In the past three years, our efforts have focused primarily on improving Deluxe’s financial performance to give us the strength and flexibility to act on these opportunities. I am pleased to note that 1998 marked our best financial performance since 1992. Our reported earnings

Gus Blanchard
Chairman, President and
Chief Executive Officer

Deluxe’s opportunities are based on capabilities we have right now in the world of payments. For example, you may be surprised to learn that if you open a checking account, use a debit card, visit an ATM, or write a check in this country, chances are Deluxe is somehow involved in that transaction – whether it’s providing the actual payment vehicle (the check) or facilitating the transaction or the exchange of value via electronic processing. Increasingly, too, a large volume of exclusive information is available to Deluxe from these important access points to the payment system, and this information represents a growing opportunity for Deluxe. Debit Bureau,(SM) announced in early 1998, is the capability that is now enhancing our products and services with information to help our financial services and retail customers minimize their risks and maximize their revenue opportunities with their customers.

The first major service enhanced with Debit Bureau, due for release in June, is FraudFinder(SM), which identifies and ranks potential identity manipulations and fraud in new accounts at financial services companies. According to the FBI, identity theft has become one of this country’s fastest growing crimes, and FraudFinder will help combat this growing problem, while other new products and services enhanced with Debit Bureau will soon help identify revenue opportunities for our customers.

The fact is that Deluxe today touches nearly every financial services company, major retailer, and consumer in the nation.Through Deluxe Electronic Payment Systems (DEPS), we process at least 8 million electronic transactions a day and close to 5 billion a year. DEPS has more than 23 years of experience in the electronic funds transfer industry and, with an $11 million renovation to its data center completed in 1998, is well-positioned for the explosive growth in electronic transactions.With our recent purchase of eFunds Corporation, we are also converting paper checks into electronic transactions at the point of sale, essentially blurring the line between the paper check and plastic payment options (debit and credit cards). Also, among our Deluxe Payment Protection Systems businesses, we verify nearly 3 billion checks per year at the point of sale for major retailers, provide applicant verification services to more than 78,000 financial services company locations, and are one of the largest collections businesses in the United States.

In sum, few companies today possess the end-to-end capabilities Deluxe has in the payment system.These important capabilities are helping us secure a leading role in two areas: 1) creating information that helps our financial services and retail customers and 2) providing secure payment processing as the growth of electronic payments begins to take off.

Check printing
People also ask about check printing–aren’t checks going the way of dinosaurs? As indicated in last year’s annual report and confirmed here again, check usage remains strong in the United States, despite predictions to the contrary. As the world’s largest check printer, Deluxe is happy to lead what remains a profitable industry. As a result, check printing is providing the important investment fuel for Deluxe’s growth opportunities.

Check usage will begin to decline sometime in the near future, but checks will be around for many years, which is why we’ve concentrated on improving this important payment method. For example, our recent acquisition of eFunds–and its technology to convert checks into electronic transactions–will help bring checks into the next millennium by speeding up the check processing system and reducing costs, thus making the check a more viable option for many years.

On behalf of financial services companies, we are also significantly improving the way consumers can order personal checks by offering two new electronic order channels. Soon to be introduced, the first channel is Internet check reordering – an exciting development that will enable consumers to place reorders directly from our Web site at www.deluxe.com or via a link to Deluxe from their financial services company’s site.The second new channel is our voice response unit (VRU) system, which will enable consumers to make a toll-free telephone call to Deluxe to place their reorders. By the way, approximately 70 percent of our personal check orders are reorders so our new service should be a great benefit to our financial services company customers (eliminates handling and forwarding paper orders), to Deluxe (greater efficiency), and most of all, to consumers (greater convenience and faster turnaround). Direct Checks Unlimited, our direct-to-consumer check business formerly called Current Checks, is also providing online ordering on its Web site at www.currentchecks.com, and Deluxe Business Forms will soon be offering Internet ordering services.

We also continue to implement the newest technology and process improvements to our check production system, preparing it too for the next millennium. By the middle of next year, nine check production plants, taking advantage of various technology and process improvements, will be producing more checks than 60 plants once did less than a decade ago.

Strong financial performace
By almost any financial standard or measurement, Deluxe delivered a strong financial performance in 1998. Our operating earnings, gross margins, working capital, cash flow and cash on hand, and asset utilization all met or exceeded targets. By the end of 1998, the combination of management initiatives and divestitures enabled the Company to announce that every core operating unit–Deluxe Paper Payment Systems, Deluxe Electronic Payment Systems and Deluxe Payment Protection Systems–had achieved profitability–a statement not possible for quite a few years.

In the past year, we also put in place many of the building blocks for continued financial strength.These included our successful implementation of SAP financial software and our adoption of activity-based costing/management processes to focus our efforts on the highest payoff activities.We also launched a financial shared services center to improve efficiency and ensure consistent excellence in financial administration; announced an effort to reduce our selling, general and administrative expenses below the level of 35 percent of revenues by the end of the year 2000; continued plant consolidation and manufacturing improvements; and developed and rolled out the Deluxe Value Added management system to ensure that all projects, investments and employee actions will contribute to shareholder value in 1999 and beyond.

We also continue to invest significantly in the people-oriented foundations necessary for any strong company. Our Deluxe Way focus on core values and strategic business principles was strengthened and contin-ues to light our way. Deluxe’s diversity initiative has gained national recognition and has enhanced the Company’s ability to attract top quality personnel from across the nation. We’re also introducing a new employee and leadership development process to strengthen performance appraisals, identify and develop tomorrow’s management and leaders, and offer more effective career planning for all employees.

Increasing shareholder value
All of our developments and actions reflect a strong commitment to increase shareholder value. Unfortunately, we have been unable to execute our strategy to make one or more major acquisitions in today’s stock market, where the market values of companies that may represent a good strategic fit with Deluxe have been too high. However, if market conditions change, a major acquisition may still be an option for us in the future. Another probable option for us in the near future is share repurchase, which would offer us an immediate opportunity to add to shareholder value by reducing the number of shares outstanding.

We will also look for smaller acquisitions and business alliances that contribute to future earnings and enhance our information and electronic payment processing capabilities.We’ll also invest more aggressively in new products and services–particularly those enhanced with Debit Bureau. Our India-based joint venture also continues to grow, with 1999 revenues expected to exceed $25 million. And we continue to evaluate operational and organizational changes that will further strengthen our ability to increase revenues and earnings.

In sum, I believe Deluxe is a good place for your investment. Our strong capabilities today in the world of payments point to a leading role in tomorrow’s payment system.We have unique information now being applied to innovative products and services. Our check printing business is giving us the fuel to leverage our opportunities. Our financial position is sound, and we are investing substantially in our business and our people. Most of all, we are committed to increasing shareholder value in a number of ways.

On a personal note, I recognize the contributions of retiring board members Whitney MacMillan, former chairman and CEO of Cargill, Inc., who joined our board in 1988, and Allen Jacobson, former chairman and CEO of 3M Company, who joined in 1991. I thank both for their service to Deluxe’s shareholders and wish them well in retirement.

I also thank you, our shareholders, for your continued support, and I gratefully acknowledge the dedication of thousands of Deluxers who have worked very hard to position our Company for a positive future.

Sincerely,

J.A. Blanchard III
Chairman, President and Chief Executive Officer

Content Listing