DELUXE CORP - 10-Q Quarterly Report

	September 30, 2002			December 31, 2001
	(dollars in thousands, except share par value)
Current Assets:
Cash and cash equivalents	$	2,295		$	9,571
Trade accounts receivable (net of allowance for doubtful accounts of $1,897 and $1,428, respectively)		46,514			37,703
Inventories		9,883			11,192
Supplies		10,641			11,071
Deferred income taxes		3,844			4,574
Prepaid expenses		17,509			3,108
Other current assets		3,366			6,753

Total current assets		94,052			83,972
Long-term Investments		39,831			37,661
Property, Plant and Equipment (net of accumulated depreciation of $293,854 and $293,413, respectively)		138,996			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 $126,715 and $102,149, respectively)		107,024			114,856
Goodwill		82,237			82,237
Other Non-current Assets		93,642			67,926

Total assets	$	557,299		$	537,721


Current Liabilities:
Accounts payable	$	50,526		$	52,834
Accrued liabilities:
Wages, including vacation pay		32,245			26,513
Employee profit sharing and pension		21,670			29,734
Income taxes		52,592			39,426
Rebates		24,969			24,923
Other		42,550			42,313
Short-term debt		189,800			150,000
Long-term debt due within one year		1,566			1,381

Total current liabilities		415,918			367,124
Long-term Debt		8,889			10,084
Deferred Income Taxes		39,080			44,890
Other Long-term Liabilities		33,283			37,018
Shareholders’ Equity:
Common shares $1 par value (authorized: 500,000,000 shares; issued: 2002—61,944,284; 2001—64,101,957)		61,944			64,102
Retained (deficit) earnings		(1,782	)		14,563
Unearned compensation		(33	)		(60	)

Total shareholders’ equity		60,129			78,605

Total liabilities and shareholders’equity	$	557,299		$	537,721

	Quarter Ended September 30,						Nine Months Ended September 30,
	2002			2001			2002			2001
	(dollars in thousands, except per share amounts)
Revenue	$	319,773		$	324,318		$	977,144		$	959,635
Cost of goods sold		107,794			111,503			331,449			341,680

Gross Profit		211,979			212,815			645,695			617,955

Selling, general and administrative expense		124,755			128,127			381,746			390,042
Goodwill amortization expense		—			1,547			—			4,641
Asset impairment and disposition losses (gains)		675			298			(35	)		325


Operating Income		86,549			82,843			263,984			222,947

Interest expense		(1,203	)		(1,346	)		(3,296	)		(4,419	)
Interest income		103			252			364			2,218
Other income (expense)		(480	)		(33	)		180			(75	)


Income Before Income Taxes		84,969			81,716			261,232			220,671

Provision for income taxes		32,306			30,654			99,304			82,818


Net Income	$	52,663		$	51,062		$	161,928		$	137,853


Earnings per Share: Basic	$	0.85		$	0.76		$	2.56		$	1.98
Diluted	$	0.83		$	0.75		$	2.53		$	1.97

Cash Dividends per Share	$	0.37		$	0.37		$	1.11		$	1.11

Total Comprehensive Income	$	52,663		$	51,246		$	161,928		$	138,128

	Nine Months Ended September 30,
	2002			2001
	(dollars in thousands)
Cash Flows from Operating Activities:
Net income	$	161,928		$	137,853
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		18,138			23,840
Amortization of intangibles and goodwill		25,678			33,869
Asset impairment and disposition losses (gains)		(35	)		325
Other non-cash items, net		8,252			8,978
Changes in assets and liabilities:
Trade accounts receivable		(8,811	)		(3,197	)
Inventories and supplies		1,739			726
Prepaid expenses		(13,661	)		(183	)
Accounts payable		2,806			6,943
Accrued liabilities		2,082			27,924
Other assets and liabilities		(20,715	)		(28,469	)

Net cash provided by operating activities		177,401			208,609


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		89			1,452
Purchases of capital assets		(26,589	)		(22,281	)
Other		(3,389	)		(3,807	)

Net cash used by investing activities		(29,889	)		(16,646	)


Cash Flows from Financing Activities:
Net borrowings on short-term debt		39,800			102,900
Payments on long-term debt		(1,010	)		(101,213	)
Change in book overdrafts		(5,114	)		(3,802	)
Payments to retire shares		(146,961	)		(231,620	)
Proceeds from issuing shares under employee plans		28,612			43,762
Cash dividends paid to shareholders		(70,115	)		(77,472	)

Net cash used by financing activities		(154,788	)		(267,445	)


Net Decrease in Cash and Cash Equivalents		(7,276	)		(75,482	)
Cash and Cash Equivalents: Beginning of Period		9,571			80,732

End of Period	$	2,295		$	5,250

The condensed consolidated balance sheet as of September 30, 2002, the condensed consolidated statements of income for the quarters and nine months ended September 30, 2002 and 2001 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2002 and 2001 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the condensed 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 condensed 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 condensed 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.

As permitted by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, we continue to account for our employee stock-based compensation in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation expense has been recognized in reported net income for stock options issued under our stock incentive plan or, in 2002, for shares issued to employees under our amended and restated employee stock purchase plan. In both 2002 and 2001, compensation expense was recognized in reported net income under APB Opinion No. 25 for restricted stock awards and for the 25% discount provided to employees on shares issued under our previous employee stock purchase plan.

	Quarter Ended September 30,						Nine Months Ended September 30,
	2002			2001			2002			2001
Net income, as reported	$	52,663		$	51,062		$	161,928		$	137,853
Add: Stock-based employee compensation expense included in net income, net of tax		375			781			1,384			1,757
Deduct: Fair value stock-based employee compensation expense, net of tax		(1,229	)		(1,525	)		(3,686	)		(4,119	)


Pro forma net income	$	51,809		$	50,318		$	159,626		$	135,491


Earnings per share:
Basic — as reported	$	0.85		$	0.76		$	2.56		$	1.98
Basic — pro forma		0.83			0.75			2.53			1.95

Diluted — as reported	$	0.83		$	0.75		$	2.53		$	1.97
Diluted — pro forma		0.82			0.74			2.49			1.94

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 September 30, 2001		Nine Months Ended September 30, 2001
Net income, as reported	$	51,062	$	137,853
Add: Goodwill amortization, net of tax		995		2,985

Pro forma net income	$	52,057	$	140,838


Earnings per share:
Basic — as reported	$	0.76	$	1.98
Basic — pro forma		0.77		2.03

Diluted — as reported	$	0.75	$	1.97
Diluted — pro forma		0.76		2.01

	September 30, 2002							December 31, 2001
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Internal-use software	$	227,980	$	(124,516	)	$	103,464	$	211,193	$	(100,557	)	$	110,636
Customer name list		5,050		(1,864	)		3,186		5,050		(1,323	)		3,727
Other		709		(335	)		374		762		(269	)		493

Total	$	233,739	$	(126,715	)	$	107,024	$	217,005	$	(102,149	)	$	114,856

Total amortization expense related to intangibles was $8.7 million for the quarter ended September 30, 2002, $9.3 million for the quarter ended September 30, 2001, $25.7 million for the nine months ended September 30, 2002 and $29.2 million for the nine months ended September 30, 2001. Based on the intangibles in service as of September 30, 2002, estimated amortization expense for each of the 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 September 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 September 30, 2001 and $4.6 million for the nine months ended September 30, 2001.

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.

	Quarter Ended September 30,				Nine Months Ended September 30,
	2002		2001		2002		2001
Earnings per share-basic:
Net income	$	52,663	$	51,062	$	161,928	$	137,853
Weighted average shares outstanding		62,222		67,228		63,180		69,521

Earnings per share-basic	$	0.85	$	0.76	$	2.56	$	1.98


Earnings per share-diluted:
Net income	$	52,663	$	51,062	$	161,928	$	137,853
Weighted average shares outstanding		62,222		67,228		63,180		69,521
Dilutive impact of options		814		844		903		505
Shares contingently issuable		46		60		29		37

Weighted average shares and potential dilutive shares outstanding		63,082		68,132		64,112		70,063

Earnings per share-diluted	$	0.83	$	0.75	$	2.53	$	1.97

During the third quarter of 2002, we recorded restructuring charges of $0.8 million for employee severance relating to various functional areas within the Direct Checks segment and manufacturing employees within the Financial Services segment. These reductions are a result of on-going cost management efforts and are expected to affect 52 employees. The reductions are expected to be completed in the fourth quarter of 2002. These charges are reflected in the condensed consolidated statements of income for the quarter and nine months ended September 30, 2002 as cost of goods sold of $0.2 million and selling, general and administrative (SG&A) expense of $0.6 million.

During the third quarter of 2001, we recorded restructuring charges of $0.7 million and during the first nine months of 2001, we recorded restructuring charges of $1.3 million. These charges relate to employee severance costs for customer service employees within the Business Services segment, mail center employees within the Financial Services segment and reductions within various functional areas within the Direct Checks segment. These reductions affect 121 employees and will be completed during 2002. Additionally, we reversed $0.4 million of previously recorded restructuring accruals during the third quarter of 2001 due to higher employee attrition than anticipated. These restructuring charges and reversals are reflected within SG&A expense in the condensed consolidated statements of income for the quarter and nine months ended September 30, 2001.

	2001 Initiatives					2002 Initiatives					Total
	Amount			No. of employees affected		Amount			No. of employees affected		Amount			No. of employees affected
Balance, December 31, 2001	$	3.2		163		$	—		—		$	3.2		163
Restructuring charges		—		—			0.8		52			0.8		52
Restructuring reversals		(0.1	)	(14	)		—		—			(0.1	)	(14	)
Severance paid		(2.6	)	(137	)		(0.3	)	(40	)		(2.9	)	(177	)

Balance, September 30, 2002	$	0.5		12		$	0.5		12		$	1.0		24

We currently have a $300.0 million commercial paper program in place. The average amount of commercial paper outstanding during the first nine months of 2002 was $161.8 million at a weighted-average interest rate of 1.82%. As of September 30, 2002, $189.8 million was outstanding at a weighted-average interest rate of 1.83%. 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 have two committed lines of credit which were executed in August 2002. These lines are available for borrowing and as support for our commercial paper program. We have a $175.0 million line of credit which expires in August 2003 and carries a commitment fee of six basis points (.06%). We also have a $175.0 million line of credit which expires in August 2007 and carries a commitment fee of eight basis points (.08%). The credit agreements which govern these lines of credit contain customary covenants regarding interest coverage and levels of subsidiary indebtedness. No amounts were drawn on these lines during the third quarter of 2002. Our previous committed line of credit expired in August 2002. No amounts were drawn on this line during 2002 or 2001, and no amounts were outstanding under this line of credit as of December 31, 2001.

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 during the first nine 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 September 30, 2002 and December 31, 2001, no amounts were outstanding under this line of credit.

We have a shelf registration in place for the issuance of up to $300.0 million in medium-term notes. If issued, these notes could be used for general corporate purposes, including working capital, capital asset purchases, possible acquisitions and repayment or repurchase of outstanding indebtedness and other securities of Deluxe. As of September 30, 2002 and December 31, 2001, no such notes were issued or outstanding.

In August 2002, we announced a financial strategy under which we plan to increase our debt level up to a maximum of $700 million. As a step to implementing this strategy, in October 2002, we entered into two forward rate lock agreements (the Lock Agreements) to effectively hedge, or lock-in, the annual interest rate on $150.0 million of future debt. The gain or loss on the Lock Agreements will fluctuate with market interest rates until the debt is issued. The cumulative gain or loss realized on the Lock Agreements will be reflected in accumulated other comprehensive income in our consolidated balance sheet and will be reclassified to earnings as a decrease or increase to interest expense over the term of the debt.

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 September 30, 2002, no amounts have been paid or claimed under this indemnification agreement. This obligation is not reflected in the condensed consolidated balance sheets, as it is not probable that any payment will occur.

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. In August 2002, our board of directors approved a plan to purchase up to an additional 12 million shares of our common stock. As of September 30, 2002, 0.6 million additional shares had been repurchased at a cost of $28.6 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 $60.1 million as of September 30, 2002, and we were in a retained deficit position as of September 30, 2002. Changes in shareholders’ equity during the first nine 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		—			—			161,928			—			161,928
Cash dividends		—			—			(70,115	)		—			(70,115	)
Common shares issued		1,165			28,128			—			—			29,293
Tax benefit of stock option plans		—			7,915			—			—			7,915
Common shares repurchased		(3,311	)		(35,492	)		(108,158	)		—			(146,961	)
Other common shares retired		(12	)		(551	)		—			—			(563	)
Unearned compensation		—			—			—			27			27

Balance, September 30, 2002	$	61,944		$	—		$	(1,782	)	$	(33	)	$	60,129

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.

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.

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 and nine months ended September 30, 2002 and 2001 (dollars in thousands):

		Reportable Business Segments
		Financial Services		Direct Checks		Business Services		Corporate		Consolidated
Revenue from external customers:	2002	$	189,170	$	75,933	$	54,670	$	—	$	319,773
Revenue from external customers:	2001		198,113		74,765		51,440		—		324,318

Operating income:	2002		46,525		21,517		18,507		—		86,549
	2001		49,932		17,409		15,502		—		82,843

Depreciation and amortization expense:	2002		11,604		1,901		1,038		—		14,543
Depreciation and amortization expense:	2001		12,592		3,845		1,454		—		17,891

Total assets:	2002		295,477		142,596		33,128		86,098		557,299
	2001		295,511		143,473		36,089		92,094		567,167

Capital purchases:	2002		6,265		589		1,651		885		9,390
	2001		3,088		1,288		577		226		5,179

		Reportable Business Segments
		Financial Services		Direct Checks		Business Services		Corporate		Consolidated
Revenue from external customers:	2002	$	578,054	$	236,688	$	162,402	$	—	$	977,144
Revenue from external customers:	2001		579,222		229,903		150,510		—		959,635

Operating income:	2002		147,342		64,656		51,986		—		263,984
	2001		126,598		53,937		42,412		—		222,947

Depreciation and amortization expense:	2002		34,763		5,759		3,294		—		43,816
Depreciation and amortization expense:	2001		41,793		11,664		4,252		—		57,709

Total assets:	2002		295,477		142,596		33,128		86,098		557,299
	2001		295,511		143,473		36,089		92,094		567,167

Capital purchases:	2002		19,909		3,065		2,363		1,252		26,589
	2001		15,106		4,917		1,920		338		22,281

	Quarter Ended September 30,
	2002				2001
	$		% of Revenue		$		% of Revenue
Revenue from external customers:
Financial Services	$	189,170	—		$	198,113	—
Direct Checks		75,933	—			74,765	—
Business Services		54,670	—			51,440	—

Total	$	319,773	—		$	324,318	—


Gross profit		211,979	66.3	%		212,815	65.6	%
Selling, general and administrative expense		124,755	39.0	%		128,127	39.5	%
Other operating expense (income)¹		675	0.2	%		1,845	0.6	%

Operating income:
Financial Services	$	46,525	24.6	%	$	49,932	25.2	%
Direct Checks		21,517	28.3	%		17,409	23.3	%
Business Services		18,507	33.9	%		15,502	30.1	%

Total	$	86,549	27.1	%	$	82,843	25.5	%

Revenue—Revenue decreased $4.5 million, or 1.4%, to $319.8 million for the third quarter of 2002 from $324.3 million for the third quarter of 2001. Unit volume was down 7.3% as compared to 2001 due to decreases in the Financial Services and Direct Checks segments. Over 30% of the volume decline was due to lower conversion activity, as bank mergers and acquisitions were down from 2001. Conversion activity is driven by the need to replace checks after one financial institution merges with or acquires another. In addition, volume decreased due to the soft economy, robust competition within the industries in which we operate and an overall decline in the number of checks being written. Partially offsetting the decrease in unit volume was a 6.4% increase in revenue per unit due to price increases in all three segments, continued strength in selling licensed designs and services and the improved effectiveness of our selling techniques.

Gross profit—Gross profit decreased $0.8 million, or 0.4%, to $212.0 million for the third quarter of 2002 from $212.8 million for the third quarter of 2001. Gross margin increased to 66.3% for the third quarter of 2002 from 65.6% for the third quarter of 2001. The increase was due to the higher revenue per unit discussed above, continued focus on productivity improvements, including the conversion to lean and cellular manufacturing concepts in our Financial Services check printing plants, and improved product mix.

Selling, general and administrative (SG&A) expense—SG&A expense decreased $3.3 million, or 2.6%, to $124.8 million for the third quarter of 2002 from $128.1 million for the third quarter of 2001. As a percentage of revenue, SG&A expense decreased to 39.0% for the third quarter of 2002 from 39.5% for the third 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

Interest expense—Interest expense decreased $0.1 million to $1.2 million for the third quarter of 2002 from $1.3 million for the third quarter of 2001. The impact of lower interest rates was offset by higher debt levels. During the third quarter of 2002, we had weighted-average debt outstanding of $168.5 million at a weighted-average interest rate of 1.80%. During the third quarter of 2001, we had weighted-average debt outstanding of $107.5 million at a weighted-average interest rate of 3.67%.

Net income—Net income increased $1.6 million, or 3.1%, to $52.7 million for the third quarter of 2002 from $51.1 million for the third quarter of 2001. The increase was primarily due to the reduction in SG&A expense discussed above. 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 third quarter of 2001.

Diluted earnings per share—Diluted earnings per share increased $0.08, or 10.7%, to $0.83 for the third quarter of 2002 from $0.75 for the third quarter of 2001. In addition to the increase in net income discussed above, average shares outstanding decreased from 2001 due to our share repurchase programs. In January 2001, our board of directors approved the repurchase of up to 14 million shares of common stock and in August 2002, the board authorized the repurchase of an additional 12 million shares. As of September 30, 2002, 14.6 million shares had been repurchased under these programs. The change in average shares outstanding resulting from share repurchases, partially offset by the impact of shares issued under employee stock purchase and incentive plans, resulted in a $0.06 increase in earnings per share for the third 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 stock options issued under our stock incentive plan or for shares issued to employees under our amended and restated employee stock purchase 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 September 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.

	Nine Months Ended September 30,
	2002					2001
	$			% of Revenue		$		% of Revenue
Revenue from external customers:
Financial Services	$	578,054		—		$	579,222	—
Direct Checks		236,688		—			229,903	—
Business Services		162,402		—			150,510	—

Total	$	977,144		—		$	959,635	—


Gross profit		645,695		66.1	%		617,955	64.4	%
Selling, general and administrative expense		381,746		39.1	%		390,042	40.6	%
Other operating expense (income)¹		(35	)	—			4,966	0.5	%

Operating income:
Financial Services	$	147,342		25.5	%	$	126,598	21.9	%
Direct Checks		64,656		27.3	%		53,937	23.5	%
Business Services		51,986		32.0	%		42,412	28.2	%

Total	$	263,984		27.0	%	$	222,947	23.2	%

Revenue—Revenue increased $17.5 million, or 1.8%, to $977.1 million for the first nine months of 2002 from $959.6 million for the first nine months of 2001. Revenue per unit was up 4.8% as compared to 2001 due to price increases in all three segments, continued strength in selling licensed designs and services and the improved effectiveness of our selling techniques. Partially offsetting the increase in revenue per unit was a 2.8% decrease in unit volume. Over 50% of this decline was due to lower financial institution conversion activity during 2002, as bank mergers and acquisitions were down from 2001. Additionally, the Direct Checks segment was impacted by lower consumer response rates.

Gross profit—Gross profit increased $27.7 million, or 4.5%, to $645.7 million for the first nine months of 2002 from $618.0 million for the first nine months of 2001. Gross margin increased to 66.1% for the first nine months of 2002 from 64.4% for the first nine months of 2001. The increase was due to the higher revenue per unit discussed above and continued focus on cost reductions, productivity improvements, including the conversion to lean and cellular manufacturing concepts in our Financial Services check printing plants, as well as reduced spoilage.

Selling, general and administrative (SG&A) expense—SG&A expense decreased $8.3 million, or 2.1%, to $381.7 million for the first nine months of 2002 from $390.0 million for the first nine months of 2001. As a percentage of revenue, SG&A expense decreased to 39.1% for the first nine months of 2002 from 40.6% for the first nine months 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 and on-going cost management efforts, including productivity improvements within our call centers. Partially offsetting these decreases was an increase in advertising costs within the Direct Checks segment.

Interest expense—Interest expense decreased $1.1 million to $3.3 million for the first nine months of 2002 from $4.4 million for the first nine months of 2001. The decrease was due to lower interest rates partially offset by higher debt levels. During the first nine months of 2002, we had weighted-average debt outstanding of $161.8 million at a weighted-average interest rate of 1.82%. During the first nine months of 2001, we had weighted-average debt outstanding of $91.9 million at a weighted-average interest rate of 4.96%. 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 $24.0 million, or 17.5%, to $161.9 million for the first nine months of 2002 from $137.9 million for the first nine months of 2001. The improvement was due to the increases in revenue and gross profit and the reduction in SG&A expense discussed above. Also contributing to the improvement was the change in accounting for goodwill explained above in the discussion of third quarter net income. This change resulted in a $3.0 million increase in net income compared to the first nine months of 2001.

Diluted earnings per share—Diluted earnings per share increased $0.56, or 28.4%, to $2.53 for the first nine months of 2002 from $1.97 for the first nine months of 2001. In addition to the increase in net income discussed above, average shares outstanding decreased from 2001 due to our share repurchase programs. In January 2001, our board of directors approved the repurchase of up to 14 million shares of our common stock and in August 2002, the board authorized the repurchase of an additional 12 million shares. As of September 30, 2002, 14.6 million shares had been repurchased under these programs. The change in average shares outstanding resulting from share repurchases, partially offset by the impact of shares issued under employee stock purchase and incentive plans, resulted in a $0.22 increase in earnings per share for the first nine 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 stock options issued under our stock incentive plan or for shares issued to employees under our amended and restated employee stock purchase plan. Had this expense been included in our results, diluted earnings per share would have been $0.04 lower for the nine months ended September 30, 2002 and $0.03 lower for the nine months ended September 30, 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—Financial Services 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 nine months ended September 30, 2002 and 2001 (dollars in thousands):

Financial Services revenue decreased $8.9 million, or 4.5%, to $189.2 million for the third quarter of 2002 from $198.1 million for the third quarter of 2001. The decrease was the result of less financial institution conversion activity during 2002, lower volume due to the soft economy, robust competition within the industries in which we operate and the overall decline in the number of checks being written. Partially offsetting the volume decrease was an increase in revenue per unit due to price increases and continued strength in service revenues. Operating income decreased $3.4 million, or 6.8%, to $46.5 million for the third quarter of 2002 from $49.9 million for the third quarter of 2001. The decrease was due primarily to the revenue decrease, partially offset by productivity improvements, including the transformation to lean and cellular manufacturing concepts, as well as increased efficiencies due to a shift from mail orders to electronic orders.

Financial Services revenue decreased $1.1 million, or 0.2%, to $578.1 million for the first nine months of 2002 from $579.2 million for the first nine months of 2001. The slight decrease was due to lower volume resulting from lower financial institution conversion activity during 2002, as well as the overall decline in the number of checks being written. The volume decline was offset by price increases and continued strength in service revenues. Operating income increased $20.7 million, or 16.4%, to $147.3 million for the first nine months of 2002 from $126.6 million for the first nine months of 2001. The improvement was due to continued focus on cost reductions, productivity improvements, 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, increased efficiencies due to a shift from mail to electronic orders and reduced spoilage.

Direct Checks—Direct Checks 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-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

Direct Checks revenue increased $1.1 million, or 1.6%, to $75.9 million for the third quarter of 2002 from $74.8 million for the third quarter of 2001. This increase was due to higher revenue per unit as a result of price increases, continued strength in selling licensed designs and the improved effectiveness of selling techniques. Partially offsetting the revenue per unit increase was a decrease in volume due to lower direct mail response rates. Operating income increased $4.1 million, or 23.6%, to $21.5 million for the third quarter of 2002 from $17.4 million for the third quarter of 2001. The change in accounting for goodwill explained previously in our discussion of third quarter net income accounted for $1.5 million of the increase. Additionally, the revenue increase, continued call center productivity improvements and a shift to the Internet order channel contributed to improved operating income. Partially offsetting these improvements were increased advertising costs as a result of fewer new customer acquisition vehicles. There has been an overall softening in direct mail industry response rates causing some of the cooperative mailers and other businesses we have relied upon to distribute direct mail advertisements to reduce their circulation or go out of business. This has made it challenging, and more costly, to acquire suitable advertising media for our traditional means of new customer acquisition.

Direct Checks revenue increased $6.8 million, or 3.0%, to $236.7 million for the first nine months of 2002 from $229.9 million for the first nine months of 2001. The increase was due to higher revenue per unit as a result of price increases, continued strength in selling licensed designs and the improved effectiveness of our selling techniques, partially offset by a decrease in volume as direct mail response rates were down. Operating income increased $10.8 million, or 19.9%, to $64.7 million for the first nine months of 2002 from $53.9 million for the first nine months of 2001. The change in accounting for goodwill explained previously in our discussion of third quarter net income accounted for $4.6 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 the increased advertising costs discussed above as a result of fewer new customer acquisition vehicles.

Business Services—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. 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 nine months ended September 30, 2002 and 2001 (dollars in thousands):

Business Services revenue increased $3.3 million, or 6.3%, to $54.7 million for the third quarter of 2002 from $51.4 million for the third quarter of 2001. The increase was due to increased volume from financial institution referrals, the improved effectiveness of our selling techniques and price increases, partially offset by lower financial institution conversion activity during 2002. Operating income increased $3.0 million, or 19.4%, to $18.5 million for the third quarter of 2002 from $15.5 million for the third quarter of 2001. The improvement was due to the revenue increase and improved product mix.

Business Services revenue increased $11.9 million, or 7.9%, to $162.4 million for the first nine months of 2002 from $150.5 million for the first nine months of 2001. The increase was due to increased volume from financial institution referrals and improved selling techniques, as well as higher revenue per unit due to price increases. Partially offsetting these increases was lower financial institution conversion activity during 2002. Operating income increased $9.6 million, or 22.6%, to $52.0 million for the first nine

Net cash provided by operating activities decreased $31.2 million to $177.4 million for the first nine months of 2002 from $208.6 million for the first nine months of 2001. Cash generated in 2001 was higher because of a tax law change that caused the 2001 third quarter estimated federal income tax payment of $29.0 million to be deferred and made in the fourth quarter of 2001. Excluding this impact, cash provided by operating activities for the first nine months of 2002 would have been only $2.2 million lower than 2001. The increase in earnings in 2002 was offset by higher voluntary employee benefit association (VEBA) trust contributions and higher employee profit sharing and pension contributions.

During the first nine months of 2002, net cash provided by operating activities of $177.4 million was primarily generated by earnings before interest, taxes, depreciation and amortization (EBITDA¹) of $308.0 million. These cash inflows were utilized primarily to fund income tax payments, employee profit sharing and pension contributions, contract acquisition payments of $33.5 million made to our financial institution clients and VEBA trust contributions. Net cash provided by operating activities during the first nine months of 2002, the net issuance of $39.8 million of commercial paper, cash receipts of $28.6 million from shares issued under employee plans, and cash on hand at December 31, 2001 enabled us to spend $147.0 million on share repurchases, to pay dividends of $70.1 million and to purchase capital assets of $26.6 million.

During 2002, we expect to spend approximately $35.0 million on purchases of capital assets. Approximately half is expected to be devoted to maintenance of our business, with the remainder targeted for strategic initiatives to drive revenue growth or reduce costs. We also expect to continue to purchase shares under our current share repurchase program. In August 2002, our board of directors approved the repurchase of up to 12 million shares. Through September 30, 2002, we have purchased 0.6 million of these shares at a cost of $28.6 million.

During the first nine months of 2001, net cash provided by operating activities of $208.6 million was primarily generated by EBITDA of $280.6 million. These cash inflows were utilized primarily to fund income tax payments, employee profit sharing and pension contributions, contract acquisition payments of $29.9 million and VEBA trust contributions. Net cash provided by operating activities during the first nine months of 2001, the net issuance of $102.9 million of commercial paper, cash on hand at December 31,

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 80.1 times for the first nine months of 2002 and 50.4 times for the first nine months of 2001. Our committed lines of credit contain 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 September 30, 2002 was 55.9%. For the year ended December 31, 2001 this ratio was 86.8%. The higher debt level as of September 30, 2002 as a result of borrowings to fund our share repurchase program was partially offset by increased EBITDA and the lower amount 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 lines of credit for liquidity. The average amount of commercial paper outstanding during the first nine months of 2002 was $161.8 million at a weighted-average interest rate of 1.82%. As of September 30, 2002, $189.8 million was outstanding at a weighted-average interest rate of 1.83%. 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 have two committed lines of credit which were executed in August 2002. These lines are available for borrowing and as support for our commercial paper program. We have a $175.0 million line of credit which expires in August 2003 and carries a commitment fee of six basis points (.06%). We also have a $175.0 million line of credit which expires in August 2007 and carries a commitment fee of eight basis points (.08%). The credit agreements which govern these lines of credit contain customary covenants regarding EBIT to interest expense coverage and levels of subsidiary indebtedness. We believe the risk of violating our financial covenants is low. No amounts were drawn on these lines during the third quarter of 2002. Our previous line of credit expired in August 2002. No amounts were drawn on this line during 2002 or 2001, and no amounts were outstanding under this line of credit as of December 31, 2001.

In August 2002, our board of directors approved a financial strategy intended to reduce our cost of capital and as a result, increase leverage. This strategy would allow us to increase our debt level up to a maximum of $700 million. The additional debt is expected to be a combination of both long-term and short-term borrowings and would be utilized in part to repurchase shares under a 12 million share repurchase program also approved by our board of directors in August as part of the financial strategy. As a result of this announcement, our long-term credit rating was downgraded to ‘A’ from ‘A+’ by one rating agency and in October 2002, was downgraded to ‘A2’ from ‘A1’ by another rating agency. We still maintain a strong investment-grade credit rating and expect no impact on our ability to borrow. Our credit facilities do not have covenants or events of default tied to maintaining an investment grade rating.

As a step to implementing this financial strategy, in October 2002, we entered into two forward rate lock agreements (the Lock Agreements) to effectively hedge, or lock-in, the annual interest rate on $150.0 million of future debt. The gain or loss on the Lock Agreements will fluctuate with market interest rates until the debt is issued. The cumulative gain or loss realized on the Lock Agreements will be reflected in accumulated other comprehensive income in our consolidated balance sheet and will be reclassified to earnings as a decrease or increase to interest expense over the term of the debt.

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 nine months of 2002.

	Quarter Ended September 30, 2001		Nine Months Ended September 30, 2001
Net income, as reported	$	51,062	$	137,853
Add: Goodwill amortization, net of tax		995		2,985

Pro forma net income	$	52,057	$	140,838


Earnings per share:
Basic — as reported	$	0.76	$	1.98
Basic — pro forma		0.77		2.03

Diluted — as reported	$	0.75	$	1.97
Diluted — pro forma		0.76		2.01

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. In August 2002, our board of directors approved the repurchase of up to 12 million additional shares. Through September 30, 2002, 0.6 million additional shares had been repurchased at a cost of $28.6 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 $60.1 million as of September 30, 2002, and we were in a retained deficit position as of September 30, 2002.

On October 25, 2002, eFunds announced that, among other things, it is reviewing the accounting treatment applied to various transactions that occurred in 2000 and 2001 and certain tax matters related to eFunds’ India operations. We completed the spin-off of eFunds on December 29, 2000. As such, eFunds’ results of operations are reflected as discontinued operations in our consolidated financial statements for the year ended December 31, 2000. eFunds’ results of operations are not included in our consolidated financial statements for any period subsequent to December 31, 2000. Thus, the results of this review will have no impact on our financial position (i.e., balance sheet) as of December 31, 2000 or on our financial position or results of operations for any period subsequent to December 31, 2000. After reviewing the nature and scope of the 2000 transactions which are under review, as described in eFunds’ October 25 announcement and based on information available to us, we do not believe that any adjustment resulting from this review would have a material impact on our results of operations for the year ended December 31, 2000. Furthermore, eFunds’ historical results of operations have no bearing on our current or future results of operations, our business strategy or on our ability to generate cash for current or future uses.

We believe current economic and business conditions are having a modest impact on our results of operations. As an example, there has been a softening in overall direct mail industry response rates, causing some of the cooperative mailers and other businesses we have relied upon to distribute direct mail advertisements to reduce their circulation or go out of business. This, in turn, has had an adverse impact on response rates in our direct-to-consumer businesses and has resulted in increased advertising costs. Given that this is our primary method of acquiring new customers in the direct channel, we continue to explore new advertising opportunities such as the Internet and other partnerships to replace traditional media sources. We have also seen a decline in unit volume during the year as low consumer confidence translates into fewer checks written. In addition, we continue to operate in a highly competitive industry. While we cannot predict what impact these or other factors will have on our results, 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 expect revenue for 2002 to be relatively flat from 2001. Through the first nine months of 2002, we have generated higher revenue per unit due to price increases, continued strength in selling licensed designs and services, and the improved effectiveness of our selling techniques. We expect this trend to continue as we focus on higher-margin products, helping us to mitigate the impact of an overall decline in the number of checks being written and the competitive pressure we continue to face in the Financial Services segment.

We do not expect our results of operations during the fourth quarter of 2002 to be as strong as the first nine months of the year due to the weak economy, the recent downward trend in direct mail response rates, lower financial institution conversion activity, competitive pressure and increased investment in both revenue-generating and cost-saving initiatives. 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 between $0.70 to $0.75 for the fourth quarter of 2002 and in the range of $3.23 and $3.28 for the full year, compared to $0.73 and $2.69 for the fourth quarter of 2001 and full year, respectively.

We have many new initiatives which are in line with this strategy. For example, our Financial Services segment recently launched a comprehensive new program – DeluxeSelect^(SM) – for its financial institution clients. DeluxeSelect 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 financial institution branch offices. We initially presented this new program to 90 financial institution clients in April 2002. As of September 30, 2002, 90% of these clients have elected to participate in DeluxeSelect. We also presented this program to 135 additional financial institutions in October 2002. The impact of DeluxeSelect on revenue will depend to a large extent upon the speed at which our clients can integrate the program with their technology.

In August 2002, our Business Services segment was chosen to be the new exclusive supplier of checks and forms for Microsoft^® Money 2003. This alliance gives users of Microsoft Money 2003 access to various products through Business Services, including business and consumer checks, software compatible laser checks and forms, manual business forms and checks, business cards, stationery and accessories.

In addition to investments in new revenue-generating programs such as DeluxeSelect, 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. 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 have seen 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.

As discussed above under Liquidity, Capital Resources and Financial Condition, in August 2002 our board of directors approved a financial strategy intended to reduce our cost of capital and as a result, increase leverage. This strategy would allow us to increase our debt level up to a maximum of $700 million. The additional debt is expected to be a combination of both long-term and short-term borrowings and would be utilized in part to repurchase shares under a 12 million share repurchase program also approved by our board of directors in August as part of the financial strategy. These steps are intended to enhance shareholder value by allowing us to: (1) reduce our cost of capital; (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 and incentive stock plans. We intend to utilize the debt proceeds, along with cash generated by operations, for general corporate purposes, including funding share repurchases, capital asset purchases, working capital or financing for possible acquisitions.

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 nine 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 continued to utilize commercial paper to fund working capital requirements during the first nine months of 2002, and we also have various lines of credit available. The nature and amount of debt outstanding can be expected to vary as a result of future business requirements, market conditions and other factors.

As of September 30, 2002, we had $189.8 million of commercial paper outstanding at a weighted-average interest rate of 1.83%. 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 $1.2 million for the first nine months of 2002 and $0.6 million for the first nine months of 2001. Other than capital lease obligations, we had no long-term debt outstanding as of September 30, 2002. Also as of that date, we had no fixed income securities in our investment portfolio.

(a) Disclosure Controls and Procedures: Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14 of the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of that evaluation date, our disclosure controls and procedures are effective at alerting them on a timely basis of material information required to be included in our periodic filings with the Securities and Exchange Commission.

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.

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.

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.

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.

In August 2002, we announced that our board of directors approved the repurchase of up to 12 million shares of our common stock. Stock repurchase activities are subject to certain pricing restrictions, stock market forces, management discretion and various regulatory requirements. As a result, there can be no assurance as to the timing and/or amount of shares that we may repurchase under the program.

We believe the slow-down in the United States economy is having a modest impact on our results of operations. As an example, there has been a softening in overall direct mail industry response rates causing some of the cooperative mailers and other businesses we have relied upon to distribute direct mail advertisements to reduce their circulation or go out of business. This in turn, has had an adverse impact on response rates in our direct-to-consumer businesses and has resulted in increased advertising costs. We have also seen a decline in unit volume during the year as low consumer confidence translates into fewer checks written. A continued weak economy could cause this trend to continue, resulting in revenue shortfalls. To mitigate against any such shortfalls, we may have to increase our marketing and sales efforts, which would result in increased expense. We may also have to take steps to further decrease our cost structure. We can provide no assurance that we would be able to sustain our current levels of profitability in such a situation.

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 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.

We have acquired complementary businesses in the past as part of our business strategy and may pursue acquisitions of complementary businesses in the future. We cannot predict whether suitable acquisition candidates can be acquired on acceptable terms or whether any acquired products, technologies or businesses will contribute to our revenues or earnings to any material extent. A significant acquisition could result in the 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 program 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 to perform by one or more of our service providers could cause a disruption in our business while we obtain an alternative source of supply.

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.

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 19, 2002, among us, Bank One, N.A. as administrative agent, The Bank of New York as syndication agent, Wachovia Bank, N.A. as documentation agent and the other financial institutions party thereto, related to a $175,000,000 364-day revolving credit agreement.	Filed herewith

4.5	Credit Agreement dated as of August 19, 2002, among us, Bank One, N.A. as administrative agent, The Bank of New York as syndication agent, Wachovia Bank, N.A. as documentation agent and the other financial institutions party thereto, related to a $175,000,000 5-year revolving credit agreement.	Filed herewith

12.1	Statement re: computation of ratios.	Filed herewith

Exhibit No.	Description	Page Number
4.4	Credit Agreement dated as of August 19, 2002, among us, Bank One, N.A. as administrative agent, The Bank of New York as syndication agent, Wachovia Bank, N.A. as documentation agent and the other financial institutions party thereto, related to a $175,000,000 364-day revolving credit agreement.

4.5	Credit Agreement dated as of August 19, 2002, among us, Bank One, N.A. as administrative agent, The Bank of New York as syndication agent, Wachovia Bank, N.A. as documentation agent and the other financial institutions party thereto, related to a $175,000,000 5-year revolving credit agreement.

12.1	Statement re: computation of ratios.

99.1	CEO Certification of Periodic Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2	CFO Certification of Periodic Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

For the transition period from		to

Commission file number:		1-7945

MINNESOTA		41-0216800
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

3680 Victoria St. N., Shoreview, Minnesota		55126-2966
(Address of principal executive offices)		(Zip Code)

Remainder of	2002	7,353
	2003	29,438
	2004	22,383
	2005	16,680
	2006	11,757

	September 30, 2002		December 31, 2001
Raw materials	$	2,789	$	3,073
Semi-finished goods		6,330		7,215
Finished goods		764		904

Total	$	9,883	$	11,192

	September 30, 2002		December 31, 2001
Contract acquisition costs	$	56,736	$	28,350
Deferred advertising costs		18,210		21,928
Prepaid post-retirement asset		15,336		12,116
Other		3,360		5,532

Total	$	93,642	$	67,926

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

		DELUXE CORPORATION
		(Registrant)

Date: November 14, 2002		/s/ LAWRENCE J. MOSNER
		Lawrence J. Mosner
		Chief Executive Officer (Principal Executive Officer)

Date: November 14, 2002		/s/ DOUGLAS J. TREFF
		Douglas J. Treff
		Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)