It is a pleasure to report to you on a second year of substantial improvement in Deluxe’s operating performance and earnings. As is the case with any company of our size, not all of our businesses performed exactly as planned. But the unanticipated difficulties of a few were offset by superior performance among others, with the result that our targeted adjusted operating earnings of $2.15 — a 13 percent improvement over 1996 — was achieved. Our substantially lower net income of 55 cents per share is the result of a large third quarter pretax accounting charge of $180 million primarily to reduce our purchase-related assets and to reserve against the outcome of litigation against Deluxe Electronic Payment Systems (DEPS), which we have appealed. That litigation pertains to DEPS’ participation in a contract to provide electronic benefits transfer services to a number of southeastern states. We believe that numerous errors were made by the court during trial and that the verdict against DEPS is not supported by the law or evidence. We are hopeful that an appeals court will agree with us.

The major consolidation and further automation of our core check printing business continued throughout the year. Another 10 plants were closed, bringing the year-end total to just 18 production facilities, which handled the largest volume of checks ever printed by Deluxe. Our massive new check order entry and customer service system continued to be deployed throughout the year, although at a slower pace than originally planned as a number of systems “bugs” appeared which had to be remedied. Those problems have now been corrected, and we are installing customers on this system at an aggressive rate. These higher-than-planned costs, as well as aggressive competitive pricing pressure, cut into expected profit margins of our check printing business, but it continued to generate great profits and substantial cash for the Company.

Deluxe Payment Protection, Current Checks, and Deluxe Business Forms had very good above-plan years. Within Deluxe Payment Protection, ChexSystems, NRC, and SCAN all exceeded their profit targets for the year in highly competitive industry segments. Current Social Expressions/PaperDirect, which had been targeted for sale during 1997, achieved its financial targets for the year, even as sale efforts continued. And DEPS, although not yet back where we want it, exceeded its plan and, excluding special charges, is making progress in its efforts to return to profitability.

The Deluxe Way

While achieving substantial improvement in adjusted operating earnings, we also greatly strengthened the Company’s management team as well as the focus and commitment of all Deluxers to our continued financial success. By mid-year, we had recruited Mr. Tom VanHimbergen, a veteran financial executive, to become chief financial officer, and had elevated Mr. Larry Mosner to the position of executive vice president with responsibilities for day-to-day operations across the Company. Other executive changes included a mix of additional outside talent as well as the promotion to greater responsibility for a number of Company veterans. Our board was also further strengthened by the additions of Mr. Jack Robinson, a consumer-marketing and finance executive from Sara Lee Corporation, and Mr. Hatim Tyabji, CEO of VeriFone Inc., a proven international business executive and one of the world’s leading authorities on electronic payment systems.

And as the top deck was being augmented, our Deluxe Way and diversity initiatives were rolled out across the Company. More than 1,600 management and supervisory personnel participated in a three-day seminar which introduced the Deluxe Way and its focus on core values (the first of which is “respect and dignity for all”) and strategic business principles (the first of which is “profitable growth”). Closely linked to this effort was the day-long introduction to diversity in which more than 4,000 employees of all levels participated. Deluxe’s commitment to diversity was further manifested by actions to match its words: among those elected to officer positions or moving to higher executive responsibilities during the year were four women, and the recruitment and election of Mr. Morris Goodwin to be corporate vice president and treasurer and the election of Mr. Jack Robinson to the board of directors represented the first appointments of African Americans to either position. Without question, Deluxe is a stronger company for its commitment to recognizing and promoting talent wherever it may be found.

In the case of both the Deluxe Way and our diversity initiative, our goal is to engage the active participation of all Deluxers in the achievement of our corporate success, and to align their interests with those of our customers and shareholders — a goal that was further enhanced at the start of 1998 by the introduction of our DeluxeSHARES program. Every employee who doesn’t participate in another stock option program has been granted options to buy 100 shares of Deluxe stock which will vest after three years or when the share price has appreciated to $49.50 — a 50 percent improvement over the $33 per share price on the grant date. All Deluxers are intent upon ensuring that vesting occurs more quickly than three years from now.

Finally, major changes in our business planning and financial management processes — driven by Mr. Mosner and Mr. VanHimbergen — have enhanced our ability to plan for the future and manage the Company toward greater profitability. The internal roll-out of the SAP accounting package begins in April and will be operational by year-end for most of the Company, further improving our decision-making while lowering expenses. And all Company officers have annual incentive bonuses more strongly tied to operating earnings and enhanced returns from the use of our assets. Most employees in the Company are similarly incented to strengthen earnings. This combination of enhanced tools, stronger management, and greater attention to financial performance across the Company helped us conclude 1997 with a stronger balance sheet and earnings capacity than we’ve enjoyed in a number of years and has enabled us to publicly state our expectations of achieving at least 3 to 6 percent annual growth in revenues and 5 to 9 percent annual growth in earnings, before taking into consideration the benefits of any significant acquisitions or alliances we may conclude.

The Future

Your Company faces two sets of challenges as it looks to the future. The first is more near-term in nature and involves a number of one-time expenditures and major projects related to SAP deployment, completion of the order entry and customer care system for check printing, and systems changes required by the approach of “year 2000.” As a systems-intensive company, we began more than a year ago to prepare for the software changes mandated by arrival of the next millennium, and we are confident of completing our work on time. These one-time costs, we estimate, will equate to approximately 15 cents a share in 1998, but will drop off quickly thereafter. Once these major changes are completed, we will have a more cost-effective company infrastructure upon which to manage Deluxe for greater profitability.

Our longer-term challenge remains that of preparing for the day when check writing in the United States begins to diminish, and of augmenting our non-check businesses in such a way that their own growth will more than offset the eventual decline in check printing profitability.

Fortunately, there is no indication that checks will quickly disappear: nearly 85 percent of American adults still maintain checking accounts, and they wrote about 63 billion checks last year — approximately half of which were printed by Deluxe. Check writing continues to expand in the United States, and checks, along with cash, still account for 74 percent of all payment transactions in this country — well ahead of the 18 percent for credit cards and 2.5 percent for debit cards. Nevertheless, most financial analysts attribute the very modest growth in Deluxe’s share price to the absence of a clear demonstration that Deluxe has non-check growth potential that will overcome the eventual decline in check profits — whenever that day arrives.

We are preparing for that day, however. For example, we have continued to invest in our payment protection, direct marketing, and electronic transaction processing segments. Each of these three market segments accounts for $3.5 billion to $5 billion in annual revenues, with annual growth rates ranging from 8 to 20 percent. Each segment offers us opportunities to link our vast sources of information — information regarding households, buying patterns, past problems (if any) with check writing and payments, etc. — to provide our client financial institutions and retailers with a combination of customized direct marketing programs as well as enhanced protection against those who abuse the payment system in this country. Deluxe’s 83-year history of integrity and confidentiality of information makes us a provider of choice of such information.

This legacy also makes us a desirable partner for other top quality information-oriented companies: our recently announced DEBIT BUREAUSM, the result of an alliance with Acxiom Corporation and Fair, Isaac & Company, Inc., is one such example (this new product family is explained later in this annual report). Our joint venture with India’s leading information technology company, HCL Corporation, has begun providing essential software services to U. S. financial institutions (as well as to Deluxe itself), and the joint venture is preparing to help lead the modernization of India’s banking and payment systems in the near future. Other potential alliances are under investigation. And our deep links to the financial services industry open many doors of opportunity for expanding our growth in these segments.

Because our financial position has improved significantly over the last two years, we are able and interested in expanding through significant acquisitions as well as through internally funded development. As always, however, we want to use this strength intelligently, and that has caused us to avoid certain potential acquisitions where the target company’s very high price/earnings multiple would have produced unacceptable future earnings dilution for Deluxe’s shareholders. However, the stock market is a constantly changing place, and we remain watchful and ready to move when a target company and the overall economics of an acquisition appear right for such a transaction.

Deluxe Corporation has a very strong leadership team, a committed and focused employee body of great depth and talent, a pristine balance sheet backed by strong operating earnings and growing cash in the bank, and the continued respect of our customers and competitors alike. While we cannot predict or disclose the precise timing and nature of our next major growth initiatives, we have a board-approved growth strategy and are ready to move quickly when the right opportunity arises. As always, we deeply appreciate your continued investment in our Company and will always work to justify your confidence in us.

Finally, and on a personal note, I want to express my deep appreciation to my predecessor as CEO and board chairman, Mr. Harold Haverty, whose departure from the board was announced late last year. After a 43-year career at Deluxe and 27 years as a director of the Company, Harold’s unceasing support for me and the many changes that have come to Deluxe over the last three years has been enormously helpful. The board as well as all of Deluxe’s employees join me in wishing Harold and his wife, Ethel, a long and happy retirement.

Sincerely,

J.A. Blanchard III
Chairman, President, and Chief Executive Officer
March 2, 1998