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Article by DailyStocks_admin    (08-08-08 09:06 AM)

Deluxe Corp. CEO LEE J SCHRAM bought 22492 shares on 8-04-2008 at $14.45

BUSINESS OVERVIEW

COMPANY OVERVIEW
Through our industry-leading businesses and brands, we help small businesses and financial institutions better manage, promote, and grow their businesses. We use direct marketing, a North American sales force, financial institution referrals, independent distributors and the internet to provide our customers a wide range of customized products and services: personalized printed items (checks, forms, business cards, stationery, greeting cards, labels, and retail packaging supplies), promotional products and merchandising materials, fraud prevention and marketing services and financial institution customer loyalty and retention programs. We also sell personalized checks, accessories, stored value gift cards and other services directly to consumers.
BUSINESS SEGMENTS
Our business segments include Small Business Services (SBS), Financial Services and Direct Checks. These businesses are generally organized by type of customer and reflect the way we manage the company. Additional information concerning our segments appears under the caption “Note 17: Business segment information” of the Notes to Consolidated Financial Statements appearing in Item 8 of this report.
Small Business Services
SBS operates under various brands including Deluxe, New England Business Service, Inc. (NEBS ® ), Safeguard ® , McBee ® , and RapidForms ® . This is our largest segment in terms of revenue and operating income, and we are concentrating on profitably growing this segment. SBS strives to be a leading resource to small businesses by providing personalized products and services that help them manage, promote and grow their businesses. SBS sells business checks, printed forms, promotional products, marketing materials and related services and products to more than six million small business customers in the United States and Canada. Of these customers, four million have ordered our products or services in the last 24 months. Printed forms include billing forms, work orders, job proposals, purchase orders, invoices and personnel forms. We also produce computer forms compatible with accounting software packages commonly used by small businesses. Our stationery, letterhead, envelopes and business cards are produced in a variety of formats and ink colors. Acquisitions in recent years have added capabilities in the custom, full-color digital and web-to-print spaces.
The majority of SBS products are distributed through more than one channel. Our primary channels are direct mail, in which promotional advertising is delivered by mail to small businesses, and financial institution referrals. These efforts are supplemented by the account development efforts of an outbound telemarketing group. We also sell through internet websites, a network of independent local dealers and Safeguard ® distributors, as well as our field sales organization that calls directly on small businesses. Customer service for initial order support, product reorders and routine service is provided by a network of call center representatives located throughout the United States and Canada.

Our focus within SBS is to grow revenue and increase operating margin by continuing to implement the following strategies:
• Acquire new customers by leveraging customer referrals that we receive from our financial institution clients and from other marketing initiatives such as direct mail and e-commerce;

• Increase our share of the amount small businesses spend on the products and services in our portfolio;

• Consolidate brands and leverage cross-selling opportunities; and

• Continue to optimize our cost and expense structure.
We are investing in several key enablers to achieve our strategies. These key enablers include improving our e-commerce capabilities, implementing an integrated platform for our various brands, improving our customer analytics and focusing on key vertical segments and improved merchandising. As we focus on these key enablers, we plan to streamline and update our brand structure, as well as transition our sales model to integrate field sales, marketing and customer call centers across the company. We believe this creates more focus on customers, positions us for growth and ensures we are leveraging processes, facilities and resources to our best advantage. We have also introduced a new www.Deluxe.com website which will serve as a platform for improved e-commerce capability, and we have identified significant opportunities to expand sales to our existing customers.
Additionally, the small business customer referrals we receive from our Deluxe Business Advantage SM program, which provides a fast and simple way for financial institutions to offer expanded personalized service to small businesses, will continue to be an important part of our growth strategy. We have acquired companies which allow us to expand our business in the custom, full color, digital and web-to-print space with our small business customers and we divested a non-strategic product line. Recently, we introduced the Deluxe Marketing Store to offer fast, hassle-free solutions for small businesses. The Deluxe Marketing Store is a website that offers products and services to help small businesses reach their customers, build customer loyalty and promote their business. Small businesses can design and create logos, websites, mailings and other promotional items. The Deluxe Marketing Store is also a resource for small businesses as it contains useful information for growing and managing a small business.
Financial Services
Financial Services sells personal and business checks, check-related products and services, stored value gift cards and customer loyalty, retention and fraud monitoring/protection services to financial institutions. We also offer enhanced services such as customized reporting, file management and expedited account conversion support. Our relationships with specific financial institutions are generally formalized through supply contracts which usually range in duration from three to five years. We serve approximately 7,000 financial institutions in the United States. Consumers and small businesses typically submit their check order to their financial institution, which then forwards the order to us. We process the order and ship it directly to the consumer or small business. Financial Services produces a wide range of check designs, with many consumers preferring one of the dozens of licensed or cause-related designs we offer, including Disney ® , Warner Brothers ® , Garfield ® , Harley-Davidson ® , NASCAR ® , PGA TOUR, Thomas Kinkade ® , Susan G. Komen Breast Cancer Foundation and National Arbor Day Foundation ® . Our strategies within Financial Services are as follows:
• Continue to retain core check revenue streams and acquire new customers;

• Provide services and products that differentiate us from the competition and make us a more relevant business partner to our financial institution clients; and

• Continue to simplify our business model and optimize our cost and expense structure.
To achieve our strategies we are leveraging our customer acquisition and loyalty programs, our Deluxe Business Advantage program and enhanced small business customer service. The Deluxe Business Advantage program is designed to maximize financial institution business check programs by offering expanded personalized service to small businesses with a number of service level options.

In our efforts to expand beyond check-related products, we have introduced and continue to pilot several new services that focus on customer loyalty and retention. Two examples are the Welcome Home SM Tool Kit and the Deluxe Impressions SM products which enable financial institutions to forge strong bonds with new customers, thereby increasing customer loyalty and retention. We also offer Deluxe ID TheftBlock ® , a set of fraud monitoring and recovery services that provides assistance to consumers in detecting and recovering from identity theft. We also enhanced our stored value gift card program and launched DeluxeCalling SM , a service providing a first point of contact with new indirect loan consumers on behalf of our financial institution clients. This service leverages our core competency of call center expertise and provides incremental revenue and increased customer retention for our financial institution clients. Providing products and services that differentiate us from the competition is expected to help offset the decline in check usage and the pricing pressures we are experiencing in our check programs. As such, we are also focused on accelerating the pace at which we introduce new products and services.
In addition to these value-added services, we continue to offer our Knowledge Exchange TM Series for financial institution clients through which we host knowledge exchange expos, conduct web seminars and host special industry conference calls, as well as offer specialized publications. Through this program, financial institutions gain knowledge and exposure to thought leaders in areas that most impact their core strategies: client loyalty, small business and retail client strategy, cost management, customer experience and brand enhancement. Our Collaborative initiative, a key component of the Knowledge Exchange Series, enlists a team of leading financial institution executives who meet with us over a one year timeframe to develop and test specific and focused solutions on behalf of the financial services industry. These findings and new strategies or services are then disseminated for the benefit of all our clients. Our Small Business Collaborative initiative grew out of our Knowledge Exchange Series and explored and identified innovative ways for financial institution clients to improve relationships with small businesses. Our current Collaborative is exploring new ways in which financial institutions can improve the customer dispute resolution process in such a way that customer loyalty is enhanced. The findings from our current Collaborative will be disclosed at a conference in May 2008.
In addition to our initiatives to retain customers and introduce new products and services, we continue our efforts to simplify processes, eliminate complexity in this business and lower our cost structure. Our efforts are focused on using lean principles to streamline call center and check fulfillment activities, redesign services into standardized flexible models, eliminate multiple systems and work streams and strengthen our ability to quickly develop and bring new products and services to market.
Direct Checks
Direct Checks is the nation’s leading direct-to-consumer check supplier, selling under the Checks Unlimited ® , Designer ® Checks and Checks.com brand names. Through these brands, we sell personal and business checks and related products and services directly to consumers using direct response marketing and the internet. We estimate the direct-to-consumer personal check printing portion of the payments industry accounts for approximately 15% of all personal checks sold.
We use a variety of direct marketing techniques to acquire new customers, including newspaper inserts, in-package advertising, statement stuffers and co-op advertising. We also use e-commerce strategies to direct traffic to our websites, which include: www.checksunlimited.com, www.designerchecks.com and www.checks.com. Our direct-to-consumer focus has resulted in a total customer base of over 43 million customers, the most in the direct-to-consumer checks marketplace.
Direct Checks competes primarily on price and design. Pricing in the direct-to-consumer channel is generally lower than prices charged to consumers in the financial institution channel. We also compete on design by seeking to offer the most attractive selection of images with high consumer appeal, many of which are acquired or licensed from well-known artists and organizations such as Disney ® , Warner Brothers ® , Harley Davidson ® and Thomas Kinkade ® .
• Maintain our 2007 level of marketing spend, which was increased from previous years;

• Maximize the lifetime value of customers by selling new features and accessories; and

• Continue to optimize our cost and expense structure.
Beginning in 2007, we increased our advertising circulation of free-standing inserts under a new direct mail advertising contract which will remain in effect for the next several years. This has been an effective form of new customer acquisition in this channel. We also intend to increase the portion of our advertising expense designated for customer retention by utilizing reactivation and e-mail campaigns. We continue to develop improved call center processes, provide additional products to Direct Checks’ small business customers and explore other avenues to increase sales to existing customers. In late 2006, we introduced the EZShield TM product, a fraud protection service that provides reimbursement to consumers for forged signatures or endorsements and altered checks. We have also introduced holiday greeting cards and stored value gift cards on our websites.

We remain one of the largest providers of checks in the United States, both in terms of revenue and the number of checks produced. We provide check printing and related services for approximately 7,000 financial institution clients, as well as personalized checks, related accessories and fraud prevention services directly to millions of small businesses and consumers. Checks and related services account for the majority of the revenue in our Financial Services and Direct Checks segments and represent 48.9%, 46.1% and 44.8% of SBS total revenue in 2007, 2006 and 2005, respectively.
We are a leading provider of printed forms to small businesses, having provided products to more than six million customers over the past five years. Printed forms include billing forms, work orders, job proposals, purchase orders, invoices and personnel forms. We produce computer forms compatible with accounting software packages commonly used by small businesses. Our stationery, letterhead, envelopes and business cards are produced in a variety of formats and ink colors. These items are designed to provide small business owners with the customized documents necessary to efficiently manage their business. We also provide promotional printed items and digital printing services designed to fulfill selling and marketing needs of the small businesses we serve.
MANUFACTURING
We continue to focus on improving the customer experience by providing excellent service and quality, reducing costs and increasing productivity. We accomplish this by embedding lean operating principles in all processes, emphasizing a culture of continuous improvement. Under this approach, employees work together to produce products, rather than working on individual tasks in a linear fashion. Because employees assume more ownership of the end product, the results are improved productivity and lower costs. We continue to see the benefit of these operational efficiencies in our results. The expertise we have developed in logistics, productivity and inventory management has allowed us to reduce our number of production facilities while still meeting client requirements. We closed six check printing facilities in 2004, and in 2006, we closed our Los Angeles, California and Athens, Ohio printing facilities. Aside from our plant consolidations, we continue to seek other innovations to further increase efficiencies and reduce costs. During 2007, we implemented a new flat check package to mitigate the effects on our customers of a postal rate increase, which demonstrates our commitment to innovative solutions.

We have a shared services approach to manufacturing through which our three business segments share manufacturing operations in order to optimize capacity utilization. This allows us to create centers of operational excellence that have a culture of continuous improvement. We have created blended sites to serve a variety of segments, brands and channels. As a result, we continue to reduce costs by utilizing our assets and printing technologies more efficiently and by enabling employees to better leverage their capabilities and talents.
INDUSTRY OVERVIEW
Checks
According to a Federal Reserve study released in December 2007, approximately 33 billion checks are written annually. This includes checks which are converted to automated clearing house (ACH) payments. Checks remain the largest single non-cash payment method in the United States, accounting for approximately 35% of all non-cash payment transactions. This is a reduction from the Federal Reserve Study released in December 2004 when checks accounted for approximately 45% of all non-cash payment transactions. The Federal Reserve estimates that checks written declined approximately four percent per year between 2003 and 2006. According to our estimates, the use of small business checks is declining at a rate of two to four percent per year. The total transaction volume of all electronic payment methods exceeds check payments, and we expect this trend to continue. We believe check usage tends to be fairly resilient to downturns in the economy, so we expect recent economic conditions to have only a minor impact on our personal check businesses in the coming year.
Small Business Customers
The Small Business Administration’s Office of Advocacy defines a small business as an independent business having fewer than 500 employees. In 2006, the most recent date for which information is available, it was estimated that there were approximately 27 million small businesses in the United States. This represented approximately 99.7% of all employers. According to the same survey, small businesses employ half of all private sector employees and generated over 60% of net new jobs created each year over the last decade.
The small business market is impacted by general economic conditions and the rate of small business formations. Small business growth continues to parallel the overall economy. The index of small business optimism published by the National Federation of Independent Business (NFIB) in December 2007 continued to be below average. We expect continued economic softness to have some negative impact on our 2008 results, primarily in the first half of the year.
We seek to serve the needs of the small business customer. We design, produce and distribute business checks, forms, envelopes, retail packaging and related products to help them grow and promote their business. The rate checks are used by small businesses has thus far not been impacted as significantly by the use of alternative payment methods. The Formtrac 2006 report from the Document Management Industries Association (DMIA), the most recent data available, indicates that the business check portion of the markets serviced by SBS declined at a rate of two to four percent in 2006. Business forms products are also under pressure. Continual technological improvements have provided small business customers with alternative means to enact and record business transactions. For example, off-the-shelf business software applications and electronic transaction systems have been designed to automate many of the functions performed by business forms products.

Financial Institution Clients
Checks are most commonly ordered through financial institutions. We estimate approximately 85% of all consumer checks are ordered in this manner. Financial institutions include banks, credit unions and other financial services companies. Several developments related to financial institutions have affected the check printing portion of the payments industry:
• Financial institutions seek to maintain the profits they have historically generated from their check programs, despite the decline in check usage. This has put significant pricing pressure on check printers in the past several years.

• Financial institutions continue to consolidate through mergers and acquisitions. Often, the newly-combined entity seeks to reduce costs by leveraging economies of scale in purchasing, including its check supply contracts. This results in check providers competing intensely on price in order to retain not only their previous business with one of the financial institutions, but also to gain the business of the other party in the merger/acquisition.

• Financial institution mergers and acquisitions can also impact the duration of our contracts. Normally, the length of our contracts with financial institutions range from three to five years. However, contracts are sometimes renegotiated or bought out mid-term due to a consolidation of financial institutions.

• Banks, especially larger ones, may request pre-paid product discounts, made in the form of cash incentives, payable at the beginning of a contract. These contract acquisition payments negatively impact check producers’ cash flows in the short-term.
The recent turmoil in the financial services industry related to subprime lending activities has not had a significant impact on financial institution check programs.
Consumer Direct Mail Response Rates
Direct Checks and portions of SBS have been impacted by reduced consumer response rates to direct mail advertisements. Our own experience indicates that the decline in our customer response rates is attributable to the decline in check usage and a general decline in direct marketing response rates. We continuously evaluate our marketing techniques to ensure we utilize the most effective and affordable advertising media.
Competition
The small business forms and supplies industry is highly fragmented with many small local suppliers and large national retailers. We believe we are well-positioned in this competitive landscape through our broad customer base, the breadth of our small business product and service offerings, multiple distribution channels, established relationships with our financial institution clients, reasonable prices, high quality and dependable service.
In the small business forms and supplies industry, the competitive factors influencing a customer’s purchase decision are breadth of product line, speed of delivery, product quality, price, convenience and customer service. Our primary competitors are office product superstores, local printers, business form dealers, contract stationers and internet-based suppliers. Local printers provide personalization and customization, but typically have a limited variety of products and services, as well as limited printing sophistication. Office superstores offer a variety of products at competitive prices, but provide limited personalization and customization. We are aware of numerous independent companies or divisions of companies offering printed products and business supplies to small businesses through the internet, direct mail, distributors or a direct sales force.
In the check printing portion of the payments industry, we face considerable competition from several other check printers, and we expect competition to remain intense as check usage continues to decline and financial institutions continue to consolidate. We also face competition from check printing software vendors and from internet-based sellers of checks and related products. Moreover, the check product must compete with alternative payment methods, including credit cards, debit cards, automated teller machines and electronic payment systems.
In the financial institution check printing business, the principal factors on which we compete are product and service breadth, price, quality and check merchandising program management. From time to time, some of our check printing competitors have reduced the prices of their products during the selection process in an attempt to gain greater volume. The corresponding pricing pressure placed on us has resulted in reduced profit margins and some shifts of business. Continuing pricing pressure will likely result in additional margin compression. Additionally, product discounts in the form of cash incentives payable to financial institutions upon contract execution have been a practice within the industry since the late 1990’s. Both the number of financial institution clients requesting these payments and the size of the payments has fluctuated significantly in recent years. These up-front payments negatively impact check printers’ cash flows in the short-term and may result in additional pricing pressure when the financial institution also negotiates greater product discount levels throughout the term of the contract. Beginning in 2006, we sought to reduce the use of up-front product discounts by structuring new contracts with incentives throughout the duration of the contract.
In May 2007, our two primary competitors in the check printing portion of the payments industry merged and are now doing business as Harland Clarke TM . As this is a recent merger, the impact, if any, it may have on competition remains uncertain.
Seasonality
General economic conditions have an impact on our business and financial results. From time to time, the markets in which we sell our products and services experience weak economic conditions that may negatively impact revenue. We experience some seasonal trends in the sale of our products. For example, holiday card sales and stored value gift cards typically are stronger in the fourth quarter of the year, and sales of tax forms are stronger in the first quarter of the year.

CEO BACKGROUND

Anthony Scarfone joined us in September 2000 as senior vice president, general counsel and secretary.
Luann Widener was named chief sales and marketing officer for financial institutions and small businesses in October 2006. From March 2006 until October 2006, Ms. Widener was senior vice president, president of manufacturing shared services, supply chain and Financial Services. From June 2003 to March 2006, Ms. Widener served as senior vice president, human resources and in December 2005, she assumed responsibility for our manufacturing and supply chain operations. From July 2000 to June 2003, Ms. Widener served as vice president of manufacturing operations for our Financial Services segment.
Terry Peterson was named vice president of investor relations in October 2006. From May 2006 to September 2006, Mr. Peterson served as interim Chief Financial Officer and was named chief accounting officer in March 2005. Mr. Peterson joined us in September 2004 and served as director of internal audit until March 2005. From August 2002 until August 2004, Mr. Peterson was vice president and controller of the GCS Services Division of Ecolab, Inc., a worldwide developer and marketer of premium cleaning and sanitation products.
Leanne Branham was named vice president, fulfillment in October 2006. From July 2004 to October 2006, Ms. Branham served as vice president of manufacturing shared services and from July 2003 to June 2004, Ms. Branham was vice president of manufacturing for Financial Services. From May 2001 to July 2003, Ms. Branham served as director of marketing for Direct Checks.
Mike Degeneffe joined us as chief information officer in October 2006. From September 2000 to October 2006, Mr. Degeneffe was employed by Residential Funding Corporation, a business unit of General Motors Acceptance Corporation (GMAC), where he served as chief information officer and enterprise chief technology officer from September 2004 to October 2006 and as managing director and enterprise chief information officer from April 2001 to September 2004.
Richard Greene joined us as senior vice president, chief financial officer in October 2006. From April 2005 to April 2006, Mr. Greene served as chief financial officer of the plastics and adhesives segment of Tyco International Ltd., which was renamed Covalence Specialty Materials Corp. upon divestiture. From October 2003 to April 2005, Mr. Greene was vice president and chief financial officer of the Tyco Plastics unit of Tyco International Ltd. From July 1999 to October 2003, Mr. Greene held various finance leadership positions at wholly-owned subsidiaries of Honeywell International Inc., a diversified technology and manufacturing company.
Lynn Koldenhoven was named vice president, sales and marketing direct-to-consumer in October 2006. Prior to this, Ms. Koldenhoven held a variety of positions within Direct Checks, including: interim vice president from February 2006 to October 2006, executive director of marketing from March 2004 to January 2006, director of core marketing from July 2003 to March 2004 and manager of checks manufacturing from May 2001 to July 2003.
Lee Schram joined us as chief executive officer in May 2006. From March 2003 to April 2006, Mr. Schram served as senior vice president of the Retail Solutions Division of NCR Corporation (NCR), a leading global technology company. From January 2002 to March 2003, Mr. Schram was vice president and general manager, payment solutions of the Financial Services Division of NCR. From September 2000 to January 2002, Mr. Schram served as chief financial officer of the Retail and Financial Group of NCR.
Jeff Stoner was named senior vice president, human resources in March 2006. Mr. Stoner joined us in November 2003 and served as vice president of organizational effectiveness until March 2006. From June 2001 until November 2003, Mr. Stoner was a vice president for the global product business unit of Personnel Decisions International, Inc., a human resources consulting firm.

MANAGEMENT DISCUSSION FROM LATEST 10K

EXECUTIVE OVERVIEW
Our business is organized into three segments: Small Business Services, Financial Services and Direct Checks. Our Small Business Services segment generated 58.4% of our consolidated revenue for 2007. This segment sells business checks, printed forms, promotional products, marketing materials and related services and products to more than six million small businesses and home offices through financial institution referrals, direct response marketing, sales representatives, independent distributors and the internet. Of the more than six million customers we have served in the past five years, four million have ordered our products or services in the last 24 months. Our Financial Services segment generated 28.5% of our consolidated revenue for 2007. This segment sells personal and business checks, check-related products and services, stored value gift cards and customer loyalty, retention and fraud monitoring/protection services to approximately 7,000 financial institution clients nationwide, including banks, credit unions and financial services companies. Our Direct Checks segment generated 13.1% of our consolidated revenue for 2007. This segment is the nation’s leading direct-to-consumer check supplier, selling under the Checks Unlimited ® , Designer ® Checks and Checks.com brand names. Through these brands, we sell personal and business checks and related products and services directly to consumers using direct response marketing and the internet. We operate primarily in the United States. Small Business Services also has operations in Canada.
Our net income for 2007, as compared to 2006, benefited from the following:
• Various cost reductions from previously announced management initiatives to reduce our cost structure, primarily within information technology, sales and marketing, and manufacturing;

• Lower amortization expense and project costs related to a software project written-off in the second quarter of 2006;

• Additional revenue in Direct Checks from selling additional premium features and services, as well as a weather-related backlog from the last week of December 2006;

• Lower net restructuring charges in 2007, as compared to 2006;

• Lower amortization of acquisition-related intangible assets within Small Business Services, as certain of the assets are amortized using accelerated methods; and

• An increase in order volume for Financial Services, as compared to 2006, due to net client gains and financial institution conversion activity.

These benefits were partially offset by the following:

• Higher performance-based employee compensation;

• Lower order volume for our Direct Checks segment; and

• Lower revenue per order for our Financial Services segment.
Further, our results for 2006 included a non-cash, pre-tax asset impairment loss of $44.7 million, an $11.0 million pre-tax gain on the termination of an underperforming outsourced payroll services contract and a $4.6 million net pre-tax gain on facility sales.
In May 2007, we issued $200.0 million of 7.375% senior, unsecured notes maturing on June 1, 2015. Proceeds from the offering, net of offering costs, were $196.3 million. These proceeds were used to repay amounts drawn on our credit facility and to invest in marketable securities. On October 1, 2007, we used proceeds from liquidating all of our marketable securities and certain cash equivalents, together with a $120.0 million advance on our credit facilities, primarily to repay $325.0 million of 3.5% unsecured notes, plus accrued interest. Further information regarding our debt can be found under the caption “Note 13: Debt” of the Notes to Consolidated Financial Statements appearing in Item 8 of this report.

Our Strategies
Small Business Services – Our focus within Small Business Services is to grow revenue and increase operating margin by continuing to implement the following strategies:
• Acquire new customers by leveraging customer referrals that we receive from our financial institution clients and from other marketing initiatives such as direct mail and e-commerce;

• Increase our share of the amount small businesses spend on the products and services in our portfolio;

• Consolidate brands and leverage cross-selling opportunities; and

• Continue to optimize our cost and expense structure.
We are investing in several key enablers to achieve our strategies. These key enablers include improving our e-commerce capabilities, implementing an integrated platform for our various brands, improving our customer analytics and focusing on key vertical segments and improved merchandising. As we focus on these key enablers, we plan to streamline and update our brand structure, as well as transition our sales model to integrate field sales, marketing and customer call centers across the company. We believe this creates more focus on customers, positions us for growth and ensures we are leveraging processes, facilities and resources to our best advantage. We have also introduced a new www.Deluxe.com website which will serve as a platform for improved e-commerce capability, and we have identified significant opportunities to expand sales to our existing customers.
Additionally, the small business customer referrals we receive from our Deluxe Business Advantage SM program, which provides a fast and simple way for financial institutions to offer expanded personalized service to small businesses, will continue to be an important part of our growth strategy. With the acquisition of the Johnson Group in October 2006 and All Trade Computer Forms, Inc. in January 2007, we have acquired companies which allow us to expand our business in the custom, full color, digital and web-to-print space with our small business customers. Further information regarding these acquisitions can be found under the caption “Note 4: Acquisitions and disposition” of the Notes to Consolidated Financial Statements appearing in Item 8 of this report. We divested a non-strategic product line in January 2007 when we completed the sale of our industrial packaging product line for $19.2 million, realizing a pre-tax gain of $3.8 million. This business generated revenue of approximately $51 million in 2006. This sale did not have a significant impact on earnings or operating cash flow.
Recently, we introduced the Deluxe Marketing Store to offer fast, hassle-free solutions for small businesses. The Deluxe Marketing Store is a website that offers products and services to help small businesses reach their customers, build customer loyalty and promote their business. Small businesses can design and create logos, websites, mailings and other promotional items. The Deluxe Marketing Store is also a resource for small businesses as it contains useful information for growing and managing a small business.
Financial Services – Our strategies within Financial Services are as follows:
• Continue to retain core check revenue streams and acquire new customers;

• Provide services and products that differentiate us from the competition and make us a more relevant business partner to our financial institution clients; and

• Continue to simplify our business model and optimize our cost and expense structure.
To achieve our strategies we are leveraging our customer acquisition and loyalty programs, our Deluxe Business Advantage program and enhanced small business customer service. The Deluxe Business Advantage program is designed to maximize financial institution business check programs by offering expanded personalized service to small businesses with a number of service level options.
In our efforts to expand beyond check-related products, we have introduced and continue to pilot several new services that focus on customer loyalty and retention. Two examples are the Welcome Home SM Tool Kit and the Deluxe Impressions SM products which enable financial institutions to forge strong bonds with new customers, thereby increasing customer loyalty and retention. We also offer Deluxe ID TheftBlock ® , a set of fraud monitoring and recovery services that provides assistance to consumers in detecting and recovering from identity theft. We also enhanced our stored value gift card program and launched DeluxeCalling SM , a service providing a first point of contact with new indirect loan consumers on behalf of our financial institution clients. This service leverages our core competency of call center expertise and provides incremental revenue and increased customer retention for our financial institution clients. Providing products and services that differentiate us from the competition is expected to help offset the decline in check usage and the pricing pressures we are experiencing in our check programs. As such, we are also focused on accelerating the pace at which we introduce new products and services. In addition to these value-added services, we continue to offer our Knowledge Exchange TM Series, a suite of resources and events for our financial institution clients focused on the customer experience.
In addition to our initiatives to retain customers and introduce new products and services, we continue our efforts to simplify processes, eliminate complexity in this business and lower our cost structure. Our efforts are focused on using lean principles to streamline call center and check fulfillment activities, redesign services into standardized flexible models, eliminate multiple systems and work streams and strengthen our ability to quickly develop and bring new products and services to market.
Direct Checks – Our focus within Direct Checks is to enhance our share of the direct-to-consumer channel by continuing to implement the following strategies:
• Maintain our 2007 level of marketing spend, which was increased from previous years;

• Maximize the lifetime value of customers by selling new features and accessories; and

• Continue to optimize our cost and expense structure.
Beginning in 2007, we increased our advertising circulation of free-standing inserts under a new direct mail advertising contract which will remain in effect for the next several years. This has been an effective form of new customer acquisition in this channel. We also intend to increase the portion of our advertising expense designated for customer retention by utilizing reactivation and email campaigns. We continue to develop improved call center processes, provide additional products to Direct Checks’ small business customers and explore other avenues to increase sales to existing customers. In late 2006, we introduced the EZShield TM product, a fraud protection service that provides reimbursement to consumers for forged signatures or endorsements and altered checks. We have also introduced holiday greeting cards and stored value gift cards on our websites.
Cost Reduction Initiatives
We are pursuing aggressive cost reduction and business simplification initiatives, including: reducing shared services infrastructure costs; streamlining our call center and check fulfillment activities; eliminating system and work stream redundancies; and strengthening our ability to quickly develop new products and services and bring them to market. We believe significant cost reduction opportunities exist in the reduction of stock keeping units (SKUs), the standardization of products and services and improvements in sourcing third-party goods and services. These opportunities collectively are expected to reduce our annual cost structure by at least $225 million, net of required investments, by the end of 2009. The baseline for these anticipated savings is the annual diluted earnings per share guidance for 2006 of $1.41 to $1.51, which we provided in our press release on July 27, 2006 regarding second quarter 2006 results. We expect all three of our business segments to benefit from cost reductions. We estimate that approximately 30-35% of the $225 million target will come from our shared services infrastructure organizations. We expect information technology will provide the greatest percentage of these savings through lowering data center costs, improving mainframe and server utilization and reducing the cost of networking and voice communications. We estimate that approximately 40-45% of the $225 million target will come from fulfillment, including manufacturing and supply chain, and we estimate that approximately 20-25% of the $225 million target will come from reorganizing our sales and marketing functions. Overall, approximately one-third of the savings are expected to affect cost of goods sold, with the remaining two-thirds impacting selling, general and administrative (SG&A) expense.
Through December 31, 2007, we estimate that we have realized approximately $105 million of our $225 million target. We anticipate that we will realize an additional $70 million of the $225 million target in 2008 and the remaining $50 million in 2009.

Business Challenges
The market for our two largest products, checks and business forms, is very competitive. These products are mature and their use has been declining. According to our estimates, the total number of checks written in the United States has been in decline as a result of alternative payment methods, including credit cards, debit cards, automated teller machines and electronic payment systems. According to a Federal Reserve study released in December 2007, approximately 33 billion checks are written annually. This includes checks which are converted to automated clearing house (ACH) payments. The check remains the largest single non-cash payment method in the United States, accounting for approximately 35% of all non-cash payment transactions. This is a reduction from the Federal Reserve study released in December 2004 when checks accounted for approximately 45% of all non-cash payment transactions. The Federal Reserve estimates that checks written declined approximately four percent per year between 2003 and 2006. According to our estimates, the use of business checks is declining at a rate of two to four percent per year. The total transaction volume of all electronic payment methods exceeds check payments, and we expect this trend to continue. In addition to the decline in check usage, the use of business forms is also under pressure. Continual technological improvements have provided small business customers with alternative means to enact and record business transactions. For example, off-the-shelf business software applications and electronic transaction systems have been designed to automate several of the functions performed by business forms products.
Because check usage is declining and financial institutions are consolidating, we have been encountering significant pricing pressure when negotiating contracts with our financial institution clients. Our traditional financial institution relationships are typically formalized through supply contracts averaging three to five years in duration. As we compete to retain and acquire new financial institution business, the resulting pricing pressure, combined with declining check usage in the marketplace, has reduced our revenue and profit margins. We expect this trend to continue.
Direct Checks and portions of Small Business Services have been impacted by reduced consumer response rates to direct mail advertisements. Our own experience indicates that direct-to-consumer media response rates are declining across a wide variety of products and services. Additionally, our consumer response rates are declining further due to the decline in check usage and the gradual obsolescence of standardized forms products.
We estimate that general economic conditions negatively impacted our 2007 results of operations in the latter half of the year, primarily in Small Business Services. The rate of small business formations and small business confidence impact Small Business Services. The index of small business optimism published by the National Federation of Independent Business (NFIB) in December 2007 continued to be below average. According to estimates of the Small Business Administration’s Office of Advocacy, new small business formations were down slightly in 2006 as compared to 2005, the most recent date for which information is available. Consumer spending and employment levels may also have some impact on our personal check businesses. Although both trended negatively during the last half of 2007, we did not experience a significant negative impact in our personal check businesses. We expect that general economic conditions will have some negative impact on our 2008 results of operations, primarily in Small Business Services in the first half of the year. A prolonged downturn in general economic conditions could result in additional declines in our revenue and profitability.
Outlook for 2008
We anticipate that consolidated revenue will be between $1.56 billion and $1.61 billion for 2008, as compared to $1.61 billion for 2007. Despite the decline in check usage and economic uncertainty, we expect to deliver near flat revenue performance in 2008 as compared to 2007. We anticipate that growth in Small Business Services will be in the very low single digits, while declines in Financial Services will be in the low to mid single digits and declines in Direct Checks will be in the high single digits. We expect that revenue from our expansion initiatives will grow modestly during the latter half of the year.
We expect that 2008 diluted earnings per share will be between $3.00 and $3.20, compared to $2.76 for 2007. We expect that operating income will increase from 2007 due to our cost reduction initiatives, partially offset by the impact of revenue declines in our personal check businesses, continued investments in new products and enablers, such as e-commerce, and other cost increases. We estimate that our effective tax rate for 2008 will be approximately 35%, compared to 34.1% for 2007.

We anticipate that operating cash flow will be between $230 million and $250 million in 2008, compared to $245 million in 2007. We expect that increased earnings and working capital improvements throughout the year will be offset by higher payments for employee performance-based compensation in the first quarter. We estimate that capital spending will be approximately $30 million in 2008, with investment focused on cost reduction and key enablers such as e-commerce. Our priorities for the use of cash include paying down our credit facility in 2008 and investing both organically and in acquisitions to augment growth. We will also consider other opportunities to enhance shareholder value, including modest share repurchase opportunities and evaluating our dividend policy.

The decrease in revenue for 2007, as compared to 2006, was primarily due to a $48 million decrease resulting from the sale of our industrial packaging product line in January 2007, as well as a decline in volume for our Direct Checks segment and lower revenue per order due to lower pricing in our Financial Services segment. Lower volume for Direct Checks was primarily due to the overall decline in check usage, as well as lower customer retention and lower direct mail consumer response rates. Small Business Services also experienced a slight revenue decrease in the last half of the year related to general economic conditions. Partially offsetting these decreases were revenues generated by the Johnson Group, which we acquired in the fourth quarter of 2006, and higher revenue per order for Direct Checks due to the introduction of new products and services, including the EZShield product discussed earlier under Executive Overview . Additionally, Financial Services volume increased due to client gains and financial institution conversion activity, and revenue in Canada increased due to a favorable exchange rate and increased check orders triggered by a new check format mandated by the Canadian Payments Association that drove higher volume in the first half of 2007.
The number of orders increased slightly for 2007, as compared to 2006, as the Financial Services volume increase of 1.4% exceeded the negative impacts of Direct Checks’ volume decline, the sale of Small Business Services’ industrial packaging product line and the negative economic impact experienced by Small Business Services in the last half of the year. Revenue per order decreased for 2007, as compared to 2006, as lower prices in Financial Services more than offset the impact of increases in revenue per order for Direct Checks and Small Business Services.
The decrease in revenue for 2006, as compared to 2005, was due to lower prices and a change in product mix in our Financial Services segment resulting in significantly lower revenue per order, as well as a decline in volume for our Direct Checks segment. Revenue for 2005 also benefited from $11.7 million of contract termination payments in the second quarter. Lower volume for Direct Checks was due to the overall decline in check usage, as well as lower customer retention, lower direct mail consumer response rates and lower advertising expenditures in prior periods. Partially offsetting these decreases was increased revenue for Small Business Services due to higher revenue per order and an increase in first-time buyers as we implemented our growth strategies. Additionally, Direct Checks revenue per order increased, as did Financial Services order volume. Revenue per order increased for Direct Checks due to the introduction of the EZShield product discussed earlier , as well as a decline in orders received through our mail channel, which typically result in lower revenue per order. Financial Services volume increased as the impact of net client gains exceeded the impact of the decline in check usage.

The number of orders decreased for 2006, as compared to 2005, as the negative impact of the Direct Checks volume decline exceeded the volume increases for Financial Services and Small Business Services. Revenue per order decreased for 2006, as compared to 2005, as lower prices and a change in product mix in Financial Services more than offset the impact of the increases in revenue per order for Small Business Services and Direct Checks.

Gross margin increased for 2007, as compared to 2006, due to manufacturing efficiencies, including the closing of two Small Business Services manufacturing facilities in mid-2006, as well as lower material costs in 2007 related to a higher mix of check products in Small Business Services. Additionally, we benefited from increased Financial Services order volume in 2007. Partially offsetting these gross margin increases was the lower Financial Services revenue per order discussed earlier, a postal rate increase in 2007 and costs associated with the implementation of new check packaging intended to mitigate the effects of the postal rate increase.
Gross margin decreased for 2006, as compared to 2005, primarily due to lower prices and an unfavorable shift in product mix in Financial Services, contract termination payments received in 2005 and higher overall product delivery costs in 2006 due to rate increases and fuel surcharges. Partially offsetting these declines was the increase in Small Business Services revenue per order discussed earlier, as well as cost savings from closing two Small Business Services manufacturing facilities in mid-2006.

The decrease in SG&A expense for 2007, as compared to 2006, was due to various cost reduction initiatives within our shared services organizations, lower amortization expense and project costs related to a software project we wrote-off in the second quarter of 2006, investments made in 2006 related to implementing our Small Business Services growth strategies and a $5.0 million reduction in net restructuring charges in 2007. Further information regarding our restructuring charges can be found under the Restructuring Accruals section of this discussion. We also benefited from lower amortization of acquisition-related intangible assets within Small Business Services, as certain of these assets are amortized using accelerated methods. Partially offsetting these SG&A decreases was higher expense for performance-based employee compensation based on our 2007 operating performance, a gain in 2006 of $11.0 million from the termination of an underperforming outsourced payroll services contract and higher referral commissions for Small Business Services resulting from growth in our Deluxe Business Advantage financial institution referral program.
The decrease in SG&A expense for 2006, as compared to 2005, was due to cost synergies resulting from the continued integration of New England Business Service, Inc. (NEBS), which was acquired in June 2004, as well as various other cost reduction initiatives, a decrease in amortization expense resulting primarily from one of our order capture software systems being fully amortized and a gain of $11.0 million, which decreased expense, from terminating an underperforming outsourced payroll services contract in the fourth quarter of 2006. Also contributing to the decrease were lower marketing costs for Small Business Services as we increased our focus on gaining new customers through financial institution referrals. Partially offsetting these decreases were investments related to our Small Business Services growth strategies, primarily the hiring and training of call center and sales personnel, higher customer care costs and commissions for Small Business Services as a result of the increased revenue and severance charges of $9.7 million related to executing our cost savings initiatives. Further information regarding the severance charges can be found under Restructuring Accruals .

During 2007, we completed the sale of our Small Business Services industrial packaging product line for $19.2 million, realizing a pre-tax gain of $3.8 million. This sale had an insignificant impact on our earnings per share because of an offsetting income tax effect.
During 2006, we completed the sale of three Financial Services facilities which were closed in 2004, realizing a gain totaling $5.5 million. During 2006, we also recorded a loss of $0.9 million when we completed the sale of a Small Business Services facility which was closed prior to the NEBS acquisition in June 2004.
During 2005, we completed the sale of a Small Business Services facility and a Financial Services facility, both of which were closed in 2004, realizing a total gain of $0.5 million.

The increase in our effective tax rate for 2007, as compared to 2006, was largely due to a $5.0 million reduction in our 2006 income tax provision for the true-up of certain deferred income tax balances. As this item was not material to our current or prior periods, we recorded a one-time, discrete benefit to our provision for income taxes for 2006. In addition, our state income tax rate was higher in 2007 and the lower pre-tax income in 2006 resulted in our permanent differences having a larger positive impact on the 2006 effective tax rate. Partially offsetting these increases in our effective tax rate compared to 2006 was the impact of positive adjustments in 2007 related to receivables for prior year tax returns. The overall increase in our effective tax rate reduced diluted earnings per share $0.20 for 2007, as compared to 2006. We expect that our annual effective tax rate for 2008 will be approximately 35%.
The decrease in our effective tax rate for 2006, as compared to 2005, was largely due to the $5.0 million reduction in our income tax provision for the true-up of certain deferred income tax balances. Additionally, our overall state tax rate was lower in 2006, and the decrease in our pre-tax income for 2006, as compared to 2005, resulted in our permanent differences having a larger positive impact on the effective tax rate. Partially offsetting these reductions in our effective tax rate were accruals for contingent tax liabilities. Accruals related to unresolved tax contingencies more than offset net accrual reversals of $1.5 million related to settled issues, primarily resulting from the expiration of the statutes of limitations in various state income tax jurisdictions. The overall decrease in our effective tax rate contributed $0.21 to diluted earnings per share for 2006, as compared to 2005.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Our business is organized into three segments: Small Business Services, Financial Services and Direct Checks. Our Small Business Services segment generated 57.1% of our consolidated revenue for the first half of 2008. This segment has sold business checks, printed forms, promotional products, marketing materials and related services and products to more than six million small businesses and home offices in the past five years through direct response marketing, financial institution referrals, independent distributors, the internet and sales representatives. Of the more than six million customers we have served in the past five years, approximately four million have ordered our products or services in the last 24 months. Our Financial Services segment generated 29.9% of our consolidated revenue for the first half of 2008. This segment sells personal and business checks, check-related products and services, stored value gift cards, and customer loyalty, retention and fraud monitoring and protection services to approximately 7,000 financial institution clients nationwide, including banks, credit unions and financial services companies. Our Direct Checks segment generated 13.0% of our consolidated revenue for the first half of 2008. This segment is the nation’s leading direct-to-consumer check supplier, selling under the Checks Unlimited ® , Designer ® Checks and Checks.com brand names. Through these brands, we sell personal and business checks and related products and services directly to consumers using direct response marketing and the internet. We operate primarily in the United States. Small Business Services also has operations in Canada.
Our net income for the first half of 2008, as compared to 2007, benefited from the following:
• A significant reduction in performance-based employee compensation;

• Various cost reductions from previously announced management initiatives to reduce our cost structure, primarily within sales and marketing, information technology and manufacturing;

• Reduced employee benefit costs related to lower workers’ compensation and medical claims activity;

• The first quarter year-over-year benefit of a February 2007 price increase in Financial Services; and

• Lower amortization of acquired intangible assets within Small Business Services, as certain of the assets are amortized using accelerated methods.

These benefits were more than offset by the following:
• Lower volume driven by unfavorable economic conditions, primarily affecting Small Business Services;

• Lower order volume for Direct Checks due to the continuing decline in check usage and advertising response rates;

• Lower revenue per order in Financial Services;

• Higher delivery-related costs due to a mid-2007 postal rate increase and fuel surcharges in 2008;

• Lower volume in Financial Services due to non-recurring financial institution conversion activity in 2007 and the continuing decline in check usage;

• Additional revenue in the first quarter of 2007 for Direct Checks due to a weather-related backlog from the last week of 2006; and

• Investments made to drive revenue growth opportunities, primarily within Small Business Services’ e-commerce and marketing.
Our Strategies and Business Challenges
Details concerning our strategies and business challenges were provided in the Management’s Discussion and Analysis of Financial Condition and Results of Operation section of our Annual Report on Form 10-K for the year ended December 31, 2007 (the “2007 Form 10-K”). There were no significant changes in our strategies or business challenges during the first half of 2008, although the impact of economic conditions on our Small Business Services segment was greater than anticipated. Additionally, we have completed four acquisitions this year. We expect that these acquisitions will expand revenue from higher growth business services.
In July 2008, we acquired the assets of PartnerUp, Inc. (PartnerUp) for cash of approximately $3.8 million plus contingent payments based on the revenue and operating margin generated by the business, provided the principals remain with the company. PartnerUp is an online community that is designed to connect small businesses and entrepreneurs with people, resources and contacts to build their businesses. Its results of operations will be included in our Small Business Services segment.
In June 2008, we entered into a definitive agreement to acquire all of the common shares of Hostopia.com Inc. (Hostopia) in a cash transaction of approximately $100 million, net of cash acquired. The merger agreement was approved by Hostopia stockholders on July 30, 2008, and the transaction became effective on August 6, 2008, in accordance with rules of the Toronto Stock Exchange. We utilized availability on our existing lines of credit to fund the acquisition. Hostopia is a leading provider of web services that enable small and medium-sized businesses to establish and maintain an internet presence. It also provides email marketing, fax-to-email, mobility synchronization and other services. Its results of operations will be included in our Small Business Services segment. Hostopia’s revenue for its fiscal year ended March 31, 2008 was $27.8 million.
In April 2008, we acquired the assets of Logo Design Mojo, Inc. (Logo Mojo) for cash of $1.5 million. Of this amount, $1.4 million was paid as of June 30, 2008. Logo Mojo is a Canadian-based online logo design firm. Its results of operations are included in our Small Business Services segment.
In March 2008, we acquired certain assets of Yoffi Digital Press (Yoffi) for cash of $0.3 million. Yoffi is a commercial digital printer specializing in one-to-one marketing strategies. Its results of operations are included in our Small Business Services segment.
Update on Cost Reduction Initiatives
As discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operation section of the 2007 Form 10-K, we are pursuing aggressive cost reduction and business simplification initiatives which we expect to collectively reduce our annual cost structure by at least $225 million, net of required investments, by the end of 2009. The baseline for these anticipated savings is the estimated cost structure for 2006, which was reflected in the earnings guidance reported in our press release on July 27, 2006 regarding second quarter 2006 results. We expect to realize approximately $70 million of the $225 million target in 2008. We realized $105 million of this target through the end of 2007, and we expect the remaining $50 million to be realized in 2009. To date, most of our savings are from sales and marketing, information technology and fulfillment, including manufacturing and supply chain.
Outlook for 2008
We anticipate that consolidated revenue will be between $1.515 billion and $1.535 billion for 2008, as compared to $1.61 billion for 2007. We expect that current economic conditions will continue to adversely affect volumes in Small Business Services and drive a mid-single digit decline in revenue despite modest contributions from our e-commerce initiatives and approximately $15 million of revenue from the Hostopia and PartnerUp acquisitions. In Financial Services, we expect check usage to continue to decline 4% to 5% per year, with the related revenue pressure being partially offset by a previously planned price increase in the fourth quarter, as well as a modest contribution from several new loyalty, retention, monitoring and protection offers. We expect the revenue decline in Direct Checks to be in the high single digits driven by the decline in check usage, the year-over-year lapping of several new feature and accessory initiatives and the $3 million revenue benefit in 2007 attributable to the weather-related backlog at the end of 2006.
We expect that 2008 diluted earnings per share will be between $2.52 and $2.62, compared to $2.76 for 2007. We expect the revenue decline to be partially offset by continued progress with our cost reduction initiatives. Our outlook includes an expected decrease in diluted earnings per share of approximately $0.08 from the Hostopia and PartnerUp acquisitions due to the estimated amortization associated with acquired intangible assets and interest expense. We estimate that our annual effective tax rate for 2008 will be approximately 35%, compared to 34.1% for 2007, although the third quarter 2008 tax rate will be lower due to the settlement of tax contingencies. Additionally, we are undertaking a review of our small business cost structure in light of recent business trends. Additional charges and the corresponding savings which may occur once the review is complete are not reflected in our earnings per share outlook or in our cost reduction target.
We anticipate that operating cash flow will be between $195 million and $205 million in 2008, compared to $245 million in 2007. We expect that working capital improvements will partially offset the lower expected earnings and the higher payments made in the first quarter of 2008 for employee performance-based compensation related to our 2007 performance. We estimate that capital spending will be approximately $30 million in 2008, with investment focused on cost reductions and key multi-segment growth enablers, such as our e-commerce platform.
Our priorities for the use of cash include investing both organically and in small to medium-sized acquisitions to augment growth. We also consider other opportunities to deploy cash to enhance shareholder value, which have focused this year on share repurchase opportunities. We do not expect our capacity for share repurchases to exceed $10 million for the remainder of 2008 based on limitations in the debt agreement related to our notes due in June 2015.

CONF CALL

Terry Peterson

Thank you, Alicia. Welcome to Deluxe Corporation's 2008 second quarter earnings call. I'm Terry Peterson, Deluxe's Vice President of Investor Relations and Chief Accounting Officer. Joining me on the call today are Lee Schram, Deluxe's Chief Executive Officer and Rick Greene, Deluxe's Chief Financial Officer. Lee, Rick and I will take questions from analysts after the prepared comments.

In accordance with Regulation FD, this call is open to all interested parties. A replay of the call will be available via telephone and Deluxe's web site. I will provide instructions for accessing the replay at the conclusion of our teleconference. Before I begin, let me make this brief cautionary statement.

Comments made today regarding financial estimates and projections and any other statements addressing management's intentions and expectations regarding the company's future performance are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. As such, these comments are subject to risks and uncertainties which could cause actual future results to differ materially from those projected. Additional information about various factors that could cause actual results to differ from those projected are contained in the news release that we issued this morning and in the company's Form 10-K for the year ended December 31st, 2007.

In addition to the financial and statistical information we will provide greater detail in today's press release which is posted in the Investor Relations section of our website, www.deluxe.com and was furnished to the SEC on the Form 8-K filed this morning. In particular, any non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the press release.

Now over to Lee Schram, Deluxe's CEO.

Lee Schram

We are disappointed with our revenue performance in the quarter and the resulting impacts on earnings per share. We are not immune from the very challenging economic conditions and the impact that this is having particularly on our small business services segment. In spite of this, our updated EPS outlook, although reduced because of the weakening economy, still reflects an improving second half over the prior year.

There are a tremendous number of positives in the quarter that tend to go unnoticed in challenging economic times. It is these positives, that allow us to remain extremely optimistic about the continued transformation of deluxe. We had a very successful knowledge exchange expo with our financial institutions which has already led to new check and non check business wins, added several new leaders to our executive and senior management teams. Further stabilized margins in our check businesses continue to deliver on our $225 million cost reduction program and made planned investments in e-commerce, virtualization

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[Author:l]

, merchandising, loyalty, retention and monitoring and protection solutions.

At the end of the quarter we released the first version of our new state-of-the-art customer facing e-commerce platform called ShopDeluxe. We also have completed four strategic acquisitions so far this year in the custom full color, logo, web and business networking services spaces. All areas we expect double digit revenue growth in the future. These acquisitions are also helping reposition Deluxe strategically from not just the leader in printed products but over time to a leader in higher growth, business services as well.

More details on our recent progress, next steps and strategically where we are positioning the company are also discussed.

Now Rick will cover our financial performance.

Rick Greene

Thanks, Lee. Earlier today, we reported diluted earnings per share for the second quarter of $0.63 in line with our previously communicated outlook. Revenue for the quarter came in at $367.7 million below our most recent outlook, primarily due to lower than expected volumes in small business services as the challenging economic environment continue to impact this segment.

Despite the revenue short fall in SBS, our core check businesses met our expectations. Solid operating margins for the quarter benefited from continued execution on our cost reduction initiatives with savings inline with our expectations and from a reduction in our performance-based compensation. Operating cash flow in the quarter totaled $37 million, which again was slightly better than our expectation for the quarter.

In the second quarter of 2007, we reported diluted earnings per share of $0.69, which included the benefit of higher revenue, partially offset by higher performance based compensation last year and additional cost savings in the 2008 period. Company wide revenue in the second quarter totaled $367.7 million down 8.1% from 2007. As noted, one of the primary drivers in this year-over-year decline is lower volumes in our small business services segment, as economic conditions worsen during the quarter and continued to impact several of our core products, including checks and forms.

Direct check volume was also down and lower revenue per order affected financial services. Gross margin for the quarter was 62% for revenue, down 2.3 points from 2007. Improvements in manufacturing productivity, as a result of lean initiatives and direct spending reductions, were more than offset by lower prices in financial services, an unfavorable shift in product mix, and higher delivery related costs, mostly from fuel surcharges.

Selling, general and administrative expense decreased $23 million in the quarter, and was 45.3% of revenue, compared to 47.4% in the same period last year. Lower performance based compensation, benefits from continued execution on our cost reduction initiatives and lower amortization, all contributed to the improvement. As a result, operating income in the quarter was $61.3 million, compared to $67.5 million last year.

Let's now shift our focus to a few highlights in each of our three business segments. In small business services, revenue of the $211.5 million was down 8.1% versus 2007. Revenue in this segment was unfavorably impacted by economic softness in the quarter, particularly in our core checks and forms products. Operating income in this segment was $29.1 million or 13.8% of revenue, compared to $30 million in 2007.

In financial services, revenue was $110 million, down 6.7% versus the second quarter last year. While check order volumes remain strong, with only 1.3% decline year-over-year, lower revenue per order, which was previously anticipated, was the primary driver of the overall decline. Financial services operating income was $18.8 million for the quarter or 17.1% of revenue, down from 23.2 million in 2007.

Finally, direct checks revenue totaled $46.2 million down 11% on a year-over-year basis due to continuing declines in check writing plus a search engine's decision to limit our internet impression based on their revised advertising policies. These reductions were partially offset by higher revenue per order from price increases. Operating income in the segment was $31.4 million for the quarter or 29% of revenue, up slightly on a percentage basis compared to last year.

Turning to the balance sheet and cash flow statement, total debt at the end of the quarter was $837 million compared to $844 million at the end of 2007. Cash provided by operating activities for the first six months was $57 million. This decrease from last year was due to a higher 2007 related incentive compensation payment earlier this year and lower net income, partially offset by lower income tax payments and progress on our working capital initiatives. Capital expenditures in the quarter were $9.4 million and depreciation and amortization expenses were $15.6 million.

Earlier, we announced that we've closed the Hostopia acquisition for approximately $100 million net. We purchased PartnerUp, a small business social networking company for $3.8 million. For the balance of the year, we expect that these companies will contribute approximately $15 million in revenue, $2 million of EBITDA, and a diluted loss per share of $0.08 due to the estimated amortization associated with purchase accounting and interest expense.

Looking ahead to the third quarter of 2008, we expect revenue to range from $367 million to $374 million, with diluted earnings per share are expected to range from $0.56 to $0.60 cents. There are several key factors in addition to the impacts of the recent acquisitions that distinguish our 2008 outlook in comparison to the third quarter of 2007, including continued economic softness in the small business services segment, and declines in the personal check businesses, driven primarily by fewer checks being written.

In addition, lower revenue per order and financial services and weaker advertising response rates in direct checks will also be contributing factors. Lower delivery rated costs in financial services, because we absorb the impact of the mid-May 2007 postal rate increase, since we did not begin implementing our flat check delivery package until the end of the third quarter last year, and continued execution of the $225 million cost and expense reduction initiatives net of investment.

For the full year, given the continued economic challenges impacting our Small Business Services segment, the pressure of lower check usage on our core check businesses and the recent acquisitions, we expect consolidated revenue to range from $1.515 billion to $1.535 billion. In addition, we expect an EPS range from $2.52 to $2.62. There are several key factors in addition to the impact of the recent acquisitions that contribute to our 2008 full outlook.

Despite modest contributions from the ramp of our e-commerce initiatives and verticalization work, we expect that current economic conditions will continue to adversely affect our Small Businesses Services segment and thus drive a mid single digit decline in revenues.

In financial services, we expect the continuation of 4% to 5% declines in check writing, with the related revenue pressure being partially offset by a previously planned [Author:l]

price increase early in the fourth quarter. And we expect the revenue declines in direct checks to be more in the high single digits driven by declines in check usage.

Other factors contributing to our 2008 earnings per share outlook include continued progress with the previously announced $225 million cost and expense reduction program and a full year effective tax-rate of approximately 35%. Although the third quarter rate will be lower as a result of settling tax contingency matters. We expect operating cash flows to range between $195 million and $205 million for the year, reflecting lower earnings, partially offset by continued progress on our working capital initiatives. We expect contract acquisition payments to be approximately $20 million.

Capital expenditures in 2008 are expected to be approximately $30 million and depreciation and amortization is expected to be approximately $65 million, including $28 million of acquisition related amortization.

To conclude, let me comment on our capital structure. We funded our acquisitions through cash and drawls on our current credit facilities. The capital structure we have in place today provides a great deal of flexibility to execute the transformation strategy that we believe will create a vibrant value creating Deluxe for the future.

Our priorities for uses of cash remain investing both organically and in small to medium size strategic acquisition to augment growth and we also pro actively evaluate other opportunities to create shareholder value. In the quarter, we did not repurchase any shares. We are focused on driving the proper balance between investment to drive long term value and near term opportunities the market may presents. Any remaining excess cash after these priorities we intend to pay down the remaining balance on our credit facilities. Before the opportunity for questions in a few minutes, I'll turn the call back to Lee.

Lee Schram

Thank you Rick. I will continue my comments with an updated clarified perspective on where we are strategically positioning the company, then highlight each of our three segments and close with the progress updates on our cost takeout program. At the enterprise level, our strategic intent remains the same, namely becoming the best at helping businesses and financial institutions grow. We will continue to target three customer segments, including small business, financial services and consumers. Where we plan to offer a suite of life cycle driven solutions including personalized printed products and a growing suite of business services, including logo design, payroll, and other human resources services, all designed to help our customers run their business.

Fraud monitoring and security solutions to protect our business partners and their customers. Hosting web services, promotional, loyalty, marketing intelligence, business networking and e-commerce services to help our customers grow their business. Our growth will come from fulfilling under-served needs by leading with higher growth business services, using a scalable, unified web enabled platform acquired through Hostopia, as a corner stone of our strategy to drive a greater portion of our revenue from annuity based services.

With this unified services delivery platform, we are better positioned to provide a pull through from printed products, including checks, forms, business cards, full color, digital web-to-print, imaging and other printed products. We will also be in a position to provide our financial institution and small business customers with market intelligence, collaborative forms, and private label business networks to improve customer connections, loyalty and retention.

We look to provide simple, easy-to-use, complete, innovative solutions, focused on fulfilling customer needs while using continuous improvement principles to operate on a daily basis. Repositioning Deluxe's brand continues to be an important growth enabler. Also critical to our growth is the key intersection between financial institutions and small businesses. Expanding relationships help us reach vertical industry segments more deeply. Key vertical segments include retailers, contractors, professional services providers and banks and credit unions.

In order to insure we execute well and align key leaders and capabilities, our go-forward plan is focused on five key areas. First, financial institutions and our core check capabilities, plus growth outside of checks in loyalty, retention, marketing intelligence and fraud monitoring and protection offers. Second, direct to the consumer and growing check share, plus adjacency growth through other products and services that consumers can buy directly from us. Third, small business core business products sold through enhanced e-commerce capabilities and an improved vertical customer focus. Fourth, higher growth business services, including logo design, payroll, human resources, business networking, hosting, and web services. And fifth, cost reductions and simplification, where we continue the solid work already under way as part of our $225 million cost reduction initiative.

Where we also see opportunity to improve processes and reduce costs further through order management system rationalization, pricing simplification, product set rationalization, and just in time product and services personalization.

Tunring to our segments. In small business services, as expected, economic softness had an impact on our business, but the impact in the quarter was even more pronounced than we expected, especially late in the quarter. Given the trends we have seen driven by the challenging economy that we now project will continue well into the second half of the year, we have reduced our revenue forecast accordingly. The most significant second quarter shortfalls were in checks, form, banking supplies and retail signage and packaging materials.

However, we had revenue growth in full colored products and payroll services. We also saw an initial ramp in the EZShield check protection service and expect even more growth in the second half of the year. We released the first version of our new state of the art e-commerce shopping site called ShopDeluxe at the end of the quarter. We will continue to add content and capability here throughout the second half of the year. And we will begin promoting the new site in our catalogues and other media. We added new safeguard distributors and will see more of a ramp as their business grows and as we leverage them where opportunities exist with financial institutions.

Now for some additional color on our acquisitions, we are off to a successful start with Logo Mojo, our log design services acquisition, leveraging personalized logo design capabilities and a differentiated simplified way into our product portfolio. Driven by conversion rate success from our web services partner ship and the stickiness that high growth web services provide for our customers, we closed the Hostopia acquisition yesterday.

We are extremely excited about this acquisition, as we believe Hostopia brings an innovative, entrepreneurial team that culturally is a strong fit with Deluxe. In addition to being focused, just like we are, on small businesses below 20 employees, it also brings us web hosting capabilities, but is much more than just a hoster. With web services, e-mail marketing, fax to e-mail, mobility sync and other offers, plus a presence outside of North America with an emerging European customer base.

Finally and critically important, Hostopia provides a unified scalable services delivery platform which can serve as the cornerstone of our strategy to obtain a higher portion of revenues from annuity based business services. We are creating a framework, using Hostopia's technology architecture that will easily connect ShopDeluxe and also provide a web services broker for Logo Mojo, PartnerUp and other business services that we continue to evaluate based upon our customer's needs. We expect Hostopia to be accretive on an EBITDA basis for the balance of 2008 and on an EPS basis in 2010.

Finally, PartnerUp, from our Knowledge Exchange Collaborative work the last several years and from market research, we have learned that financial institutions and small businesses desire more information, more market intelligence and more of an opportunity to drive relationships with each other. Similar to Hostopia, PartnerUp first brings smart innovative entrepreneurial people. They also bring market intelligence tools, collaborative building capabilities, business networking tool and a small advertising revenue stream

We see these three is giving us capability to partner with both financial institutions and small businesses in bringing private label and community building networking capabilities to improve customer connection, loyalty, and retention. In the human resources services area, in addition to our current payroll services capability currently deployed in Canada, in late July we initiated a pilot with HireRight, that we expect to extend over 90 days to test employee background screening services for our small business customers.

Shifting a bit. The following addressable marketable statistics linked to our current revenue base will allow you to better understand market sizes and growth potential and give you a sense of why our strategic acquisitions and partnerships dating back to the Johnson group are so important to our future small businesses success.

Nearly 50% of our current small business revenue today comes from a $1.5 billion check market declining 3% to 4% a year. Also, approximately 50% to 60% will fall to the bottom line. However, the percentage was lower in the second quarter and first half, as we more aggressively invested in new non-check revenue solutions and key enablers. Here are some highlights of the key cost reduction activities for the second quarter in continued areas of opportunity as we move forward. These are in addition to the ongoing savings that are occurring each quarter from previously implemented actions.

In our go to market sales and marketing, our factor continues to be on realigning sales marketing back end operations and our refining our channel management structure through process centralization, simplifying business processes, platform and tool consolidation, and leveraging e-commerce and vertical segmentation capabilities.

During the quarter, we announced an August closure of our Flagstaff call center. And we also completed smaller reductions in several other call center locations. Our externally led review of our call centers mentioned on the first quarter call with the objective of continuing to improve our productivity, also continued in the quarter.

For fulfillment, we had a strong quarter with lean productivity improvements and direct spend reductions. Given small business volume declines, we have recently initiated a deeper review of our small business cost structure. As such, the culmination of this review may trigger charges later this year and additional cost savings, neither of which are included on our current outlook or our $225 million cost reduction target.

Throughout the remainder of 2008, we also continued to invest in automating our flat check package processing and we expect to continue our lean product standardization and indirect spend reduction initiatives, plus advance our work on realigning to a common manufacturing platform. We also plan to initiate more strategic supplier sourcing arrangements and enhanced value stream mapping improvements and efficiencies.

Finally, for shared services infrastructure, we continue to make good progress in information technology, driven by data center cost reductions, and other system utilization, networking and voice communication efficiencies, as well as in finance, human resources and real estate. For the balance of 2008, we expect to continue to reduce costs in all areas as opportunities exist to centralize, streamline, standardize and improve efficiencies.

As you can see, although our revenue was disappointing, driven by challenging economic conditions, we again progressed in the second quarter on our cost reductions. But more importantly in creating and starting to build out a frame work for revenue growth through new organic and business services offerings. Unfortunately, we saw deterioration in the economy as the second quarter matured and we now expect this impact to continue at this level in the second half of the year. So we have reduced our revenue outlook to reflect this. In the second half, we still expect continued strong execution on our cost reduction initiatives, stability in our core check revenues, more meaningful revenue contributions from new non-check revenue offers and key enablers, and some revenue logo, web services and business networking acquisitions.

Looking ahead, we believe that our portfolio is becoming better positioned to deliver sustainable future revenue growth opportunities and higher operating income and cash flow. Using market growth and decline rates against our updated portfolio creates a roughly flat top line. Existing organic initiatives such as ShopDeluxe and verticali

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[Author:l]

zation, plus higher response and penetration rates and strategic additions in other business services spaces creates a top line that can grow solidly into the mid single digits over the medium term. Also importantly, the dependency on checks and small business products and accessories declines to 45% and 25%, while business services grow to 30% and we achieved a better balanced overall portfolio.


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