| DELUXE CORP Item 1A Risk Factors |
| The check printing portion of the payments industry is mature and, if it declines faster than expected, it could have a materially adverse impact on our operating results |
| We primarily sell checks for personal and small business use and believe that there will continue to be a substantial demand for these checks for the foreseeable future |
| However, according to our estimates, the total number of checks written by individuals and small businesses continued to decline approximately four to five percent each year over the past three years, and the total number of checks written in the United States has been in decline since the mid-1990’s |
| We believe that the number of checks written will continue to decline due to the increasing use of alternative payment methods, including credit cards, debit cards, smart cards, automated teller machines, direct deposit, electronic and other bill paying services, home banking applications and internet-based payment services |
| However, the rate and the extent to which alternative payment methods will achieve consumer acceptance and replace checks, whether as a result of legislative developments, personal preference or otherwise, cannot be predicted with certainty |
| A surge in the popularity of any of these alternative payment methods could have a material, adverse effect on the demand for checks and a material, adverse effect on our business, results of operations and prospects |
| 9 _________________________________________________________________ We face intense competition in all areas of our business |
| Although we are the leading check printer in the United States, we face considerable competition |
| In addition to competition from alternative payment systems, we also face intense competition from other check printers in our traditional financial institution sales channel, from direct mail sellers of checks, from sellers of business checks and forms, from check printing software vendors and from internet-based sellers of checks to individuals and small businesses |
| Additionally, low-price, high volume office supply chain stores offer standardized business forms, checks and related products to small businesses |
| We cannot assure you that we will be able to compete effectively against current and future competitors |
| Continued competition could result in price reductions, reduced profit margins, loss of customers and an increase in up-front cash payments to financial institutions upon contract execution or renewal |
| Continuing softness in direct mail response rates could have a further adverse impact on our operating results |
| Our Direct Checks segment and portions of our Small Business Services segment have experienced declines in response and retention rates related to direct mail promotional materials |
| We believe that media response rates are declining across a wide variety of products and services |
| Additionally, we believe that our declines are attributable to the decline in check usage, the gradual obsolescence of standardized forms products and an increase in financial institutions offering free checks to consumers |
| To offset these impacts, we may have to modify and/or increase our marketing and sales efforts, which could result in increased expense |
| The profitability of our Direct Checks segment depends in large part on our ability to secure adequate advertising media placements at acceptable rates, as well as the consumer response rates generated by such advertising, and there can be no assurances regarding the future cost, effectiveness and/or availability of suitable advertising media |
| Competitive pressure may inhibit our ability to reflect any of these increased costs in the prices of our products |
| We can provide no assurance that we will be able to sustain our current levels of profitability in this situation |
| Consolidation among financial institutions may adversely affect the pricing of our products |
| The number of financial institutions has declined due to large-scale consolidation in the last few years |
| Margin pressures arise from such consolidation as merged entities seek to reduce costs by leveraging economies of scale in purchasing, including their check supply contracts |
| This increases the importance of retaining our major financial institution clients and attracting additional clients in an increasingly competitive environment |
| The increase in general negotiating leverage possessed by such consolidated entities typically results in new and/or renewed contracts which are not as favorable as those historically negotiated with these clients |
| Although we devote considerable effort toward the development of a competitively priced, high quality suite of products and services for the financial services industry, there can be no assurance that significant financial institution clients will be retained or that the loss of a significant client can be counterbalanced through the addition of new clients or by expanded sales to our remaining clients |
| Standardized business forms and related products face technological obsolescence and changing customer preferences |
| Continual technological improvements have provided small business customers with alternative means to enact and record business transactions |
| For example, because of the lower price and higher performance capabilities of personal computers and related printers, small businesses now have an alternate means to print business forms |
| Additionally, electronic transaction systems and off-the-shelf business software applications have been designed to automate several of the functions performed by business forms products |
| If small business customer preferences change rapidly and we are unable to develop new products and services with comparable profit margins, our results of operations could be adversely affected |
| Our failure to successfully implement a project we have undertaken to replace major portions of our existing order capture, billing and pricing systems would negatively impact our business |
| During 2006, we will continue to expand our use of the SAP software platform with the planned installation of the SAP sales and distribution module in a portion of our business |
| Once implemented, we expect the new system to reduce redundancy while standardizing systems and processes and reducing our costs |
| This is a significant information systems project with wide-reaching impacts on our internal operations and business |
| We can provide no assurance that the amount of this investment will not exceed our expectations and result in materially increased levels of expense or asset impairment charges |
| There is also no assurance that this initiative will achieve the expected cost savings or result in a positive return on our investment |
| Additionally, if the new system does not operate as intended, or is not implemented as planned, there could be disruptions in our business which could adversely affect our results |
| 10 _________________________________________________________________ We face uncertainty with respect to recent and future acquisitions |
| We acquired NEBS in June 2004 and have stated that we expect growth in our Small Business Services segment as we implement the business strategies contemplated at the time of the acquisition |
| The integration of any acquisition involves numerous risks, including, among others, difficulties in assimilating operations and products, diversion of management’s attention from other business concerns, potential loss of our key employees or key employees of acquired businesses, potential exposure to unknown liabilities and possible loss of our clients and customers or clients and customers of the acquired businesses |
| While we anticipate that we will be able to achieve our stated objectives, we can provide no assurance that one or more of these factors will not negatively impact our results of operations |
| In regard to future acquisitions, we cannot predict whether suitable acquisition candidates can be acquired on acceptable terms or whether any acquired products, technologies or businesses will contribute to our revenues or earnings to any material extent |
| Significant acquisitions typically result in the incurrence of contingent liabilities or debt, or additional amortization expense related to acquired intangible assets, and thus, could adversely affect our business, results of operations and financial condition |
| Costs incurred to implement our growth strategies within Small Business Services may exceed our expectations |
| As we execute our growth strategies within Small Business Services, we will incur additional costs, such as hiring and supporting a significant number of sales and call center personnel in early 2006 |
| We can provide no assurance that these costs will not significantly exceed our expectations or that we will be able to hire enough qualified candidates to meet our sales targets |
| Additionally, we can provide no assurance that our strategy to expand sales to new and existing customers will be successful and result in a positive return on our investment |
| Forecasts involving future results reflect various assumptions that may prove to be incorrect |
| From time to time, we make predictions or forecasts regarding our future results, including, but not limited to, forecasts regarding estimated revenues, earnings, earnings per share or operating cash flow |
| Any forecast regarding our future performance reflects various assumptions which are subject to significant uncertainties, and, as a matter of course, may prove to be incorrect |
| Further, the achievement of any forecast depends on numerous factors which are beyond our control |
| As a result, we cannot assure you that our performance will be consistent with any management forecasts or that the variation from such forecasts will not be material and adverse |
| You are cautioned not to base your entire analysis of our business and prospects upon isolated predictions, and are encouraged to use the entire mix of historical and forward-looking information made available by us, and other information affecting us and our products and services, including the factors discussed here |
| In addition, independent analysts periodically publish reports regarding our projected future performance |
| The methodologies we employ in arriving at our own internal projections and the approaches taken by independent analysts in making their estimates are likely different in many significant respects |
| We expressly disclaim any responsibility to advise analysts or the public markets of our views regarding the accuracy of the published estimates of independent analysts |
| If you are relying on these estimates, you should pursue your own investigation and analysis of their accuracy and the reasonableness of the assumptions on which they are based |
| We may be unable to protect our rights in intellectual property |
| Despite our efforts to protect our intellectual property, third parties may infringe or misappropriate our intellectual property or otherwise independently develop substantially equivalent products and services |
| In addition, designs licensed from third parties account for a portion of our revenues, and there can be no guarantee that such licenses will be available to us indefinitely or on terms that would allow us to continue to be profitable with those products |
| The loss of intellectual property protection or the inability to secure or enforce intellectual property protection could harm our business and ability to compete |
| We rely on a combination of trademark and copyright laws, trade secret protection and confidentiality and license agreements to protect our trademarks, software and know-how |
| We may be required to spend significant resources to protect our trade secrets and monitor and police our intellectual property rights |
| We are dependent upon third party providers for certain significant information technology needs |
| We have entered into agreements with third party providers for information technology services, including software development and support services, and personal computer, telecommunications, network server and help desk services |
| In the event that one or more of these providers is not able to provide adequate information technology 11 _________________________________________________________________ services, we would be adversely affected |
| Although we believe that information technology services are available from numerous sources, a failure to perform by one or more of our service providers could cause a disruption in our business while we obtain an alternative source of supply |
| Legislation relating to consumer privacy protection could harm our business |
| We are subject to regulations implementing the privacy and information security requirements of the federal financial modernization law known as the Gramm-Leach-Bliley Act and other federal regulation and state law on the same subject |
| These laws and regulations require us to develop and implement policies to protect the security and confidentiality of consumers’ nonpublic personal information and to disclose these policies to consumers before a customer relationship is established and annually thereafter |
| These regulations could have the effect of foreclosing future business initiatives |
| In addition, new technologies and higher criminal capabilities may breach or compromise the security of consumers’ nonpublic personal information |
| More restrictive legislation or regulations have been introduced in the past and could be introduced in the future in Congress and the states |
| We are unable to predict whether more restrictive legislation or regulations will be adopted in the future |
| Any future legislation or regulations could have a negative impact on our business, results of operations or prospects |
| Laws and regulations may be adopted in the future with respect to the internet, e-commerce or marketing practices generally relating to consumer privacy |
| Such laws or regulations may impede the growth of the internet and/or use of other sales or marketing vehicles |
| As an example, new privacy laws could decrease traffic to our websites, decrease telemarketing opportunities and increase the cost of obtaining new customers |
| Additionally, the applicability to the internet of existing laws governing property ownership, taxation, libel and personal privacy is uncertain and may remain uncertain for a considerable length of time |
| We may be subject to sales and other taxes which could have adverse effects on our business |
| In accordance with current federal, state and local tax laws, and the constitutional limitations thereon, we currently collect sales, use or other similar taxes in state and local jurisdictions where our direct-to-consumer businesses have a physical presence |
| One or more state or local jurisdictions may seek to impose sales tax collection obligations on us and other out-of-state companies which engage in remote or online commerce |
| Further, tax law and the interpretation of constitutional limitations thereon are subject to change |
| In addition, any new operations of these businesses in states where they do not currently have a physical presence could subject shipments of goods by these businesses into such states to sales tax under current or future laws |
| If one or more state or local jurisdictions successfully asserts that we must collect sales or other taxes beyond our current practices, it could have a material, adverse affect on our business |
| We may be subject to environmental risks |
| Our printing facilities are subject to many existing and proposed federal and state regulations designed to protect the environment |
| In some instances, we owned and operated our printing facilities before the environmental regulations came into existence |
| We have sold former printing facilities to third parties and in some instances have agreed to indemnify the buyer of the facility for certain environmental liabilities |
| We have obtained insurance coverage related to environmental issues at certain of these facilities |
| We believe that, based on current information, we will not be required to incur additional material and uninsured expense with respect to these sites, but unforeseen conditions could result in additional exposure at lesser levels |