UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

DELUXE CORPORATION

Minnesota		41-0216800
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3680 Victoria St. N., Shoreview, Minnesota		55126-2966
(Address of principal executive offices)		(Zip Code)

(651) 483-7111

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No

The number of shares outstanding of registrant’s common stock, par value $1.00 per share, at October 20, 2008 was 51,135,850.

 

 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

DELUXE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share par value)
(Unaudited)

		September 30,				December 31,
		2008				2007
ASSETS
Current Assets:
Cash and cash equivalents		$	18,013			$	21,615
Trade accounts receivable (net of allowances for uncollectible accounts of $6,396 and $7,194, respectively)			69,245				85,687
Inventories and supplies			30,283				32,279
Deferred income taxes			18,849				14,901
Cash held for customers			26,671				23,285
Other current assets			17,942				14,178
Total current assets			181,003				191,945
Long-Term Investments (including $2,612 and $3,025 of investments at fair value, respectively)			37,111				36,013
Property, Plant, and Equipment (net of accumulated depreciation of $337,325 and $326,742, respectively)			128,424				139,245
Intangibles (net of accumulated amortization of $397,476 and $368,816, respectively)			157,427				148,487
Goodwill			657,088				585,294
Other Non-Current Assets			91,100				109,771
Total assets		$	1,252,153			$	1,210,755
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	65,650			$	78,871
Accrued liabilities			153,527				149,763
Short-term debt			109,740				67,200
Long-term debt due within one year			1,896				1,754
Total current liabilities			330,813				297,588
Long-Term Debt			773,834				775,086
Deferred Income Taxes			21,540				10,194
Other Non-Current Liabilities			61,450				86,780
Commitments and Contingencies (Notes 8, 9, 10 and 13)
Shareholders’ Equity:
Common shares $1 par value (authorized: 500,000 shares; outstanding: 2008 - 51,139; 2007 - 51,887)			51,139				51,887
Additional paid-in capital			52,902				65,796
Accumulated deficit			(2,439	)			(37,530	)
Accumulated other comprehensive loss			(37,086	)			(39,046	)
Total shareholders’ equity			64,516				41,107
Total liabilities and shareholders’ equity		$	1,252,153			$	1,210,755

See Condensed Notes to Unaudited Consolidated Financial Statements

DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)

		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Revenue		$	366,188			$	388,636			$	1,115,150			$	1,192,341
Restructuring charges (reversals)			12,639				(62	)			13,098				(366	)
Other cost of goods sold			139,948				143,560				425,183				435,976
Total cost of goods sold			152,587				143,498				438,281				435,610
Gross Profit			213,601				245,138				676,869				756,731
Selling, general and administrative expense			164,624				182,243				510,542				561,394
Restructuring charges			9,007				2,173				10,226				1,933
Asset impairment charges			9,687				—				9,687				—
Net gain on sale of product line			—				—				—				(3,773	)
Operating Income			30,283				60,722				146,414				197,177
Interest expense			(12,740	)			(15,517	)			(37,873	)			(42,226	)
Other income			234				2,675				1,107				4,540
Income Before Income Taxes			17,777				47,880				109,648				159,491
Income tax provision			4,017				15,720				35,954				56,128
Net Income		$	13,760			$	32,160			$	73,694			$	103,363
Earnings per share:
Basic		$	0.27			$	0.62			$	1.45			$	2.01
Diluted			0.27				0.62				1.43				1.99
Cash Dividends per Share		$	0.25			$	0.25			$	0.75			$	0.75
Total Comprehensive Income		$	13,837			$	35,929			$	75,654			$	112,186

See Condensed Notes to Unaudited Consolidated Financial Statements

DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

		Nine Months Ended
		September 30,
		2008				2007
Cash Flows from Operating Activities:
Net income		$	73,694			$	103,363
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			16,355				16,622
Amortization of intangibles			30,751				34,924
Asset impairment charges			9,687				—
Amortization of contract acquisition costs			19,573				21,764
Employee share-based compensation expense			7,518				9,667
Deferred income taxes			(6,345	)			2,521
Net gain on sale of product line			—				(3,773	)
Other non-cash items, net			16,854				14,114
Changes in assets and liabilities, net of effect of acquisitions and product line disposition:
Trade accounts receivable			13,937				453
Inventories and supplies			(662	)			(2,899	)
Other current assets			(3,199	)			2,719
Non-current assets			(878	)			(6,881	)
Accounts payable			(3,342	)			2,882
Contract acquisition payments			(7,653	)			(12,797	)
Other accrued and non-current liabilities			(20,915	)			(4,937	)
Net cash provided by operating activities			145,375				177,742
Cash Flows from Investing Activities:
Purchases of capital assets			(21,961	)			(17,594	)
Payments for acquisitions, net of cash acquired			(104,846	)			(2,316	)
Purchases of marketable securities			—				(855,760	)
Proceeds from sales of marketable securities			—				638,805
Proceeds from sale of facility and product line			4,181				19,214
Other			98				4,075
Net cash used by investing activities			(122,528	)			(213,576	)
Cash Flows from Financing Activities:
Net proceeds (payments) from short-term debt			42,540				(112,660	)
Proceeds from long-term debt, net of debt issuance costs			—				196,329
Payments on long-term debt			(1,299	)			(1,171	)
Change in book overdrafts			(9,528	)			(5,625	)
Proceeds from issuing shares under employee plans			2,801				15,309
Excess tax benefit from share-based employee awards			92				971
Payments for common shares repurchased			(21,847	)			(3,019	)
Cash dividends paid to shareholders			(38,603	)			(39,015	)
Net cash (used) provided by financing activities			(25,844	)			51,119
Effect of Exchange Rate Change on Cash			(605	)			1,323
Net Change in Cash and Cash Equivalents			(3,602	)			16,608
Cash and Cash Equivalents: Beginning of Period			21,615				11,599
End of Period		$	18,013			$	28,207

See Condensed Notes to Unaudited Consolidated Financial Statements

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Consolidated financial statements

     The consolidated balance sheet as of September 30, 2008, the consolidated statements of income for the quarters and nine months ended September 30, 2008 and 2007 and the consolidated statements of cash flows for the nine months ended September 30, 2008 and 2007 are unaudited. The consolidated balance sheet as of December 31, 2007 was derived from audited consolidated financial statements, but does not include all disclosures required by generally accepted accounting principles (GAAP) in the United States of America. In the opinion of management, all adjustments necessary for a fair statement of the consolidated financial statements are included. Adjustments consist only of normal recurring items, except for any discussed in the notes below. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements and notes are presented in accordance with instructions for Form 10-Q, and do not contain certain information included in our consolidated annual financial statements and notes. The consolidated financial statements and notes appearing in this report should be read in conjunction with the consolidated audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2007 (the “2007 Form 10-K”).

     We have reclassified certain amounts presented in the consolidated statements of income for the quarter and nine months ended September 30, 2007, to conform to the current period presentation. These reclassifications did not affect our previously reported results of operations.

Note 2: New accounting pronouncements

     Recently adopted accounting pronouncements - In December 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 110. This guidance allows companies, in certain circumstances, to utilize a simplified method in determining the expected term of stock option grants when calculating the compensation expense to be recorded under Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment. The simplified method can be used after December 31, 2007 only if a company’s stock option exercise experience does not provide a reasonable basis upon which to estimate the expected option term. Through 2007, we utilized the simplified method to determine the expected option term, based upon the vesting and original contractual terms of the option. On January 1, 2008, we began calculating the expected option term based on our historical option exercise data. This change did not have a significant impact on the compensation expense recognized for stock options granted in 2008.

     Accounting pronouncements not yet adopted - In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141(R), Business Combinations, which modifies the required accounting for business combinations. This guidance applies to all transactions or other events in which an entity (the acquirer) obtains control of one or more businesses (the acquiree), including those sometimes referred to as “true mergers” or “mergers of equals.” SFAS No. 141(R) changes the accounting for business acquisitions and will impact financial statements at the acquisition date and in subsequent periods. We are required to apply the new guidance to business combinations completed after December 31, 2008.

     In April 2008, the FASB issued FASB Staff Position (FSP) No. FAS 142-3, Determination of the Useful Life of Intangible Assets. This guidance addresses the determination of the useful life of intangible assets which have legal, regulatory or contractual provisions that potentially limit a company’s use of an asset. Under the new guidance, a company should consider its own historical experience in renewing or extending similar arrangements. We are required to apply the new guidance to intangible assets acquired after December 31, 2008.

     In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. This guidance states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalent payments are participating securities and should be included in the computation of earnings per share using the two-class method outlined in SFAS No. 128, Earnings per Share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. The terms of our restricted stock unit and restricted stock awards do provide a nonforfeitable right to receive dividend equivalent payments on unvested awards. As such, these awards are considered participating securities under the new guidance. Effective January 1, 2009, we will begin reporting earnings per share under the two-class method and will restate all historical earnings per share data. We do not expect the adoption of this statement to have a significant impact on reported earnings per share.

Note 3: Supplemental balance sheet and cash flow information

     Inventories and supplies - Inventories and supplies were comprised of the following:

		September 30,				December 31,
(in thousands)		2008				2007
Raw materials		$	6,252			$	6,803
Semi-finished goods			11,483				10,886
Finished goods			7,857				8,499
Total inventories			25,592				26,188
Supplies, primarily production			4,691				6,091
Inventories and supplies		$	30,283			$	32,279

     Fair value measurements - During the quarters and nine months ended September 30, 2008 and 2007, we measured a long-term mutual fund investment at fair value based on quoted prices in active markets for identical assets. This is considered a Level 1 fair value measurement under SFAS No. 157, Fair Value Measurements. We account for this investment at fair value in accordance with SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This investment corresponds to our liability under an officers’ deferred compensation plan. This deferred compensation plan is not available to new participants and is fully funded by the mutual fund investment. The liability under the plan equals the fair value of the mutual fund investment. Under SFAS No. 159, changes in the value of both the plan asset and the liability are netted in the consolidated statements of income within selling, general and administrative (SG&A) expense. Dividends earned by the mutual fund investment, as reported by the fund, are also netted within SG&A expense in the consolidated statements of income. The fair value of this investment is included in long-term investments in the consolidated balance sheets. The long-term investment caption on our consolidated balance sheets also includes life insurance policies which are recorded at their cash surrender values. The fair value of the mutual fund investment was $2.6 million as of September 30, 2008 and $3.0 million as of December 31, 2007. We recognized a net unrealized loss of $0.2 million on the mutual fund investment during the quarter ended September 30, 2008 and a net unrealized loss of $0.1 million during the quarter ended September 30, 2007. During the nine months ended September 30, 2008 and 2007, we recognized net unrealized losses of $0.6 million and $0.2 million, respectively.

     As of July 31, 2008, our annual measurement date, we completed the annual impairment analysis of indefinite-lived intangibles and goodwill. Information regarding these nonrecurring fair value measurements completed during the third quarter of 2008 was as follows:

Fair value measurements using

Quoted prices

Fair value

in active

Significant

Significant

as of

markets for

other

unobservable

measurement

identical assets

observable

inputs

(in thousands)

date

(Level 1)

inputs (Level 2)

(Level 3)

Indefinite-lived trade names

$

50,100

$

—

$

—

$

50,100

Goodwill(1)

1,615,394

—

—

1,615,394

     When evaluating whether goodwill is impaired, we compare the fair value of the reporting unit to which the goodwill is assigned to its carrying amount. In calculating fair value, we use the income approach. The income approach is a valuation technique under which we estimate future cash flows using each reporting unit’s financial forecast from the perspective of an unrelated market participant. Future estimated cash flows are discounted to their present value to calculate fair value. For reasonableness, we compare the summation of our reporting units’ fair values to our market capitalization. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. An impairment loss is calculated by comparing the implied fair value of the reporting unit goodwill to its carrying amount. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized when the carrying amount of goodwill exceeds its implied fair value. Since the fair value of all our reporting units exceeded their carrying values, the impairment analysis completed during the third quarter of 2008 indicated no goodwill impairment. See Note 13 for information regarding market risks.

     When evaluating whether our indefinite-lived trade names are impaired, we estimate the fair values based on a relief from royalty method which calculates the cost savings associated with owning, rather than licensing, the trade names. An assumed royalty rate is applied to forecasted revenue and the resulting cash flows are discounted. The impairment analysis completed during the third quarter of 2008 indicated a $9.3 million impairment of trade names in our Small Business Services segment. The impairment charges related to assets held as of September 30, 2008 and are reflected in asset impairment charges in our consolidated statements of income for the quarter and nine months ended September 30, 2008. The impairment charges resulted from the effects of the economic downturn on our expected revenues and the broader effects of recent U.S. market conditions on the fair value of the assets (see Note 13).

     In addition to the impairment analysis of indefinite-lived trade names, we completed a fair value analysis of an amortizable trade name with a carrying value of $0.4 million. This asset was written down to a carrying value of zero due to a change in our branding strategy. The $0.4 million impairment charge is reflected in asset impairment charges in our consolidated statements of income for the quarter and nine months ended September 30, 2008.

     Intangibles - Intangibles were comprised of the following:

		September 30, 2008												December 31, 2007
		Gross								Net				Gross								Net
		carrying				Accumulated				carrying				carrying				Accumulated				carrying
(in thousands)		amount				amortization				amount				amount				amortization				amount
Indefinite-lived:
Trade names		$	50,100			$	—			$	50,100			$	59,400			$	—			$	59,400
Amortizable intangibles:
Internal-use software			312,467				(254,818	)			57,649				278,802				(243,483	)			35,319
Customer lists/relationships			123,984				(96,307	)			27,677				110,165				(85,199	)			24,966
Distributor contracts			30,900				(21,934	)			8,966				30,900				(19,016	)			11,884
Trade names			29,816				(19,403	)			10,413				30,369				(16,708	)			13,661
Other			7,636				(5,014	)			2,622				7,667				(4,410	)			3,257
Amortizable intangibles			504,803				(397,476	)			107,327				457,903				(368,816	)			89,087
Intangibles		$	554,903			$	(397,476	)		$	157,427			$	517,303			$	(368,816	)		$	148,487

     Total amortization of intangibles was $10.4 million for the quarter ended September 30, 2008 and $11.3 million for the quarter ended September 30, 2007. Amortization of intangibles was $30.8 million for the nine months ended September 30, 2008 and $34.9 million for the nine months ended September 30, 2007. Based on the intangibles in service as of September 30, 2008, estimated future amortization expense is as follows:

(in thousands)
Remainder of 2008		$	11,349
2009			36,285
2010			22,020
2011			13,428
2012			5,574

     Goodwill - Changes in goodwill during the nine months ended September 30, 2008 were as follows:

		Small
		Business				Direct
(in thousands)		Services				Checks				Total
Balance, December 31, 2007		$	503,057			$	82,237			$	585,294
Adjustment to New England Business Service, Inc. (NEBS) acquisition uncertain tax positions			(1,436	)			—				(1,436	)
Acquisition of Logo Design Mojo, Inc. (see Note 5)			1,359				—				1,359
Acquisition of Hostopia.com Inc. (see Note 5)			71,991				—				71,991
Currency translation adjustment			(120	)			—				(120	)
Balance, September 30, 2008		$	574,851			$	82,237			$	657,088

     Other non-current assets - Other non-current assets were comprised of the following:

		September 30,				December 31,
(in thousands)		2008				2007
Contract acquisition costs (net of accumulated amortization of $98,599 and $82,976, respectively)		$	41,496			$	55,516
Deferred advertising costs			26,470				26,009
Other			23,134				28,246
Other non-current assets		$	91,100			$	109,771

     See Note 13 for discussion of the recoverability of contract acquisition costs. Changes in contract acquisition costs during the first nine months of 2008 and 2007 were as follows:

		Nine Months Ended September 30,
(in thousands)		2008				2007
Balance, beginning of year		$	55,516			$	71,721
Additions(1)			5,553				10,310
Amortization			(19,573	)			(21,764	)
Balance, end of period		$	41,496			$	60,267

     Accrued liabilities - Accrued liabilities were comprised of the following:

		September 30,				December 31,
(in thousands)		2008				2007
Customer rebates		$	28,433			$	20,397
Cash held for customers			26,671				23,285
Restructuring (see Note 6)			19,587				5,050
Wages, including vacation			18,019				17,275
Interest			16,377				5,414
Employee profit sharing and pension			11,644				40,294
Other			32,796				38,048
Accrued liabilities		$	153,527			$	149,763

     Supplemental cash flow disclosure - As of September 30, 2008, we had accounts payable of $2.2 million related to capital asset purchases. These amounts were reflected in property, plant and equipment and intangibles in our consolidated balance sheet as of September 30, 2008, as we received the assets as of that date. As these liabilities are paid, the payments will be included in purchases of capital assets on the consolidated statements of cash flows. As of December 31, 2007, we had accounts payable of $3.9 million related to capital asset purchases.

     During the quarter ended September 30, 2008, we completed the sale of our Flagstaff, Arizona facility, which was closed in August 2008. Proceeds from the sale were $4.2 million, resulting in a pre-tax gain of $1.4 million.

     Marketable securities purchased and sold during the nine months ended September 30, 2007 consisted of investments in tax-exempt mutual funds. The funds were comprised of variable rate demand notes, municipal bonds and notes, and commercial paper. The cost of these investments equaled their fair value due to the short-term duration of the underlying investments. Proceeds from sales of marketable securities were $638.8 million during the nine months ended September 30, 2007. No gains or losses were realized on these sales.

Note 4: Earnings per share

     The following table reflects the calculation of basic and diluted earnings per share. During each period, certain options as noted below, were excluded from the calculation of diluted earnings per share because their effect would have been antidilutive.

		Quarter Ended								Nine Months Ended
		September 30,								September 30,
(in thousands, except per share amounts)		2008				2007				2008				2007
Earnings per share – basic:
Net income		$	13,760			$	32,160			$	73,694			$	103,363
Weighted-average shares outstanding			50,859				51,616				50,974				51,422
Earnings per share – basic		$	0.27			$	0.62			$	1.45			$	2.01
Earnings per share – diluted:
Net income		$	13,760			$	32,160			$	73,694			$	103,363
Re-measurement of share-based awards classified as liabilities			(75	)			(1	)			(347	)			(9	)
Income available to common shareholders		$	13,685			$	32,159			$	73,347			$	103,354
Weighted-average shares outstanding			50,859				51,616				50,974				51,422
Dilutive impact of options, restricted stock units, unvested restricted stock and employee stock purchase plan			414				507				428				471
Weighted-average shares and potential dilutive shares outstanding			51,273				52,123				51,402				51,893
Earnings per share – diluted		$	0.27			$	0.62			$	1.43			$	1.99
Antidilutive options excluded from calculation (weighted-average amount for nine month periods)			3,562				1,815				3,639				1,946

Note 5: Acquisitions and disposition

     Acquisitions - 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 for $99.4 million, net of cash acquired. The transaction closed on August 6, 2008, and we utilized availability under our existing lines of credit to fund the acquisition. Hostopia is a provider of web services that enable small businesses to establish and maintain an internet presence. It also provides email marketing, fax-to-email, mobility synchronization and other services and is included in our Small Business Services segment. Hostopia’s operating results are included in our consolidated results of operations from the acquisition date. The preliminary allocation of the purchase price based upon the fair values of the assets acquired and liabilities assumed resulted in goodwill of $72.0 million as of September 30, 2008. We expect to complete the allocation of the purchase price during the fourth quarter of 2008 when certain income tax calculations are finalized. We believe this acquisition resulted in the recognition of goodwill as Hostopia provides a unified, scaleable services delivery platform which we expect to utilize as we strive to obtain a greater portion of our revenue from annuity-based business services. We plan to use Hostopia’s technology architecture as the primary delivery platform for these business services offerings.

     The following illustrates our preliminary allocation of the purchase price to the assets acquired and liabilities assumed:

(in thousands)
Cash and cash equivalents		$	23,747
Other current assets			6,371
Intangibles			32,700
Goodwill			71,991
Other non-current assets			4,104
Current liabilities			(4,845	)
Non-current liabilities			(10,971	)
Total purchase price			123,097
Less: cash acquired			(23,747	)
Purchase price, net of cash acquired		$	99,350

     Acquired intangible assets included internal-use software valued at $17.9 million with useful lives ranging from 3 to 5 years, customer relationships valued at $13.9 million with a useful life of 10 years and a trade name valued at $0.9 million with a useful life of 10 years. The software and trade name assets are being amortized using the straight-line method, while the customer relationship asset is being amortized using an accelerated method.

     We also acquired the assets of PartnerUp, Inc. (PartnerUp), Logo Design Mojo, Inc. (Logo Mojo) and Yoffi Digital Press (Yoffi) during 2008 for an aggregate cash amount of $5.6 million. The PartnerUp transaction also includes contingent compensation payments through 2012 based on PartnerUp’s revenue and operating margin, provided the principals remain employed by the company. PartnerUp is an online community that is designed to connect small businesses and entrepreneurs with resources and contacts to build their businesses. Logo Mojo is a Canadian-based online logo design firm and Yoffi is a commercial digital printer specializing in one-to-one marketing strategies. The results of all three businesses are included in Small Business Services from the acquisition dates. The allocation of the purchase price based upon the fair values of the assets acquired and liabilities assumed resulted in tax deductible goodwill of $1.4 million related to the Logo Mojo acquisition. We believe this acquisition resulted in goodwill primarily due to Logo Mojo’s web-based workflow which we are incorporating into our processes and which we expect will increase our product offerings for small businesses. The assets acquired consisted primarily of internal-use software which is being amortized on the straight-line basis over 3 years.

     In February 2007, we acquired all of the common stock of All Trade Computer Forms, Inc. (All Trade) for cash of $2.3 million, net of cash acquired. All Trade is a custom form printer based in Canada and is included in our Small Business Services segment. All Trade’s operating results are included in our consolidated results of operations from the acquisition date. The allocation of the purchase price based upon the fair values of the assets acquired and liabilities assumed resulted in goodwill of $0.7 million. We believe this acquisition resulted in goodwill due to All Trade’s expertise in custom printing which we expect will help us expand our core printing capabilities and product offerings for small businesses.

     Disposition - In January 2007, we completed the sale of the assets 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 diluted earnings per share as the effective tax rate specifically attributable to the gain was higher because the goodwill written-off is not deductible for tax purposes. This product line generated approximately $51 million of revenue in 2006. The disposition of this product line did not qualify to be reported as discontinued operations in our consolidated financial statements.

Note 6: Restructuring accruals

     During the quarter ended September 30, 2008, we recorded restructuring accruals of $18.0 million for employee severance related to the planned closing of our Greensboro, North Carolina and North Wales, Pennsylvania manufacturing facilities and our Thorofare, New Jersey manufacturing facility and customer call center, as well as employee reductions within our business unit support and corporate shared services functions. These actions were the result of a review of our cost structure in response to the impact a weakened U.S. economy continues to have on our business.

The restructuring accruals included severance benefits for 1,025 employees. The North Wales and Thorofare facility closures are expected to be completed in the first quarter of 2009, while the Greensboro facility will play a transitional role and is expected to close later in 2009. The majority of the other employee reductions are expected to be completed by the end of 2009. As such, we expect most of the severance benefits to be fully paid by the first half of 2010, utilizing cash from operations. Also during the quarter ended September 30, 2008, we reversed $0.1 million of restructuring accruals due to fewer employees receiving severance benefits than originally estimated. These restructuring charges, net of reversals, were reflected as cost of goods sold of $9.6 million and operating expenses of $8.3 million in our consolidated statement of income for the quarter ended September 30, 2008.

     During the nine months ended September 30, 2008, we recorded restructuring accruals of $20.6 million for employee severance. In addition to the actions taken during the quarter ended September 30, 2008, the accruals related to the recent closing of our customer service call center located in Flagstaff, Arizona, as well as employee reductions in various functional areas, including sales, marketing and fulfillment. These reductions were a result of our cost savings initiatives. The restructuring accruals included severance benefits for 1,220 employees. During the nine months ended September 30, 2008, we reversed $0.9 million of restructuring accruals as fewer employees received severance benefits than originally estimated. These restructuring charges, net of reversals, were reflected as cost of goods sold of $10.1 million and operating expenses of $9.6 million in our consolidated statement of income for the nine months ended September 30, 2008.

     During the quarter ended September 30, 2007, we recorded restructuring accruals of $2.6 million and during the nine months ended September 30, 2007, we recorded restructuring accruals of $4.1 million. These restructuring accruals related to employee reductions resulting from our cost savings initiatives. Also during the quarter ended September 30, 2007, we reversed $0.5 million of restructuring accruals and during the nine months ended September 30, 2007, we reversed $2.3 million of restructuring accruals. These reversals were due to fewer employees receiving severance benefits than originally estimated and the re-negotiation of operating lease obligations. The restructuring charges, net of reversals, were reflected as a reduction in cost of goods sold of $0.1 million and operating expense of $2.2 million in our consolidated statement of income for the quarter ended September 30, 2007. For the nine months ended September 30, 2007, the restructuring charges, net of reversals, were reflected as a reduction of cost of goods sold of $0.4 million, operating expenses of $1.9 million and a $0.3 million reduction of the gain recognized on the sale of our industrial packaging product line (see Note 5).

     Restructuring accruals of $19.6 million as of September 30, 2008 and $5.1 million as of December 31, 2007 are reflected in accrued liabilities in the consolidated balance sheets. The accruals consist of employee severance benefits and payments due under operating lease obligations for facilities that we have vacated. The remaining payments due under the operating lease obligations will be paid through early 2009. Further information regarding our restructuring accruals can be found under the caption “Note 6: Restructuring accruals” in the Notes to Consolidated Financial Statements appearing in the 2007 Form 10-K.

     As of September 30, 2008, our restructuring accruals, by company initiative, were as follows:

		NEBS
		acquisition				2006				2007				2008
(in thousands)		related				initiatives				initiatives				initiatives				Total
Balance, December 31, 2007		$	36			$	325			$	4,689			$	—			$	5,050
Restructuring charges			—				—				109				20,455				20,564
Restructuring reversals			—				(27	)			(843	)			(73	)			(943	)
Payments			(16	)			(108	)			(3,308	)			(1,652	)			(5,084	)
Balance, September 30, 2008		$	20			$	190			$	647			$	18,730			$	19,587
Cumulative amounts:
Restructuring accruals		$	30,243			$	10,859			$	7,037			$	20,455			$	68,594
Restructuring reversals			(839	)			(1,671	)			(1,405	)			(73	)			(3,988	)
Payments			(29,384	)			(8,998	)			(4,985	)			(1,652	)			(45,019	)
Balance, September 30, 2008		$	20			$	190			$	647			$	18,730			$	19,587

     As of September 30, 2008, the components of our restructuring accruals, by segment, were as follows:

																		Operating
																		lease
		Employee severance benefits																obligations
		Small																Small
		Business				Financial				Direct								Business
(in thousands)		Services				Services				Checks				Corporate				Services				Total
Balance, December 31, 2007		$	2,001			$	953			$	—			$	2,060			$	36			$	5,050
Restructuring charges			4,837				2,872				219				12,636				—				20,564
Restructuring reversals			(431	)			(405	)			(1	)			(106	)			—				(943	)
Inter-segment transfer			763				354				—				(1,117	)			—				—
Payments			(2,989	)			(723	)			(151	)			(1,205	)			(16	)			(5,084	)
Balance, September 30, 2008		$	4,181			$	3,051			$	67			$	12,268			$	20			$	19,587
Cumulative amounts for current initiatives(1) :
Restructuring accruals		$	37,150			$	7,182			$	347			$	20,997			$	2,918			$	68,594
Restructuring reversals			(851	)			(1,041	)			(143	)			(1,402	)			(551	)			(3,988	)
Inter-segment transfer			1,396				732				32				(2,160	)			—				—
Payments			(33,514	)			(3,822	)			(169	)			(5,167	)			(2,347	)			(45,019	)
Balance, September 30, 2008		$	4,181			$	3,051			$	67			$	12,268			$	20			$	19,587

     In addition to severance benefits, we incurred other expenses related to our restructuring activities. During the quarter ended September 30, 2008, we recorded a $3.0 million write-down of the carrying value of spare parts used on our offset printing presses. During a third quarter review of our cost structure, we made the decision to expand our use of the digital printing process. As such, a portion of the spare parts kept on hand for use on our offset printing presses was written down to zero, as these parts have no future use or market value. The spare parts were included in other non-current assets on our consolidated balance sheet. The write-down is included in the restructuring charges caption within cost of goods sold on our consolidated statements of income for the quarter and nine months ended September 30, 2008. In addition to the spare parts write-down, we incurred $0.9 million of other restructuring-related costs during the quarter ended September 30, 2008, including the acceleration of expense for employee share-based compensation awards.

Note 7: Pension and other postretirement benefits

     We have historically provided certain health care benefits for a large number of retired employees. In addition to our retiree health care plan, we also have supplemental executive retirement plans (SERP’s) in the United States and Canada and a pension plan which covers certain Canadian employees. These pension plans were acquired as part of the NEBS acquisition in 2004. Further information regarding our postretirement benefit plans can be found under the caption “Note 12: Pension and other postretirement benefits” in the Notes to Consolidated Financial Statements appearing in the 2007 Form 10-K. See Note 13 for discussion of the plan assets of our postretirement benefit and pension plans.

     Pension and postretirement benefit expense for the quarters ended September 30, 2008 and 2007 consisted of the following components:

		Postretirement benefit
		plan								Pension plans
(in thousands)		2008				2007				2008				2007
Service cost		$	24			$	39			$	—			$	57
Interest cost			1,989				1,753				126				130
Expected return on plan assets			(2,183	)			(2,066	)			(68	)			(67	)
Amortization of prior service credit			(990	)			(990	)			—				—
Amortization of net actuarial losses			2,369				2,464				3				2
Total periodic benefit expense		$	1,209			$	1,200			$	61			$	122

     Pension and postretirement benefit expense for the nine months ended September 30, 2008 and 2007 consisted of the following components:

		Postretirement benefit
		plan								Pension plans
(in thousands)		2008				2007				2008				2007
Service cost		$	71			$	117			$	—			$	161
Interest cost			5,966				5,258				383				378
Expected return on plan assets			(6,550	)			(6,198	)			(209	)			(190	)
Amortization of prior service credit			(2,969	)			(2,969	)			—				—
Amortization of net actuarial losses			7,108				7,393				8				5
Settlement loss			—				—				111				—
Total periodic benefit expense		$	3,626			$	3,601			$	293			$	354

     In March 2008, we used $0.5 million of plan assets to settle approximately one-half of the benefits due under our Canadian SERP plan. We anticipate that final settlement of this plan will occur by the end of 2008.

Note 8: Provision for income taxes

     Our effective tax rate for the nine months ended September 30, 2008 was 32.8%, compared to our 2007 annual effective tax rate of 34.1%. Our 2008 effective tax rate included favorable discrete adjustments related primarily to receivables for prior year tax returns, which lowered our effective tax rate 2.8 percentage points. Additionally, our 2008 effective tax rate was reduced due to the impact of restructuring and asset impairment charges on the calculation of our annual effective tax rate. Our 2007 effective tax rate included favorable adjustments which lowered our effective tax rate 2.1 percentage points related to receivables for prior year tax returns and the reconciliation of our 2006 federal income tax return to our 2006 estimated provision for income taxes. Additionally, our 2007 effective tax rate was favorably impacted by tax-exempt interest income. These favorable amounts in 2007 were partially offset by the non-deductible write-off of goodwill related to the sale of our industrial packaging product line in January 2007.

     As of September 30, 2008, our unrecognized tax benefits, excluding interest and penalties, were $11.3 million compared to $14.4 million as of December 31, 2007. Changes in unrecognized tax benefits during the first nine months of 2008 were as follows:

(in thousands)
Balance, December 31, 2007		$	14,395
Additions for tax positions of current year			739
Additions for tax positions of prior years			2,885
Reductions for tax positions of prior years			(2,828	)
Settlements			(2,182	)
Lapse of statutes of limitations			(1,670	)
Balance, September 30, 2008		$	11,339

     The statute of limitations for federal tax assessments for 2004 and prior years has closed, with the exception of 2000. Our federal income tax returns for 2005 through 2007 remain subject to Internal Revenue Service examination. In general, income tax returns for the years 2003 through 2007 remain subject to examination by major state and city jurisdictions. In the event that we have determined not to file income tax returns with a particular city or state, all years remain subject to examination by the tax jurisdiction.

Note 9: Debt

     Total debt outstanding was comprised of the following:

		September 30,				December 31,
(in thousands)		2008				2007
5.0% senior, unsecured notes due December 15, 2012, net of discount		$	299,203			$	299,062
5.125% senior, unsecured notes due October 1, 2014, net of discount			274,631				274,584
7.375% senior, unsecured notes due June 1, 2015			200,000				200,000
Long-term portion of capital lease obligation			—				1,440
Long-term portion of debt			773,834				775,086
Amounts drawn on credit facilities		$	109,740			$	67,200
Capital lease obligation due within one year			1,896				1,754
Short-term portion of debt			111,636				68,954
Total debt		$	885,470			$	844,040

     Our senior, unsecured notes include covenants that place restrictions on the issuance of additional debt, the execution of certain sale-leaseback agreements and limitations on certain liens. Discounts from par value are being amortized ratably as increases to interest expense over the term of the related debt.

     In May 2007, we issued $200.0 million of 7.375% senior, unsecured notes maturing on June 1, 2015. The notes were issued via a private placement under Rule 144A of the Securities Act of 1933. These notes were subsequently registered with the SEC via a registration statement which became effective on June 29, 2007. Interest payments are due each June and December. The notes place a limitation on restricted payments, including increases in dividend levels and share repurchases. This limitation does not apply if the notes are upgraded to an investment-grade credit rating. Principal redemptions may be made at our election at any time on or after June 1, 2011 at redemption prices ranging from 100% to 103.688% of the principal amount. We may also redeem up to 35% of the notes at a price equal to 107.375% of the principal amount plus accrued and unpaid interest using the proceeds of certain equity offerings completed before June 1, 2010. In addition, at any time prior to June 1, 2011, we may redeem some or all of the notes at a price equal to 100% of the principal amount plus accrued and unpaid interest and a make-whole premium. If we sell certain of our assets or experience specific types of changes in control, we must offer to purchase the notes at 101% of the principal amount. 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 liquidated all of the marketable securities and used the proceeds, along with an advance on our credit facility, to repay $325.0 million of unsecured notes plus accrued interest. The fair value of the notes issued in May 2007 was $174.0 million as of September 30, 2008, based on quoted market prices.

     In October 2004, we issued $275.0 million of 5.125% senior, unsecured notes maturing on October 1, 2014. The notes were issued via a private placement under Rule 144A of the Securities Act of 1933 and were subsequently registered with the SEC via a registration statement which became effective on November 23, 2004. Interest payments are due each April and October. Principal redemptions may be made at our election prior to their stated maturity. Proceeds from the offering, net of offering costs, were $272.3 million. These proceeds were used to repay commercial paper borrowings used for the acquisition of NEBS in 2004. The fair value of these notes was $195.3 million as of September 30, 2008, based on quoted market prices.

     In December 2002, we issued $300.0 million of 5.0% senior, unsecured notes maturing on December 15, 2012. These notes were issued under our shelf registration statement covering up to $300.0 million in medium-term notes, thereby exhausting that registration statement. Interest payments are due each June and December. Principal redemptions may be made at our election prior to the stated maturity. Proceeds from the offering, net of offering costs, were $295.7 million. These proceeds were used for general corporate purposes, including funding share repurchases, capital asset purchases and working capital. The fair value of these notes was $210.0 million as of September 30, 2008, based on quoted market prices.

     As of September 30, 2008, we had committed lines of credit available for borrowing. The credit agreements governing the lines of credit contain customary covenants requiring a ratio of earnings before interest and taxes to interest expense of 3.0 times, as well as limits on the level of subsidiary indebtedness. The daily average amount outstanding under our lines of credit during the nine months ended September 30, 2008 was $76.1 million at a weighted-average interest rate of 3.34%. As of September 30, 2008, $109.7 million was outstanding at a weighted-average interest rate of 4.35%. During 2007, the daily average amount outstanding under our lines of credit was $45.5 million at a weighted-average interest rate of 5.57%. As of December 31, 2007, $67.2 million was outstanding at a weighted-average interest rate of 5.62%. As of September 30, 2008, amounts were available for borrowing under our committed lines of credit as follows:

		Total				Expiration				Commitment
(in thousands)		available				date				fee
Five year line of credit		$	275,000			July 2010					.175	%
Five year line of credit			225,000			July 2009					.225	%
Total committed lines of credit			500,000
Amounts drawn on lines of credit			(109,740	)
Outstanding letters of credit			(10,835	)
Net available for borrowing as of September 30, 2008		$	379,425

     Absent certain defined events of default under our debt instruments, and as long as our ratio of earnings before interest, taxes, depreciation and amortization to interest expense is in excess of two to one, our debt covenants do not restrict our ability to pay cash dividends at our current rate.

Note 10: Other commitments and contingencies

     Information regarding indemnifications, environmental matters, self-insurance and litigation can be found under the caption “Note 14: Other commitments and contingencies” in the Notes to Consolidated Financial Statements appearing in the 2007 Form 10-K. Based on information available as of September 30, 2008, the liability for workers’ compensation decreased to $8.1 million as of September 30, 2008 from $9.9 million as of December 31, 2007, and the liability for self-insured medical and dental benefits decreased to $5.9 million as of September 30, 2008 from $8.5 million as of December 31, 2007.

Note 11: Shareholders’ equity

     We have an outstanding authorization from our board of directors to purchase up to 10 million shares of our common stock. This authorization has no expiration date, and 6.5 million shares remain available for purchase under this authorization. The terms of our $200.0 million notes maturing in 2015 place a limitation on restricted payments, including increases in dividend levels and share repurchases. Share repurchases are reflected as reductions of shareholders’ equity in the consolidated balance sheets. Under the laws of Minnesota, our state of incorporation, shares which we repurchase are considered to be authorized and unissued shares. Thus, share repurchases are not presented as a separate treasury stock caption in our consolidated balance sheets, but are recorded as direct reductions of common shares and additional paid-in capital and increases in accumulated deficit.

     Changes in shareholders’ equity during the nine months ended September 30, 2008 were as follows:

																		Accumulated
		Common shares								Additional								other				Total
		Number				Par				paid-in				Accumulated				comprehensive				shareholders’
(in thousands)		of shares				value				capital				deficit				loss				equity
Balance, December 31, 2007			51,887			$	51,887			$	65,796			$	(37,530	)		$	(39,046	)		$	41,107
Net income			—				—				—				73,694				—				73,694
Cash dividends			—				—				—				(38,603	)			—				(38,603	)
Common shares issued(1)			375				375				2,438				—				—				2,813
Tax impact of share-based awards			—				—				(1,625	)			—				—				(1,625	)
Common shares repurchased			(1,054	)			(1,054	)			(20,793	)			—				—				(21,847	)
Other common shares retired			(69	)			(69	)			(1,486	)			—				—				(1,555	)
Fair value of share-based compensation			—				—				8,572				—				—				8,572
Amortization of postretirement prior service credit, net of tax			—				—				—				—				(1,837	)			(1,837	)
Amortization of postretirement net actuarial losses, net of tax			—				—				—				—				4,444				4,444
Amortization of loss on derivatives, net of tax			—				—				—				—				1,038				1,038
Currency translation adjustment			—				—				—				—				(1,685	)			(1,685	)
Balance, September 30, 2008			51,139			$	51,139			$	52,902			$	(2,439	)		$	(37,086	)		$	64,516

     Accumulated other comprehensive loss was comprised of the following:

		September 30,				December 31,
(in thousands)		2008				2007
Postretirement and defined benefit pension plans:
Unrealized prior service credit		$	23,468			$	25,305
Unrealized net actuarial losses			(56,978	)			(61,422	)
Postretirement and defined benefit pension plans, net of tax			(33,510	)			(36,117	)
Loss on derivatives, net of tax			(7,843	)			(8,881	)
Currency translation adjustment			4,267				5,952
Accumulated other comprehensive loss		$	(37,086	)		$	(39,046	)

Note 12: Business segment information

     We operate three business segments: Small Business Services, Financial Services and Direct Checks. Small Business Services sells business checks, printed forms, promotional products, marketing materials, web services and other related services and products to small businesses and home offices through direct response marketing, financial institution referrals, independent distributors, the internet and sales representatives. Financial Services 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 financial institutions. Direct Checks sells personal and business checks and related products and services directly to consumers through direct response marketing and the internet. All three segments operate primarily in the United States. Small Business Services also has operations in Canada.

     The accounting policies of the segments are the same as those described in the Notes to Consolidated Financial Statements included in the 2007 Form 10-K. We allocate corporate costs to our business segments, including costs of our executive management, human resources, supply chain, finance, information technology and legal functions. Generally, where costs incurred are directly attributable to a business segment, primarily within the areas of information technology, supply chain and finance, those costs are reported in that segment’s results. Due to our corporate shared services approach to many of our functions, certain costs are not directly attributable to a business segment. These costs are allocated to our business segments based on segment revenue, as revenue is a measure of the relative size and magnitude of each segment and indicates the level of corporate shared services consumed by each segment. Corporate assets are not allocated to the segments and consist of property, plant and equipment, internal-use software, inventories and supplies related to our corporate shared services functions of manufacturing, information technology and real estate, as well as long-term investments and deferred income taxes.

     We are an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations and the sharing of assets. Therefore, we do not represent that these segments, if operated independently, would report the operating income and other financial information shown.

     The following is our segment information as of and for the quarters ended September 30, 2008 and 2007:

						Reportable Business Segments
						Small
						Business				Financial				Direct
(in thousands)						Services				Services				Checks				Corporate				Consolidated
Revenue from external customers:			2008			$	216,407			$	103,771			$	46,010			$	—			$	366,188
			2007				225,789				113,001				49,846				—				388,636
Operating income:			2008				10,276				7,149				12,858				—				30,283
			2007				30,197				16,752				13,773				—				60,722
Depreciation and amortization			2008				12,534				2,417				1,063				—				16,014
expense:			2007				12,861				2,856				1,201				—				16,918
Asset impairment charges:			2008				9,687				—				—				—				9,687
			2007				—				—				—				—				—
Total assets:			2008				801,826				49,262				100,220				300,845				1,252,153
			2007				753,578				76,835				103,269				516,660				1,450,342
Capital asset purchases:			2008				—				—				—				6,747				6,747
			2007				—				—				—				5,568				5,568

     The following is our segment information as of and for the nine months ended September 30, 2008 and 2007:

						Reportable Business Segments
						Small
						Business				Financial				Direct
(in thousands)						Services				Services				Checks				Corporate				Consolidated
Revenue from external customers:			2008			$	643,746			$	327,766			$	143,638			$	—			$	1,115,150
			2007				687,674				344,421				160,246				—				1,192,341
Operating income:			2008				60,547				44,898				40,969				—				146,414
			2007				93,362				55,646				48,169				—				197,177
Depreciation and amortization			2008				36,681				7,184				3,241				—				47,106
expense:			2007				40,523				7,415				3,608				—				51,546
Asset impairment charges:			2008				9,687				—				—				—				9,687
			2007				—				—				—				—				—
Total assets:			2008				801,826				49,262				100,220				300,845				1,252,153
			2007				753,578				76,835				103,269				516,660				1,450,342
Capital asset purchases:			2008				—				—				—				21,961				21,961
			2007				—				—				—				17,594				17,594

Note 13: Market risks

          Due to recent failures and consolidations of companies within the financial services industry and the downturn in the broader U.S. economy, including the liquidity crisis in the credit markets, we have identified certain market risks which may affect our future operating performance.

          As discussed in Note 3, we recorded non-cash asset impairment charges of $9.7 million during the third quarter of 2008 related to trade names in our Small Business Services segment. Of this amount, $9.3 million related to indefinite-lived trade names. The impairment charges resulted from the effects of the economic downturn on our expected revenues and the broader effects of recent U.S. market conditions on the fair value of the assets. The impairment analysis completed during the third quarter of 2008 indicated no impairment of goodwill. However, due to the ongoing uncertainty in market conditions, which may continue to negatively impact our market value, we will continue to monitor and evaluate the carrying value of goodwill and our indefinite-lived trade names, particularly with respect to our Safeguard distributor reporting unit. The calculated fair value of this reporting unit exceeded its carrying value by $1.6 million as of the measurement date. The fair values of our other reporting units exceeded their carrying values between $32 and $482 million. If market and economic conditions deteriorate further, this could increase the likelihood of future non-cash impairment charges related to our indefinite-lived trade names and/or goodwill.

          The plan assets of our postretirement benefit and pension plans are valued at fair value using quoted market prices. Investments, in general, are subject to various risks, including credit, interest and overall market volatility risks. During 2008, the equity markets have seen a significant decline in value. As such, the fair values of our plan assets have decreased significantly from December 31, 2007. As our plan assets and liabilities will be re-measured at December 31, 2008, in accordance with SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, the decreases in the fair values of plan assets could materially affect the funded status of the plans. This would affect the amounts reported in the consolidated balance sheet, as well as increase future postretirement benefit expense, which would impact our consolidated results of operations.

          Upheaval in the financial services industry resulting in recent bank failures and consolidations could have a significant impact on our consolidated results of operations if any of the following were to occur:

	•		We could lose a significant contract, which would have a negative impact on our future results of operations.
	•		We may be unable to recover the value of any related unamortized contract acquisition cost and/or accounts receivable. Contract acquisition costs, which are essentially pre-paid product discounts, are sometimes utilized in our Financial Services segment when signing or renewing contracts with our financial institution clients and totalled $41.5 million as of September 30, 2008. These amounts are recorded as non-current assets upon contract execution and are amortized, generally on the straight-line basis, as reductions of revenue over the related contract term. In certain situations, the contract may require a financial institution to reimburse us for the unamortized contract acquisition cost if it terminates its contract with us prior to the end of the contract term. Our contract acquisition costs are comprised of amounts paid to individual financial institutions, many of which would not have a significant impact on our consolidated financial statements if they were deemed unrecoverable. However, the inability to recover amounts paid to one or more of our larger financial institution clients could have a significant negative impact on our consolidated results of operations.
	•		If one or more of our financial institution clients is taken over by a financial institution which is not one of our clients, we could lose significant business. In the case of a cancelled contract, we may be entitled to collect a contract termination payment. However, if a financial institution fails, we may be unable to collect that termination payment. We have no indication at this time that a significant contract termination is expected.
	•		If one or more of our larger clients were to consolidate with a financial institution which is not one of our clients, our results of operations could be positively impacted if we retain the client, as well as obtain the additional business from the other party in the consolidation.
	•		If two of our financial institution clients consolidate, the increase in general negotiating leverage possessed by the consolidated entities could result in new contracts which are not as favorable to us as those historically negotiated with the clients.
	•		We could generate non-recurring conversion revenue. Conversions are driven by the need to replace checks after one financial institution merges with or acquires another. However, we presently do not have specific information that indicates that we should expect to generate significant income from conversions.

          We have a non-qualified deferred compensation plan that allows eligible employees to defer a portion of their compensation. The compensation deferred under this plan is credited with earnings or losses measured by the mirrored rate of return on investments elected by plan participants. As such, our liability for this plan fluctuates with market conditions. During the nine months ended September 30, 2008, we reduced our deferred compensation liability by $0.9 million due to losses on the underlying investments elected by plan participants. The carrying value of this liability, which was $5.0 million as of September 30, 2008, may change significantly in future periods if the equity markets continue to be volatile.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

EXECUTIVE OVERVIEW

          Our business is organized into three segments: Small Business Services, Financial Services and Direct Checks. Our Small Business Services segment generated 57.7% of our consolidated revenue for the first nine months of 2008. This segment has sold business checks, printed forms, promotional products, marketing materials, web services and other 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 29.4% of our consolidated revenue for the first nine months 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 12.9% of our consolidated revenue for the first nine months 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 nine months of 2008, as compared to 2007, benefited from the following:

	•		A significant reduction in performance-based employee compensation expense;
	•		Various management initiatives to reduce our cost structure, primarily within sales and marketing, information technology and manufacturing;
	•		Higher revenue per order in Direct Checks, primarily from price increases and increased sales of fraud protection services;
	•		Reduced employee benefit costs related to lower workers’ compensation and medical claims activity;
	•		The year-over-year benefit of a February 2007 price increase in Financial Services; and
	•		Lower amortization of acquired intangible assets in 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;
	•		Restructuring charges and related costs resulting from our cost savings initiatives;
	•		Lower order volume in Direct Checks due to the continuing decline in check usage and advertising response rates;
	•		Increased manufacturing costs, including higher delivery-related costs due to a mid-2007 postal rate increase and fuel surcharges in 2008, as well as higher materials costs due to an unfavorable product mix;
	•		Impairment charges in 2008 related to Small Business Services trade names;
	•		Lower revenue per order in Financial Services;
	•		Lower volume in Financial Services due to the continuing decline in check usage and non-recurring financial institution conversion activity in 2007;
	•		Additional revenue in the first quarter of 2007 in Direct Checks due to a weather-related backlog from the last week of 2006; and
	•		Investments made primarily in the first half of the year 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”). For additional information regarding recent developments, see the section entitled Market Risks within this quarterly report.

     We completed four acquisitions in 2008. These acquisitions support our strategy to expand revenue from higher growth business services. 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 for $99.4 million, net of cash acquired. The transaction closed on August 6, 2008, and we utilized availability under our existing lines of credit to fund the acquisition. Hostopia is a provider of web services that enable small businesses to establish and maintain an internet presence. It also provides email marketing, fax-to-email, mobility synchronization and other services and is included in our Small Business Services segment. Hostopia provides a unified, scaleable services delivery platform which we expect to utilize as we strive to obtain a greater portion of our revenue from annuity-based business services. We plan to use Hostopia’s technology architecture as the primary delivery platform for these business services offerings. Hostopia’s revenue for its fiscal year ended March 31, 2008 was $27.8 million.

     We also acquired the assets of PartnerUp, Inc. (PartnerUp), Logo Design Mojo, Inc. (Logo Mojo) and Yoffi Digital Press (Yoffi) during 2008 for an aggregate cash amount of $5.6 million. The PartnerUp transaction also includes contingent compensation payments through 2012 based on PartnerUp’s revenue and operating margin, provided the principals remain employed by the company. PartnerUp is an online community that is designed to connect small businesses and entrepreneurs with resources and contacts to build their businesses. Logo Mojo is a Canadian-based online logo design firm and Yoffi is a commercial digital printer specializing in one-to-one marketing strategies. The results of all three businesses are included in Small Business Services from the acquisition dates.

Update on Cost Reduction Initiatives

     In the Management’s Discussion and Analysis of Financial Condition and Results of Operation section of the 2007 Form 10-K, we discussed that we were pursuing aggressive cost reduction and business simplification initiatives which we expected 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 was 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. During the third quarter of 2008, we announced further cost reduction actions, including the planned closing of three printing facilities and one customer call center. As such, we now expect to generate $250 million of cost reductions, net of required investments, through 2010. We realized $105 million of this target through the end of 2007. We expect to realize approximately $50 million in 2008, $60 million in 2009 and $35 million in 2010. 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 $1.490 billion and $1.505 billion for 2008, as compared to $1.606 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 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 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 $2.07 and $2.17, compared to $2.76 for 2007. We expect that the economic softness in Small Business Services and the declines in our personal check businesses driven primarily by fewer checks being written, as well as restructuring costs and asset impairment charges, will be partially offset by continued progress with our cost reduction initiatives. We estimate that our annual effective tax rate for 2008 will be approximately 34%, comparable with the 2007 rate.

     We anticipate that net cash provided by operating activities will be between $185 million and $200 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.

     We funded our recent acquisitions through cash and borrowings on our credit facilities. Additionally, during the third quarter of 2008, we repurchased $7.9 million of common stock. Even with these actions, we continue to have reasonable access to capital in order to fund operations and execute our strategies. Our priorities for the use of cash remain investing both organically and in small to medium-sized acquisitions to augment growth. We also consider other opportunities to deploy cash

to create shareholder value. We do not expect to purchase a significant amount of shares during the remainder of 2008 as we have nearly depleted our capacity for share repurchases based on limitations in the debt agreement related to our notes due in June 2015. To the extent we have excess cash, we intend to pay down borrowings on our credit facilities.

Market Risks

          We recorded non-cash asset impairment charges of $9.7 million during the third quarter of 2008 related to trade names in our Small Business Services segment. Of this amount, $9.3 million related to indefinite-lived trade names. The impairment charges resulted from the effects of the economic downturn on our expected revenues and the broader effects of recent U.S. market conditions on the fair value of the assets. The impairment analysis completed during the third quarter of 2008 indicated no impairment of goodwill. However, due to the ongoing uncertainty in market conditions, which may continue to negatively impact our market value, we will continue to monitor and evaluate the carrying value of goodwill and our indefinite-lived trade names, particularly with respect to our Safeguard distributor reporting unit. The calculated fair value of this reporting unit exceeded its carrying value by $1.6 million as of the measurement date. The fair values of our other reporting units exceeded their carrying values between $32 and $482 million. If market and economic conditions deteriorate further, this could increase the likelihood of future non-cash impairment charges related to our indefinite-lived trade names and/or goodwill.

          The plan assets of our postretirement benefit and pension plans are valued at fair value using quoted market prices. Investments, in general, are subject to various risks, including credit, interest and overall market volatility risks. During 2008, the equity markets have seen a significant decline in value. As such, the fair values of our plan assets have decreased significantly from December 31, 2007. As our plan assets and liabilities will be re-measured at December 31, 2008, in accordance with Statement of Financial Accounting Standards (SFAS) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, the decreases in the fair values of plan assets could materially affect the funded status of the plans. This would affect the amounts reported in the consolidated balance sheet, as well as increase future postretirement benefit expense, which would impact our consolidated results of operations.

          Upheaval in the financial services industry resulting in recent bank failures and consolidations could have a significant impact on our consolidated results of operations if any of the following were to occur:

	•		We could lose a significant contract, which would have a negative impact on our future results of operations.
	•		We may be unable to recover the value of any related unamortized contract acquisition cost and/or accounts receivable. Contract acquisition costs, which are essentially pre-paid product discounts, are sometimes utilized in our Financial Services segment when signing or renewing contracts with our financial institution clients and totalled $41.5 million as of September 30, 2008. These amounts are recorded as non-current assets upon contract execution and are amortized, generally on the straight-line basis, as reductions of revenue over the related contract term. In certain situations, the contract may require a financial institution to reimburse us for the unamortized contract acquisition cost if it terminates its contract with us prior to the end of the contract term. Our contract acquisition costs are comprised of amounts paid to individual financial institutions, many of which would not have a significant impact on our consolidated financial statements if they were deemed unrecoverable. However, the inability to recover amounts paid to one or more of our larger financial institution clients could have a significant negative impact on our consolidated results of operations.
	•		If one or more of our financial institution clients is taken over by a financial institution which is not one of our clients, we could lose significant business. In the case of a cancelled contract, we may be entitled to collect a contract termination payment. However, if a financial institution fails, we may be unable to collect that termination payment. We have no indication at this time that a significant contract termination is expected.
	•		If one or more of our larger clients were to consolidate with a financial institution which is not one of our clients, our results of operations could be positively impacted if we retain the client, as well as obtain the additional business from the other party in the consolidation.
	•		If two of our financial institution clients consolidate, the increase in general negotiating leverage possessed by the consolidated entities could result in new contracts which are not as favorable to us as those historically negotiated with the clients.
	•		We could generate non-recurring conversion revenue. Conversions are driven by the need to replace checks after one financial institution merges with or acquires another. However, we presently do not have specific information that indicates that we should expect to generate significant income from conversions.

          We have a non-qualified deferred compensation plan that allows eligible employees to defer a portion of their compensation. The compensation deferred under this plan is credited with earnings or losses measured by the mirrored rate of return on investments elected by plan participants. As such, our liability for this plan fluctuates with market conditions. During

the nine months ended September 30, 2008, we reduced our deferred compensation liability by $0.9 million due to losses on the underlying investments elected by plan participants. The carrying value of this liability, which was $5.0 million as of September 30, 2008, may change significantly in future periods if the equity markets continue to be volatile.

CONSOLIDATED RESULTS OF OPERATIONS

Consolidated Revenue

		Quarter Ended September 30,												Nine Months Ended September 30,
(in thousands, except per order amounts)		2008				2007				Change				2008				2007				Change
Revenue		$	366,188			$	388,636				(5.8	%)		$	1,115,150			$	1,192,341				(6.5	%)
Orders			15,917				16,102				(1.1	%)			47,495				49,080				(3.2	%)
Revenue per order		$	23.01			$	24.14				(4.7	%)		$	23.48			$	24.29				(3.4	%)

     Revenue for the third quarter of 2008 decreased $22.4 million, as compared to the third quarter of 2007, due to unfavorable economic conditions, primarily affecting Small Business Services, as well as lower revenue per order for Financial Services, lower volume for Direct Checks due to the overall decline in check usage and advertising response rates, and lower order volume for Financial Services due to the decline in check usage and non-recurring client conversion activity in 2007. Conversion activity is driven by the need to replace checks after one financial institution merges with or acquires another. Partially offsetting these decreases was revenue from the Small Business Services acquisitions completed in 2008, as discussed under Executive Overview, and higher revenue per order for Direct Checks due to price increases and increased sales of fraud protection services. Small Business Services also increased sales of fraud protection services.

     Revenue for the first nine months of 2008 decreased $77.2 million, as compared to the first nine months of 2007, primarily due to the same factors discussed for the third quarter. Additionally, Small Business Services revenue decreased $3 million due to revenue generated in 2007 by our industrial packaging product line which was sold in January 2007, and Direct Checks revenue decreased $3 million due to a weather-related backlog from the last week of 2006 which pushed revenue into 2007. Revenue in 2007 also benefited from higher Canadian check sales due to the impact of a new check format mandated by the Canadian Payments Association. These revenue decreases were partially offset by the first quarter 2008 benefit of the Financial Services price increase implemented in February 2007.

     The number of orders decreased for the third quarter and first nine months of 2008, as compared to the same periods in 2007, due to the volume declines for Direct Checks and Financial Services discussed earlier, as well as the unfavorable economic conditions primarily affecting Small Business Services. Partially offsetting these volume decreases was the Small Business Services acquisitions completed in 2008. The decline in orders, excluding the acquisitions, was 4.7% for the third quarter of 2008 and 4.4% for the first nine months of 2008, as compared to the same periods in 2007.

     Revenue per order decreased for the third quarter and first nine months of 2008, as compared to the same periods in 2007, primarily due to continued pricing pressure within Financial Services, partially offset by Direct Checks price increases. For the nine month period, the effects of competitive pricing pressure in Financial Services were partially offset by the first quarter 2008 benefit of the price increase implemented in February 2007. Also impacting revenue per order were the Small Business Services acquisitions completed in 2008. For the third quarter of 2008, the acquisitions reduced revenue per order by 2.3 percentage points. For the first nine months of 2008, the acquisitions reduced revenue per order by 0.8 percentage points.

Consolidated Gross Margin

		Quarter Ended September 30,												Nine Months Ended September 30,
(in thousands)		2008				2007				Change				2008				2007				Change
Gross profit		$	213,601			$	245,138				(12.9	%)		$	676,869			$	756,731				(10.6	%)
Gross margin			58.3	%			63.1	%		(4.8) pts.					60.7	%			63.5	%		(2.8) pts.