October 20, 2000 St. Paul, Minn.—Deluxe Corporation (NYSE: DLX) reported record third quarter earnings of $.68 per diluted share today, ahead of consensus estimates. Quarterly results included $4 million of one-time expenses associated with the separation of eFunds and Deluxe Paper Payment Systems (PPS). Excluding these separation costs, third quarter earnings were $.72 per diluted share. Third quarter performance Deluxe’s third quarter 2000 net earnings were $49.4 million, or $.68 diluted and basic per share, on revenues of $404.9 million, compared with net earnings of $49.1 million, or $.65 diluted and basic per share, on revenues of $417.1 million in the third quarter of 1999. Adjusted for separation expenses, EPS was $.72 diluted and basic per share. eFunds contributed income of approximately $.05 per share to Deluxe’s consolidated EPS for the quarter and contributed a loss of $.12 per share for the same period in 1999. Third quarter 1999 results included revenues of $28.2 million from a business that Deluxe divested at the end of 1999. Adjusted for divestitures, Deluxe’s consolidated revenues increased 4.1 percent. Paper Payment Systems had third quarter revenues of $314.6 million, compared to $311.5 million a year ago. Designer Checks, which was acquired earlier this year, contributed $14.6 million in revenue. Equivalent unit volume for PPS was down 5.1 percent compared to third quarter 1999, however, revenue per unit increased 6.4 percent and profit per unit was up 15.7 percent. Revenues for eFunds Corporation (formerly Electronic Payment Systems, iDLX Technology Partners and Government Services) increased 30.2 percent to $104.0 million, compared to $79.9 million a year ago. Deluxe’s consolidated revenues reflect almost $14 million of eliminations from intercompany sales in the third quarter of 2000 and $2.5 million of eliminations for the year earlier period related to Deluxe’s information services outsourcing contract with eFunds. Deluxe’s consolidated gross margin improved to 56.7 percent of sales in the third quarter from 55.1 percent for the same period last year. Selling, general and administrative (SG&A) expense was $152.5 million or 37.7 percent of sales, compared to $156.3 million or 37.5 percent of sales a year ago. Excluding separation expenses, SG&A was 36.7 percent of sales in third quarter 2000. Operating income reached $77.2 million or 19.1 percent of sales in the third quarter, compared to $73.4 million or 17.6 percent of sales in third quarter 1999. Excluding separation costs, operating income was $81.2 million or 20.1 percent of sales in third quarter 2000. EBITDA (earnings before interest, taxes, depreciation and amortization) was $105.8 million, up 6.7 percent in third quarter 2000 versus $99.2 million a year ago. Excluding separation costs, EBITDA was $110.3 million. Capital spending was $25.8 million during third quarter 2000, compared to $27.1 million in the year earlier period. The Company’s effective tax rate for the third quarter was 37.5 percent versus 36.9 percent a year ago. Nine-month performance Through nine months, Deluxe’s net earnings were $128.6 million, or $1.78 diluted and basic per share, compared to earnings of $144.9 million or $1.85 diluted per share and $1.86 basic per share in 1999. Adjusted for separation expenses, and additional net adjustments for eFunds’ electronic benefits loss contracts and restructurings in the second quarter of 2000, EPS was $1.97 diluted per share. eFunds contributed income of approximately $.01 per share to Deluxe’s consolidated EPS for the nine month period and contributed a loss of $.10 per share for the year earlier period. Consolidated revenues were $1,216.1 million for the nine months ended September 30, 2000, compared to $1,239.0 million a year ago. Nine-month 1999 results included revenues of $94.7 million for a business that Deluxe divested at the end of 1999. Adjusted for divestitures, Deluxe’s consolidated revenues increased 6.3 percent. Paper Payment Systems’ revenues were up 3.0 percent to $955.0 million, compared to $927.2 million during the first nine months of 1999. Designer Checks contributed $41.3 million of revenue. Revenues for eFunds were up 38.5 percent to $305.2 million, from $220.3 million a year ago. Deluxe’s consolidated revenues reflect just over $44 million of eliminations from intercompany sales during the first nine months of 2000 and just over $3 million of eliminations for the year earlier period. Deluxe’s consolidated gross margin improved to 56.7 percent of sales through nine months, compared to 55.0 percent in 1999. SG&A expense was up from 36.5 percent of sales to 39.3 percent of sales. Excluding the separation expenses and the net restructuring adjustments in the second quarter of 2000, SG&A was 38.3 percent of sales through the first nine months of 2000. The increase in SG&A reflects the acquisition of Designer Checks, and investments in e-commerce capabilities for Paper Payment Systems and investments within eFunds. The operating income margin was 17.3 percent of sales for the nine-month period. Excluding separation expenses and the additional loss contract and restructuring adjustments, the operating margin was 19.2 percent of sales. EBITDA was $282.3 million, compared to $295.0 million in 1999. Excluding separation expenses and additional net adjustments for eFunds’ electronic benefits transfer loss contracts and restructurings in the second quarter, EBITDA was $305.2 million for the nine month period. Approximately $92 million of Deluxe Value Added (DVA) was created during the first nine months of 2000. DVA represents Deluxe’s calculation of return on capital invested in the business that exceeds the cost of capital. Capital spending was $68.6 million through the first nine months of the year, compared with $78.7 million in the same period of 1999. The Company’s effective tax rate through the first three quarters was 37.5 percent versus 38.0 percent in 1999. 2000 operating plan on target "Paper Payment Systems and eFunds both had strong performances in the third quarter and Deluxe is on track to deliver its 2000 earnings from operations target," said J. A. Blanchard, chairman and CEO. "And we are proceeding with our plan to distribute the remaining portion of Deluxe’s ownership in eFunds to Deluxe shareholders via a spin-off." The spin-off On October 9, 2000, the Company announced that it would be completing the separation of eFunds Corporation by means of a tax-free spin-off rather than by an exchange offer or split-off, as originally planned. Under the spin-off, every Deluxe shareholder of record on a designated record date will receive a fixed number of eFunds shares for each Deluxe share owned. The spin-off will distribute 40 million shares of eFunds common stock currently owned by Deluxe to Deluxe’s shareholders, and is conditioned upon obtaining Internal Revenue Service (IRS) confirmation that the spin-off will be tax-free to the Company and its shareholders. While there can be no assurance that such confirmation will be obtained, the Company is targeting year-end for completion of the spin-off. In accordance with applicable accounting rules for split-offs, the Company recognized a gain of $30.1 million from the IPO of eFunds shares in June of 2000. Due to its decision to pursue a spin-off, the Company will be required to unwind this $30.1 million gain in its June 30 consolidated income statement and reclassify it to additional paid in capital. A spin-off transaction requires a gain on the sale of subsidiary stock to be recorded as a capital transaction, directly in shareholders’ equity, rather than in the consolidated income statement. Business outlook "We are proceeding with our plan to separate Deluxe’s core check printing businesses and its eFunds business via a spin-off," said Lawrence J. Mosner, vice chairman of Deluxe who is designated to become chairman and CEO after the spin-off of eFunds. "The separation is still the best strategic business decision and a spin-off is the fairest means of meeting our shareholder value goal in today’s market and at the current prices of Deluxe and eFunds shares." Excluding separation expenses and the eFunds loss contract and restructuring charges recorded in the second quarter, eFunds is expected to contribute approximately $.20 of earnings per share to Deluxe’s 2000 consolidated performance. The remainder of the Company (PPS and the holding company) is expected to contribute between $2.42 to $2.45 of earnings per share this year which gives Deluxe a consolidated earnings target of $2.62 to $2.65 per share for 2000 before the separation and loss contract charges. Excluding eFunds, EBITDA is expected to be in the range of $350 to $360 million for 2000. "After the separation, Deluxe will continue to be strong financially," said Lois M. Martin, chief financial officer. "We will have a strong balance sheet and cash flows to support high return investments in our businesses, pay dividends, and pursue strategic accretive acquisitions." "Many shareholders have asked about our intentions concerning Deluxe’s dividend payout and share repurchaseactivities following the spin-off. We have no current plan to modify our quarterly dividend of $.37 per share or to engage in any share repurchase activity," Martin explained. "As a result of restrictions imposed at this time in connection with the tax-free spin-off of eFunds, our tax lawyers have advised us that no change concerning our capital structure may be made at this time. After confirmation of the tax-free status of the spin-off is obtained from the Internal Revenue Service and the spin-off is completed, Deluxe will have greater flexibility to consider various alternatives." As announced on October 9, Deluxe is repositioning its PlaidMoon business concept within its existing direct-to-consumer business (Direct Checks) and its business-to-business unit (Business Forms). PlaidMoon is intended to leverage Deluxe’s personalization and information management competencies into an Internet-based business that allows consumers to design and purchase personalized items. "Instead of being a stand-alone business as we’d planned, we will scale-back our investment and fold the initiative into existing businesses where we have a proven track record of e-commerce success," Mosner said. "Regarding the financial institution (FI) channel," said Mosner, "we expect that it will continue to be a challenge in 2001, both from a volume and price standpoint. The FI market continues to contract as more consumers order their checks direct and switch to alternative payment methods. However, we expect to continue to invest in our core check businesses next year as we enhance our e-commerce capabilities. We will also increase promotional spending to attract new customer orders in our direct businesses as the return on this investment is very strong." Following the planned spin-off of eFunds, Deluxe expects its 2001 earnings from operations and EBITDA to be relatively flat when compared to its earnings this year (excluding eFunds) as weaker profitability in the FI channel and investment in new customer acquisition in the direct channel are offset by reduced PlaidMoon spending and the elimination of most holding company expenses. Revenues are also expected to be flat year-over-year as pricing and volume pressures in the FI channel are offset by improved product mix and growth in the direct channel businesses.