compared to 2001 due to price increases in all three segments, a $5.0 million contract buyout for the Financial Services segment in the second quarter of 2002 plus continued strength in selling licensed designs and services. Excluding the contract buyout, revenue per unit was up 3.2% compared to 2001. Partially offsetting the increase in revenue per unit, was a 0.5% decrease in unit volume. The decline was due to lower financial institution conversion activity during

Gross profit—Gross profit increased $28.6 million, or 7.1%, to $433.7 million for the first six months of 2002 from $405.1 million for the first six months of 2001. As a percentage of revenue, gross margin increased to 66.0% for the first half of 2002 from 63.8% for the first half of 2001. The increase was due to the higher revenue per unit discussed above and continued focus on cost reductions, productivity improvements and reduced spoilage, including the conversion to lean and cellular manufacturing concepts in our Financial Services check printing plants.

Selling, general and administrative (SG&A) expense—SG&A expense decreased $4.9 million, or 1.9%, to $257.0 million for the first six months of 2002 from $261.9 million for the first six months of 2001. As a percentage of revenue, SG&A expense decreased to 39.1% for the first half of 2002 from 41.2% for the first half of 2001. The improvement was primarily due to increased electronic and Internet orders across all businesses, lower depreciation and amortization expense as a result of reductions in capital purchases in recent years, as well as on-going cost management efforts, including productivity improvements within our call centers. Partially offsetting these decreases was an increase in advertising costs due to lower direct mail response rates within the Direct Checks segment.

Interest expense—Interest expense decreased $1.0 million to $2.1 million for the first six months of 2002 from $3.1 million for the first six months of 2001. The decrease was due to lower interest rates partially offset by higher debt levels. During the first half of 2002, we had weighted-average debt outstanding of $158.4 million at a weighted-average interest rate of 1.83%. During the first half of 2001, we had weighted-average debt outstanding of $84.0 million at a weighted-average interest rate of 5.80%. In February 2001, we paid off $100.0 million of unsecured and unsubordinated notes, which carried interest at 8.55%.

Net income—Net income increased $22.5 million, or 25.9%, to $109.3 million for the first six months of 2002 from $86.8 million for the first six months of 2001. The improvement was due to the increases in revenue and gross profit and the reductions in SG&A expense discussed above. The $5.0 million contract buyout discussed above contributed $3.1 million to 2002 net income. Also contributing to the improvement was the change in accounting for goodwill explained above in the discussion of second quarter net income. This change resulted in a $2.0 million increase in net income compared to the first six months of 2001.

Diluted earnings per share—Diluted earnings per share increased $0.47, or 38.5%, to $1.69 for the first six months of 2002 from $1.22 for the first six months of 2001. In addition to the increases in net income discussed above, average shares outstanding decreased from 2001 due to our share repurchase program. In January 2001, our board of directors approved the repurchase of up to 14 million shares of our common stock. As of June 30, 2002, all 14 million shares had been repurchased. The change in average shares outstanding resulting from the share repurchases, partially offset by the impact of shares issued under employee stock purchase and incentive plans, resulted in a $0.15 increase in earnings per share for the first six months of 2002 as compared to 2001.

As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, we continue to account for employee stock-based compensation in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, our results of operations do not include compensation expense for fixed stock options issued under our stock incentive plan. Had this expense been included in our results, diluted earnings per share would have been $0.02 lower for each of the six month periods ended June 30, 2002 and 2001. This pro forma impact of stock-based compensation was calculated under a methodology consistent with that disclosed in the footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2001.

Financial Services segment—Our Financial Services segment sells checks, related products and program management services on behalf of financial institutions. Additionally, we offer enhanced services to our financial institution clients, such as customized reporting, file management, expedited account conversion support, fraud prevention and check merchandising. The following table shows the results of this segment for the quarters and six months ended June 30, 2002 and 2001 (dollars in thousands):

Financial Services revenue increased $2.5 million, or 1.3%, to $196.6 million for the second quarter of 2002 from $194.1 million for the second quarter of 2001. The improvement was due to a $5.0 million contract buyout in the second quarter of 2002, price increases and increased sales of licensed designs, partially offset by lower volume due to less financial institution conversion activity during 2002. Operating income increased $10.0 million, or 23.4%, to $52.5 million for the second quarter of 2002 from $42.5 million for the second quarter of 2001. The improvement was due to the revenue increase, lower depreciation and amortization as a result of lower levels of capital purchases in recent years, continued focus on cost reductions and productivity improvements, including the transformation to lean and cellular manufacturing concepts, as well as increased efficiencies due to a shift from mail to electronic orders.

Financial Services revenue increased $7.8 million, or 2.0%, to $388.9 million for the first six months of 2002 from $381.1 million for the first six months of 2001. The increase was due to price increases, a $5.0 million contract buyout in the second quarter of 2002, share gain during the last half of 2001 and increased sales of licensed designs. These improvements were partially offset by lower volume due to the overall decline in the check printing industry, as well as lower financial institution conversion activity during 2002. Operating income increased $24.1 million, or 31.5%, to $100.8 million for the first six months of 2002 from $76.7 million for the first six months of 2001. The improvement was due to the revenue increase, continued focus on cost reductions, productivity improvements and reduced spoilage, including the transformation to lean and cellular manufacturing concepts, lower depreciation and amortization as a result of lower levels of capital purchases in recent years, and increased efficiencies due to a shift from mail to electronic orders.

Direct Checks segment—Our Direct Checks segment sells checks and related products directly to consumers through direct mail and the Internet. We use a variety of direct marketing techniques to acquire new customers in the direct-to-the-consumer market, including freestanding inserts in newspapers and cooperative advertising. We also use e-commerce strategies to direct traffic to our websites. Our Direct Checks segment sells under the Checks Unlimited and Designer Checks brand names. The following table shows the results of this segment for the quarters and six months ended June 30, 2002 and 2001 (dollars in thousands):

Direct Checks revenue increased $4.9 million, or 6.5%, to $79.9 million for the second quarter of 2002 from $75.0 million for the second quarter of 2001. The increase was due to higher revenue per unit as a result of price increases and the sale of higher priced products, including continued strength in selling licensed designs. Additionally, volume increased due to the effectiveness of our selling techniques, resulting in increased units per order. Operating income increased $5.0 million, or 30.9%, to $21.1 million for the second quarter of 2002 from $16.1 million for the second quarter of 2001. The change in accounting for goodwill explained earlier in our discussion of second quarter net income accounted for $1.5 million of the increase. In addition, the improvement was due to the revenue increase, as well as continued cost management and productivity improvements within the manufacturing and call center functions. Partially offsetting these improvements were increased advertising costs due to lower direct mail response rates. The slow-down in the United States economy has made it challenging to acquire suitable advertising media for our traditional means of new customer acquisition. There has been an overall softening in direct mail industry response rates and as such, some of the cooperative mailers and other businesses we have relied upon to distribute direct mail advertisements have reduced their circulations or gone out of business.

were down. Operating income increased $6.6 million, or 18.1%, to $43.1 million for the first six months of 2002 from $36.5 million for the first six months of 2001. The change in accounting for goodwill explained earlier in our discussion of second quarter net income accounted for $3.1 million of the increase. In addition, the improvement was due to the revenue increase, as well as continued cost management and productivity improvements within the manufacturing and call center functions. Partially offsetting these improvements were increased advertising costs due to the lower direct mail response rates discussed above.

Business Services segment—Our Business Services segment sells checks, forms and related products to small businesses on behalf of financial institutions and directly to customers via direct mail and the Internet. Through our business referral program, our financial institution clients refer new small business customers by calling us directly at the time of new account opening. We also use a variety of direct marketing techniques to acquire and retain customers. The following table shows the results of this segment for the quarters and six months ended June 30, 2002 and 2001 (dollars in thousands):

Business Services revenue increased $2.4 million, or 4.8%, to $52.0 million for the second quarter of 2002 from $49.6 million for the second quarter of 2001. The increase was due to higher revenue per unit as a result of price increases, as well as increased volume primarily from financial institution referrals, partially offset by lower financial institution conversion activity during 2002. Operating income increased $1.5 million, or 11.4%, to $14.8 million for the second quarter of 2002 from $13.3 million for the second quarter of 2001. The improvement was due to the revenue increase and continued cost management efforts.

Business Services revenue increased $8.6 million, or 8.7%, to $107.7 million for the first six months of 2002 from $99.1 million for the first six months of 2001. The increase was due to higher revenue per unit as a result of price increases, as well as increased volume primarily from financial institution referrals, partially offset by lower financial institution conversion activity during 2002. Operating income increased $6.6 million, or 24.4%, to $33.5 million for the first six months of 2002 from $26.9 million for the first six months of 2001. The improvement was due to the revenue increase, reduced material costs and continued cost management efforts.

During the first six months of 2002, net cash provided by operating activities of $121.4 million was primarily generated by earnings before interest, taxes, depreciation and amortization (EBITDA¹) of $207.4 million. The operating cash inflows were utilized primarily to fund income tax payments, 2001 employee profit sharing and pension contributions, voluntary employee benefit association (VEBA) trust contributions, and contract acquisition payments made to our financial institution clients. Net cash provided by operating activities during the first six months of 2002, the net issuance of $41.6 million of commercial paper, cash receipts of $24.7 million from shares issued under employee plans, and cash on hand at December 31, 2001 enabled us to spend $118.4 million on share repurchases, to pay dividends of $47.1 million and to purchase capital assets of $17.2 million.

During the first six months of 2001, net cash provided by operating activities of $91.3 million was primarily generated by EBITDA of $179.9 million. These operating cash inflows were utilized primarily to fund income tax payments, 2000 employee profit sharing and pension contributions, contract acquisition payments and VEBA trust contributions. The net issuance of $116.2 million of commercial paper, net cash provided by operating activities during the first six months of 2001 and cash on hand at December 31, 2000 enabled us to spend $122.5 million on share repurchases, to make payments on long-term debt of $100.7 million, to pay dividends of $52.6 million and to purchase capital assets of $17.1 million.

We believe that important measures of our financial strength are the ratios of earnings before interest and taxes (EBIT) to interest expense and free cash flow to debt. Free cash flow represents net cash provided by operating activities less purchases of capital assets and cash dividends paid to shareholders. EBIT to interest expense was 85.1 times for the first half of 2002 and 45.6 times for the first half of 2001. Our committed line of credit contains covenants requiring a minimum EBIT to interest expense ratio of 2.5 times. The increase in 2002 was due to the improvements in operating results discussed above under Results of Operations and lower interest expense in 2002 resulting from lower interest rates. Free cash flow to debt on a four-quarter trailing basis through June 30, 2002 was 86.7%. For the year ended December 31, 2001 this ratio was 86.8%. The higher debt level as of June 30, 2002 as a result of our share repurchase program was partially offset by increased EBITDA and the lower level of dividends paid in 2002 based on fewer shares outstanding.

We currently have a $300.0 million commercial paper program in place. Our commercial paper program carries a credit rating of A1/P1. If for any reason we were unable to access the commercial paper markets, we would rely on our committed line of credit for liquidity. The average amount of commercial paper outstanding during the first six months of 2002 was $158.4 million at a weighted-average interest rate of 1.83%. As of June 30, 2002, $191.6 million was outstanding at a weighted-average interest rate of 1.89%. The average amount of commercial paper outstanding during 2001 was $90.9 million at a weighted-average interest rate of 3.37%. As of December 31, 2001, $150.0 million was outstanding at a weighted-average interest rate of 1.85%.

We currently have $350.0 million available under a committed line of credit which supports our commercial paper program and is available for borrowing. The commitment fee on this line is seven basis points. This line of credit expires on August 22, 2002, and we expect that we will be able to obtain a replacement line or lines of credit at generally the same terms. The agreement which governs the committed line of credit contains customary covenants regarding EBIT to interest expense coverage and levels of subsidiary indebtedness. We believe the risk of violating our financial covenants is low. During the first six months of 2002 and during 2001, no amounts were drawn on this line of credit and as of June 30, 2002 and December 31, 2001, no amounts were outstanding under this line of credit.

We currently have commitments under both operating and capital leases. Our capital lease obligations bear interest at rates of 5.5% to 10.4% and are due through 2009. We have also entered into operating leases on certain facilities and equipment. We are not engaged in any transactions, arrangements or other relationships with unconsolidated entities or other third parties that are reasonably likely to have a material effect on our liquidity, or on our access to, or requirements for capital resources. In addition, we have not established any special purpose entities. A list of our minimum contractual cash commitments has been provided in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2001. There were no significant changes to these minimum contractual cash commitments during the first six months of 2002.

In connection with the spin-off of eFunds Corporation (eFunds) 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. The maximum contractual amount of litigation and contract losses for which we will indemnify eFunds is $14.6 million. Through June 30, 2002, no amounts have been paid or claimed under this indemnification agreement. This obligation is not reflected in the consolidated balance sheet, as it is not probable at this time that any payment will occur.

On January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets, in its entirety. This statement addresses accounting and financial reporting for goodwill and intangible assets. Under the new statement, goodwill and intangible assets with indefinite lives are no longer amortized, but are subject to impairment testing on at least an annual basis. Other than goodwill, we have no intangible assets with indefinite lives. Adoption of this statement resulted in no goodwill impairment losses and had no impact on our financial position as of January 1, 2002. In addition, the remaining useful lives of amortizable intangible assets were reviewed and deemed appropriate. The following pro forma information reflects our results of operations as they would have appeared had we not recorded goodwill amortization and its related tax effects during 2001 (dollars in thousands, except per share amounts):

	Quarter Ended June 30, 2001		Six Months Ended June 30, 2001
Reported net income	$	44,312	$	86,791
Add back: goodwill amortization, net of tax		995		1,990

Adjusted net income	$	45,307	$	88,781

Reported basic earnings per share	$	0.64	$	1.23
Add back: goodwill amortization, net of tax		0.01		0.03

Adjusted basic earnings per share	$	0.65	$	1.26

Reported diluted earnings per share	$	0.63	$	1.22
Add back: goodwill amortization, net of tax		0.02		0.03

Adjusted diluted earnings per share	$	0.65	$	1.25

As of June 30, 2002, we completed the 14 million share repurchase program approved by our board of directors in January 2001. The total cost to purchase the 14 million shares was $463.8 million. Primarily as a result of the required accounting treatment for these share repurchases, shareholders’ equity decreased from $262.8 million as of December 31, 2000 to $54.7 million as of June 30, 2002, and we were in a retained deficit position as of June 30, 2002.

In July 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement addresses the financial accounting and reporting for costs associated with exit or disposal activities, including costs to terminate contracts that are not capital leases, costs to consolidate facilities or relocate employees and one-time termination benefits provided to employees who are involuntarily terminated. We must adopt this statement by January 1, 2003. The adoption of this statement will have no impact on our results of operations or financial position, as it applies only to exit or disposal activities initiated on or after the date of adoption.

In August 2002, our board of directors approved a plan to repurchase up to 12 million shares of our common stock. No timeframe has been outlined for the completion of this plan. Additionally, the board approved a financial strategy intended to increase leverage. We plan to increase our debt level up to a maximum of $700 million. The additional debt would be a combination of both long-term and short-term borrowings. As a result of this annoucement, our long-term credit rating was downgraded to ‘A’ from ‘A+’ by one rating agency and was placed under review for possible downgrade by another rating agency. However, we still maintain a strong investment-grade credit rating and expect no impact on our ability to borrow.

The downturn in the United States economy had limited impact on our 2001 results of operations. In 2002 we are seeing an impact in our direct-to-the-consumer businesses. There has been a softening in overall direct mail industry response rates and as such, some of the cooperative mailers and other businesses we have relied upon to distribute direct mail advertisements have reduced their circulations or gone out of business. This is our primary method of acquiring new customers. Thus, we continue to explore new advertising opportunities such as the Internet and other partnerships to replace traditional media sources. While we cannot predict what impact a prolonged war on terrorism or other factors, including the current business environment, will have on the United States economy, our plan is to continue to manage expenses, invest in our business and purchase capital assets when they will reduce operating expenses, increase productivity or profitably increase revenue.

We do not expect our results of operations during the last six months of 2002 to be as strong as the first six months of 2002 due to the anniversary of share gains from last year, increased investment in both revenue generating and cost saving initiatives, the impact of higher postal rates that went into effect in June 2002 and the recent downward trend in direct mail response rates. However, cost management and productivity improvements, primarily from the transformation to lean and cellular manufacturing concepts and an increasing mix of orders coming through electronic and Internet channels, are expected to continue. We expect diluted earnings per share to be at least $3.15 for the full year and in the range of $0.76 to $0.79 for the third quarter of 2002 compared to $2.69 and $0.75 for the full year and third quarter of 2001, respectively.

As discussed above under Recent Developments, in August 2002 our board of directors approved a plan to repurchase up to 12 million shares of our common stock. Additionally, the board approved a financial strategy intended to increase leverage. We plan to increase our debt level up to a maximum of $700 million. The additional debt would be a combination of both long-term and short-term borrowings. These steps are intended to enhance shareholder value by allowing us to: (1) manage to our target capital structure; (2) acquire shares from time to time, at prices we believe to be opportunistic; and (3) minimize dilution resulting from shares issued through our employee share purchase plan and stock-based compensation program. In addition to share repurchases, we also intend to utilize the additional debt, along with cash generated by operations, to fund dividend payments, capital asset purchases, additional contract acquisition payments related to signing or renewing contracts with financial institutions and new product initiatives.

In line with this strategy, we have expanded our product offerings by introducing new licensed check designs and new services. Our Business Services segment introduced, in June 2002, business cards, stationery and envelope product lines. Additionally, our Financial Services segment recently launched a comprehensive new service – DeluxeSelect (SM) – for its financial institution clients. DeluxeSelect (SM) provides financial institution customers more information regarding check-related products as they interact directly with our professional sales associates or order their checks via the Internet. We can actively promote product upgrades during both the new account opening and check re-ordering processes, by engaging consumers through our call centers, advanced Internet ordering capabilities and point-of-sale marketing support at branches.

In addition to investments in revenue-generating programs such as DeluxeSelect (SM) and non-check product offerings, we continue to invest in areas of the business where we can reduce costs and increase productivity. Our conversion to a cellular manufacturing environment in our check printing facilities is one example of this. Within the cellular manufacturing environment, a group of employees work together to produce products, rather than those same employees working on individual tasks in a linear fashion. Because employees assume more ownership of the end product, we see an improvement in quality and service levels and a reduction in cost per unit. Our conversion to cellular began in 2000, and the process is expected to be completed in our Financial Services check printing facilities in early 2003.

The Private Securities Litigation Reform Act of 1995 (“the Reform Act”) provides companies with a “safe harbor” when making forward-looking statements as a way of encouraging them to furnish their shareholders with information regarding expected trends in their operating results, anticipated business developments and other prospective information. Statements made in this report concerning our intentions, expectations or predictions about future results or events are “forward-looking statements” within the meaning of the Reform Act. These statements reflect our current expectations or beliefs, and are subject to risks and uncertainties that could cause actual results or events to vary from stated expectations, which variations could be material and adverse. Given that circumstances may change, and new risks to the business may emerge from time to time, having the potential to negatively impact our business in ways we could not anticipate at the time of making a forward-looking statement, you are cautioned not to place undue reliance on these statements, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Some of the factors that could cause actual results or events to vary from stated expectations include, but are not limited to, the following: developments in the demand for our products or services, such as the rate at which the use of checks may decline as consumers’ preferred method of payment; the inherent unreliability of earnings, revenue and cash flow predictions due to numerous factors, many of which are beyond our control; the terms under which we do business with our major financial institution clients, customers and suppliers; unanticipated delays, costs and expenses inherent in the development and marketing of new products and services; the impact of governmental laws and regulations, particularly in the area of consumer privacy; and competitive forces. Additional information concerning these and other factors that could cause actual results or events to differ materially from our current expectations are contained in Item 5 of this Report.

We are exposed to changes in interest rates primarily as a result of the borrowing and investing activities used to maintain liquidity and fund business operations. During the first six months of 2002 and during 2001, we did not engage in speculative transactions nor did we hold or issue financial instruments for trading purposes. We continue to utilize commercial paper to fund working capital requirements. We also have various lines of credit available, as well as a shelf registration for the issuance of up to $300.0 million in medium-term notes. The nature and amount of debt outstanding can be expected to vary as a result of future business requirements, market conditions and other factors. As of June 30, 2002, we had $191.6 million of commercial paper outstanding at a weighted-average interest rate of 1.89%. The carrying value of this debt approximates its fair value due to its short-term duration. Based on the outstanding variable rate debt in our portfolio, a one percentage point increase in interest rates would have resulted in additional interest expense of $0.8 million for the first six months of 2002 and $0.3 million for the first six months of 2001. Other than capital lease obligations, we had no long-term debt outstanding as of June 30, 2002. Also as of that date, we had no fixed income securities in our investment portfolio.

Election of Directors	For	Withhold
Lawrence J. Mosner	54,926,823	448,303
Ronald E. Eilers	54,923,503	451,623
Barbara B. Grogan	54,911,718	463,408
Stephen P. Nachtsheim	54,928,210	446,916
Donald R. Hollis	54,926,766	448,360
Robert C. Salipante	54,917,371	457,755
Cheryl E. Mayberry McKissack	54,929,618	445,508
Daniel D. Granger	54,914,062	461,064
Charles A. Haggerty	54,921,087	454,039
Martyn R. Redgrave	54,910,111	465,015

The Private Securities Litigation Reform Act of 1995 (“the Reform Act”) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information. We are filing this cautionary statement in connection with the Reform Act. When we use the words or phrases “should result,” “believe,” “intend,” “plan,” “are expected to,” “targeted,” “will continue,” “will approximate,” “is anticipated,” “estimate,” “project” or similar expressions in this Quarterly Report on Form 10-Q, in future filings with the Securities and Exchange Commission (“the Commission”), in our press releases and in oral statements made by our representatives, they indicate forward-looking statements within the meaning of the Reform Act.

We want to caution you that any forward-looking statements made by us or on our behalf are subject to uncertainties and other factors that could cause them to be wrong. Some of these uncertainties and other factors are listed under the caption “Risk Factors” below (many of which have been discussed in prior filings with the Commission). Although we have attempted to compile a comprehensive list of these important factors, we want to caution you that other factors may prove to be important in affecting future operating results. New factors emerge from time to time, and it is not possible for us to predict all of these factors, nor can we assess the impact each factor or combination of factors may have on our business.

Check printing is, and is expected to continue to be, an essential part of our business and the principal source of our operating income. We primarily sell checks for personal and small business use and believe that there will continue to be a substantial demand for these checks for the foreseeable future. However, according to our estimates, total checks written by individuals and small businesses declined slightly in 2001 compared to 2000, and the total number of personal, business and government checks written in the United States has been in decline since 1997. We believe that checks written by individuals and small businesses will continue to decline due to the increasing use of alternative payment methods, including credit cards, debit cards, smart cards, automated teller machines, direct deposit, electronic and other bill paying services, home banking applications and Internet-based payment services. However, the rate and the extent to which alternative payment methods will achieve consumer acceptance and replace checks cannot be predicted with certainty. A surge in the popularity of any of these alternative payment methods could have a material, adverse effect on the demand for checks and a material, adverse effect on our business, results of operations and prospects.

Although we believe we are the leading check printer in the United States, we face considerable competition. In addition to competition from alternative payment systems, we also face considerable competition from other check printers in our traditional sales channel through financial institutions, from direct mail sellers of checks and from sellers of business checks and forms. Additionally, we face competition from check printing software vendors, and increasingly, from Internet-based sellers of checks to individuals and small businesses. From time to time, some of our competitors have reduced the prices of their products in an attempt to gain volume. The corresponding pricing pressure placed on us has resulted in reduced profit margins in the past and similar pressures can reasonably be expected in the future. We cannot assure you that we will be able to compete effectively against current and future competitors. Continued competition could result in price reductions, reduced margins and loss of customers.

Financial institutions have been undergoing large-scale consolidation, causing the number of financial institutions to decline. Margin pressures arise from this consolidation when merged entities seek not only the most favorable prices formerly offered to the predecessor institutions, but also additional discounts due to the greater volume represented by the combined entity. This concentration greatly increases the importance of retaining our major financial institution clients and attracting significant additional clients in an increasingly competitive environment. The increase in general negotiating leverage possessed by such consolidated entities also

presents a risk that new and/or renewed contracts with these institutions may not be secured on terms as favorable as those historically negotiated with these clients. Although we devote considerable efforts towards the development of a competitively priced, high quality suite of products and services for the financial services industry, there can be no assurance that significant financial institution clients will not be lost or that any such loss can be counterbalanced through the addition of new clients or by expanded sales to our remaining clients.

From time to time, our representatives make predictions or forecasts regarding our future results, including but not limited to, forecasts regarding estimated revenues, earnings or earnings per share. Any forecast regarding our future performance reflects various assumptions which are subject to significant uncertainties, and, as a matter of course, may prove to be incorrect. Further, the achievement of any forecast depends on numerous factors which are beyond our control. As a result, we cannot assure you that our performance will be consistent with any management forecasts or that the variation from such forecasts will not be material and adverse. You are cautioned not to base your entire analysis of our business and prospects upon isolated predictions, and are encouraged to use the entire available mix of historical and forward-looking information made available by us, and other information affecting us and our products and services, including the risk factors discussed here.

In addition, our representatives may occasionally comment publicly on the perceived reasonableness of published reports by independent analysts regarding our projected future performance. Such comments should not be interpreted as an endorsement or adoption of any given estimate or range of estimates or the assumptions and methodologies upon which such estimates are based. The methodologies we employ in arriving at our own internal projections and the approaches taken by independent analysts in making their estimates are likely different in many significant respects. We expressly disclaim any responsibility to advise analysts or the public markets of our views regarding the current accuracy of the published estimates of outside analysts. If you are relying on these estimates, you should pursue your own independent investigation and analysis of their accuracy and the reasonableness of the assumptions on which they are based.

Increases in production costs such as labor, paper and delivery could adversely affect our profitability. Events resulting in an inability of contractual service providers to perform their obligations, such as extended labor strikes, can also adversely impact our margins by requiring us to secure alternate providers at higher costs. In addition, the profitability of our Direct Checks segment depends in large part on our ability to secure adequate advertising media placements at acceptable rates, and there can be no assurances regarding the future cost and/or availability of suitable advertising media. Competitive pressures may inhibit our ability to reflect any of these increased costs in the prices of our products.

We are developing and evaluating plans and launching initiatives for future growth, including the development of additional products and services and the expansion of Internet commerce capabilities. These plans and initiatives will involve increased levels of investment. There can be no assurance that the amount of this investment will not exceed our expectations and result in materially increased levels of expense. The new products and services we develop may not meet acceptance in the marketplace. Also, Internet commerce initiatives involve new technologies and business methods and serve new or developing markets. There is no assurance that these initiatives will achieve targeted revenue, profit or cash flow levels or result in positive returns on our investment.

We use sophisticated software and computing systems. We may experience difficulties in installing or integrating our technologies on platforms used by our customers or in new environments, such as the Internet. Errors or delays in the processing of check orders or other difficulties could result in lost customers, delay in market acceptance, additional development costs, diversion of technical and other resources, negative publicity or exposure to liability claims.

significant acquisition could result in the incurrence of contingent liabilities or debt, or additional amortization expense relating to acquired intangible assets, and thus, could adversely affect our business, results of operations and financial condition. Additionally, the success of any acquisition would depend upon our ability to effectively integrate the acquired businesses into ours. The process of integrating acquired businesses may involve numerous risks, including among others, difficulties in assimilating operations and products, diversion of management’s attention from other business concerns, risks of operating businesses in which we have limited or no direct prior experience, potential loss of our key employees or key employees of acquired businesses, potential exposure to unknown liabilities and possible loss of our clients and customers or clients and customers of the acquired businesses.

Under Section 355(e) of the Internal Revenue Code, the spin-off of eFunds Corporation, which was completed in December, 2000, could be taxable if 50% or more of our shares are acquired as part of a plan or series of transactions that include the spin-off. For this purpose, any acquisitions of our shares within two years before or after the spin-off are presumed to be part of such a plan, although we may be able to rebut that presumption. As a result of the possible adverse U.S. federal income tax consequences, we may be restricted in our ability to effect certain acquisitions, to issue our shares or to execute other transactions that would result in a change of control of Deluxe. The stock repurchase program completed in June 2002 and the repurchase plan approved by our board of directors in August 2002 were structured to comply with Section 355(e) of the Internal Revenue Code.

Our check printing operations utilize a paper printing plate material that is available from only a limited number of sources. We believe we have a reliable source of supply for this material and that we maintain an inventory sufficient to avoid any production disruptions in the event of an interruption of its supply. In the event, however, that our current supplier becomes unwilling or unable to supply the required printing plate material at an acceptable price and we are unable to locate a suitable alternative source within a reasonable time frame, we would be forced to convert our facilities to an alternative printing process. Any such conversion would require the unanticipated investment of significant sums and could result in production delays and loss of business.

Despite our efforts to protect our intellectual property, third parties may infringe or misappropriate our intellectual property or otherwise independently develop substantially equivalent products and services. In addition, designs licensed from third parties account for an increasing portion of our revenues, and there can be no guarantee that such licenses will be available to us indefinitely or on terms that would allow us to continue to be profitable with those products. The loss of intellectual property protection or the inability to secure or enforce intellectual property protection could harm our business and ability to compete. We rely on a combination of trademark and copyright laws, trade secret protection and confidentiality and license agreements to protect our trademarks, software and know-how. We may be required to spend significant resources to protect our trade secrets and monitor and police our intellectual property rights.

Third parties may assert infringement claims against us in the future. In particular, there has been a substantial increase in applications for, and the issuance of, patents for Internet-related systems and business methods, which may have broad implications for all participants in Internet commerce. Claims for infringement of these patents are increasingly becoming a subject of litigation. If we become subject to an infringement claim, we may be required to modify our products, services and technologies or obtain a license to permit our continued use of those rights. We may not be able to do either of these things in a timely manner or upon reasonable terms and conditions. Failure to do so could seriously harm our business, operating results and prospects as a result of lost business, increased expense or being barred from offering our products or implementing our systems or other business methods. In addition, future litigation relating to infringement claims could result in substantial costs and a diversion of management resources. Adverse determinations in any litigation or proceeding could also subject us to significant liabilities and could prevent us from using or offering some of our products, services or technologies.

We have entered into agreements with third party providers for the provision of information technology services, including software development and support services, and personal computer, asset management, telecommunications, network server and help desk services. In the event that one or more of these providers is not able to provide adequate information technology services, we would be adversely affected. Although we believe that information technology services are available from numerous sources, a failure

We are subject to regulations implementing the privacy requirements of the federal financial modernization law known as The Gramm-Leach-Bliley Act (“the Act”). The Act requires us to develop and implement policies to protect the security and confidentiality of consumers’ nonpublic personal information and to disclose these policies to consumers before a customer relationship is established and annually thereafter. These regulations could have the effect of foreclosing future business initiatives.

The Act does not prohibit state legislation or regulations that are more restrictive on the collection and use of data. More restrictive legislation or regulations have been introduced in the past and could be introduced in the future in Congress and the states. We are unable to predict whether more restrictive legislation or regulations will be adopted in the future. Any future legislation or regulations could have a negative impact on our business, results of operations or prospects.

Laws and regulations may be adopted in the future with respect to the Internet, e-commerce or marketing practices generally relating to consumer privacy. Such laws or regulations may impede the growth of the Internet and/or use of other sales or marketing vehicles. As an example, new privacy laws could decrease traffic to our websites and decrease the demand for our products and services. Additionally, the applicability to the Internet of existing laws governing property ownership, taxation, libel and personal privacy is uncertain and may remain uncertain for a considerable length of time.

We received confirmation from the IRS that, for U.S. federal income tax purposes, the December 2000 spin-off of eFunds is tax-free to us and to our shareholders, except to the extent that cash was received in lieu of fractional shares. This confirmation is premised on a number of representations and undertakings made by us and by eFunds to the IRS, including representations with respect to each company’s intention not to engage in certain transactions in the future. The spin-off may be held to be taxable to us and to our shareholders who received eFunds shares if the IRS determines that any of the representations made are incorrect or untrue in any respect, or if any undertakings made are not complied with. If the spin-off is held to be taxable, both Deluxe and our shareholders who received eFunds shares could be subject to a material amount of taxes. eFunds will be liable to us for any such taxes incurred to the extent such taxes are attributable to specific actions or failures to act by eFunds, or to specific transactions involving eFunds following the spin-off. In addition, eFunds will be liable to us for a portion of any taxes incurred if the spin-off fails to qualify as tax-free as a result of a retroactive change of law or other reason unrelated to the action or inaction of either us or eFunds. We cannot be certain of eFunds’ ability to perform its indemnification obligations and such indemnification obligations are only for the benefit of Deluxe and not individual shareholders.

Our check printing plants are subject to many existing and proposed federal and state regulations designed to protect the environment. In some instances, we owned and operated our check printing plants before the environmental regulations came into existence. We have sold former check printing plants to third parties and in most instances have agreed to indemnify the current owner of the facility for on-site environmental liabilities. Although we are not aware of any fact or circumstance which would require the future expenditure of material amounts for environmental compliance, if environmental liabilities are discovered at our check printing plants, we could be required to spend material amounts for environmental compliance in the future.

In accordance with current federal, state and local tax laws, and the constitutional limitations thereon, we currently collect sales, use or other similar taxes in state and local jurisdictions where our direct-to-consumer businesses have a physical presence. One or more state or local jurisdictions may seek to impose sales tax collection obligations on us and other out-of-state companies which engage in remote or online commerce. Further, tax law and the interpretation of constitutional limitations thereon is subject to change. In addition, any new operations of these businesses in states where they do not presently have a physical presence could subject shipments of goods by these businesses into such states to sales tax under current or future laws. If one or more state or local jurisdictions successfully asserts that we must collect sales or other taxes beyond our current practices, it could have a material, adverse affect on our business.

Exhibit Number	Description	Method of Filing

3.1	Articles of Incorporation (incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1990).	*

3.2	Bylaws (incorporated by reference to Exhibit 3.2 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).	*

4.1	Amended and Restated Rights Agreement, dated as of January 31, 1997, by and between the Company and Norwest Bank Minnesota, National Association, as Rights Agent, which includes as Exhibit A thereto, the form of Rights Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 1 on Form 8-A/A-1 (File No. 001-07945) filed with the Commission on February 7, 1997).	*

4.2	Amendment No. 1 to Amended and Restated Rights Agreement, entered into as of January 21, 2000, between us and Norwest Bank Minnesota, National Association as Rights Agent (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2000).	*

4.3	Indenture, relating to up to $300,000,000 of debt securities (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-3 (33-62041) filed with the Commission on August 23, 1995).	*

4.4	Credit Agreement dated as of August 24, 2001, among us, Bank One, N.A. as administrative agent, The Bank of New York as syndication agent and the other financial institutions party thereto, related to a $350,000,000 revolving credit agreement (incorporated by reference to Exhibit 4.4 to the Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2001).	*

10.1	Amended and Restated 2000 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.18 to the Annual Report on Form 10-K for the year ended December 31, 2001).	*

10.2	2000 Stock Incentive Plan, as Amended.	Filed herewith

12.2	Statement re: computation of ratios.	Filed herewith

99.1	CEO Certification of Periodic Report	Filed herewith

99.2	CFO Certification of Periodic Report	Filed herewith

Remainder of 2002		$15,608
2003		28,810
2004		21,378
2005		16,034
2006		11,757

	June 30, 2002		December 31, 2001
Raw materials	$	2,868	$	3,073
Semi-finished goods		6,849		7,215
Finished goods		884		904

Total	$	10,601	$	11,192

	June 30, 2002		December 31, 2001
Contract acquisition costs	$	34,654	$	28,350
Deferred advertising costs		17,391		21,928
Prepaid post-retirement asset		13,920		12,116
Other		3,830		5,532

Total	$	69,795	$	67,926

For:		42,770,343
Against:		3,955,332
Abstain:		302,228
Broker Non-Votes:		8,347,223

For:		38,511,080
Against:		7,942,805
Abstain:		574,018
Broker Non-Votes:		8,347,223

	Amount			No. of employees affected
Balance, December 31, 2001	$	3.2		163
Severance paid		(2.3	)	(122	)

Balance, June 30, 2002	$	0.9		41

Exhibit No.	Description	Page Number

10.2	2000 Stock Incentive Plan, as Amended

12.2	Statement re: computation of ratios

99.1	CEO Certification of Periodic Report

99.2	CFO Certification of Perodic Report

For:		54,532,442
Against:		551,522
Abstain:		291,162