(Mark One)

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

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

(Exact name of registrant as specified in its charter)

Minnesota		41-0216800
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
3680 Victoria St. N., Shoreview, Minnesota		55126-2966
(Address of principal executive offices)		(Zip Code)

(651) 483-7111
(Registrant’s telephone number, including area code)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).
o 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 definitions 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 (Do not check if a smaller reporting company)		Smaller reporting company o

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 July 27, 2009 was 51,136,889.

 

 

Item 1.		Financial Statements.

DELUXE CORPORATION

(in thousands, except share par value)

(Unaudited)

		June 30,				December 31,
		2009				2008
ASSETS
Current Assets:
Cash and cash equivalents		$	18,141			$	15,590
Trade accounts receivable (net of allowances for uncollectible accounts of $4,802 and $5,930, respectively)			58,925				68,572
Inventories and supplies			24,345				25,791
Deferred income taxes			15,765				17,825
Cash held for customers			33,499				26,078
Other current assets			18,241				13,230
Total current assets			168,916				167,086
Long-Term Investments (including $1,903 and $1,855 of investments at fair value, respectively)			38,100				36,794
Property, Plant, and Equipment (net of accumulated depreciation of $346,074 and $340,886, respectively)			126,499				128,105
Asset Held for Sale			3,935				—
Intangibles (net of accumulated amortization of $428,511 and $405,208, respectively)			137,382				154,081
Goodwill			633,124				653,044
Other Non-Current Assets			94,940				79,875
Total assets		$	1,202,896			$	1,218,985
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	59,427			$	61,598
Accrued liabilities			138,483				142,599
Short-term debt			75,257				78,000
Long-term debt due within one year			493				1,440
Total current liabilities			273,660				283,637
Long-Term Debt			742,888				773,896
Deferred Income Taxes			15,575				9,491
Other Non-Current Liabilities			95,923				98,895
Commitments and Contingencies (Notes 10, 11 and 14)
Shareholders’ Equity:
Common shares $1 par value (authorized: 500,000 shares; outstanding: 2009 - 51,137; 2008 - 51,131)			51,137				51,131
Additional paid-in capital			54,507				54,207
Retained earnings			27,341				12,682
Accumulated other comprehensive loss			(58,135	)			(64,954	)
Total shareholders’ equity			74,850				53,066
Total liabilities and shareholders’ equity		$	1,202,896			$	1,218,985

See Condensed Notes to Unaudited Consolidated Financial Statements

(in thousands, except per share amounts)

(Unaudited)

		Quarter Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Revenue		$	332,069			$	363,992			$	671,589			$	741,069
Net restructuring charges			778				422				2,285				459
Other cost of goods sold			126,186				136,738				253,938				279,639
Total cost of goods sold			126,964				137,160				256,223				280,098
Gross Profit			205,105				226,832				415,366				460,971
Selling, general and administrative expense			151,730				162,757				310,086				341,909
Net restructuring charges			292				1,560				115				1,021
Asset impairment charges			—				—				24,900				—
Operating Income			53,083				62,515				80,265				118,041
Gain on early debt extinguishment			—				—				9,834				—
Interest expense			(11,627	)			(12,380	)			(24,047	)			(25,133	)
Other income			207				379				565				874
Income Before Income Taxes			41,663				50,514				66,617				93,782
Income tax provision			13,887				17,105				26,337				32,597
Income From Continuing Operations			27,776				33,409				40,280				61,185
Net Loss From Discontinued Operations			—				(792	)			—				(1,251	)
Net Income		$	27,776			$	32,617			$	40,280			$	59,934
Basic Earnings per Share:
Income from continuing operations		$	0.54			$	0.65			$	0.79			$	1.18
Net loss from discontinued operations			—				(0.02	)			—				(0.02	)
Basic earnings per share			0.54				0.63				0.79				1.16
Diluted Earnings per Share:
Income from continuing operations		$	0.54			$	0.65			$	0.79			$	1.18
Net loss from discontinued operations			—				(0.02	)			—				(0.02	)
Diluted earnings per share			0.54				0.63				0.79				1.15
Cash Dividends per Share		$	0.25			$	0.25			$	0.50			$	0.50
Total Comprehensive Income		$	32,577			$	33,905			$	47,099			$	61,817

See Condensed Notes to Unaudited Consolidated Financial Statements

(in thousands)
(Unaudited)

		Six Months Ended
		June 30,
		2009				2008
Cash Flows from Operating Activities:
Net income		$	40,280			$	59,934
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:
Net loss from discontinued operations			—				1,251
Depreciation			11,638				10,620
Amortization of intangibles			23,116				20,320
Asset impairment charges			24,900				—
Amortization of contract acquisition costs			12,460				12,442
Employee share-based compensation expense			3,464				4,873
Deferred income taxes			3,826				971
Gain on early debt extinguishment			(9,834	)			—
Other non-cash items, net			9,228				8,849
Changes in assets and liabilities, net of effect of acquisitions and discontinued operations:
Trade accounts receivable			7,203				7,203
Inventories and supplies			1,065				(1,088	)
Other current assets			(2,969	)			(1,239	)
Non-current assets			5,671				3,373
Accounts payable			3,031				(4,170	)
Contract acquisition payments			(15,456	)			(4,571	)
Other accrued and non-current liabilities			(31,763	)			(51,854	)
Net cash provided by operating activities of continuing operations			85,860				66,914
Cash Flows from Investing Activities:
Purchases of capital assets			(23,737	)			(15,198	)
Payments for acquisitions, net of cash acquired			—				(1,675	)
Purchase of customer list			(1,639	)			—
Other			(3,023	)			109
Net cash used by investing activities of continuing operations			(28,399	)			(16,764	)
Cash Flows from Financing Activities:
Net payments on short-term debt			(2,743	)			(6,870	)
Payments on long-term debt			(22,134	)			(855	)
Change in book overdrafts			(4,161	)			(7,876	)
Proceeds from issuing shares under employee plans			1,042				1,635
Excess tax benefit from share-based employee awards			8				92
Payments for common shares repurchased			(1,319	)			(13,943	)
Cash dividends paid to shareholders			(25,621	)			(25,779	)
Net cash used by financing activities of continuing operations			(54,928	)			(53,596	)
Effect of Exchange Rate Change on Cash			500				(202	)
Cash Used by Operating Activities of Discontinued Operations			(470	)			(171	)
Cash Used by Investing Activities of Discontinued Operations			(12	)			(16	)
Net Change in Cash and Cash Equivalents			2,551				(3,835	)
Cash and Cash Equivalents: Beginning of Period			15,590				21,615
End of Period		$	18,141			$	17,780

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 June 30, 2009, the consolidated statements of income for the quarters and six months ended June 30, 2009 and 2008 and the consolidated statements of cash flows for the six months ended June 30, 2009 and 2008 are unaudited. The consolidated balance sheet as of December 31, 2008 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, 2008 (the “2008 Form 10-K”).

          We have reclassified certain amounts presented in the consolidated statements of income for the quarter and six months ended June 30, 2008 and the consolidated statement of cash flows for the six months ended June 30, 2008, to reflect the results of our retail packaging and signage business as discontinued operations (see Note 6). These reclassifications did not affect previously reported net income.

Note 2: New accounting pronouncements

          Recently adopted accounting pronouncements - In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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. Under the new guidance, acquisition-related costs must be expensed as incurred. Previously, these costs were capitalized as part of the acquisition’s purchase price. As discussed in Note 15, we completed two acquisitions in July 2009. Acquisition-related costs included in our consolidated statements of income for the quarter and six months ended June 30, 2009 were not significant. For acquisitions completed prior to January 1, 2009, the new standard requires that changes in deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period must be recognized in earnings rather than as adjustments to the cost of the acquisition. This new guidance did not significantly impact our consolidated financial statements for the quarter or six months ended June 30, 2009.

          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. We did not acquire any limited use intangibles during the six months ended June 30, 2009, and we are not able to predict the impact of this guidance, if any, on the accounting for assets we may acquire in future periods. As of January 1, 2009, we had an intangible asset for distributor contracts which was recorded in conjunction with the acquisition of New England Business Service, Inc. (NEBS) in June 2004. The distributor contract asset had a carrying value of $7.2 million as of June 30, 2009 and is being amortized over nine years. In general, the distributor contracts have an initial five-year term and may be renewed for successive five-year periods upon mutual agreement of both parties. At the time the original fair value of these contracts was determined, an annual 90% contract retention rate was assumed based on historical experience. As of June 30, 2009, the average period remaining to the next contract renewal for our recognized distributor contracts was 2.5 years. Costs related to renewing or extending these contracts are not material and are expensed as incurred.

          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 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 began reporting earnings per share under the two-class method and we restated our historical earnings per share accordingly (see Note 5). The impact on previously reported earnings per share was not significant.

          In April 2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. The new guidance amends and clarifies the initial recognition and measurement, subsequent measurement and accounting, and related disclosures arising from contingencies in a business combination under SFAS No. 141(R), Business Combinations. We are required to apply the new guidance to business combinations completed after December 31, 2008. We are not able to predict the impact this guidance will have on the accounting for acquisitions we may complete in future periods.

          In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. The new guidance requires disclosures about the fair value of financial instruments for interim reporting periods, as well as in annual financial statements. The disclosures required under this guidance are presented in Note 4.

          In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. We adopted this standard during the quarter ended June 30, 2009. We evaluated subsequent events through August 7, 2009, the date our consolidated financial statements were filed with the Securities and Exchange Commission (SEC).

          Accounting pronouncements not yet adopted - In December 2008, the FASB issued FSP No. FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets. This standard provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. Any additional disclosures required under this guidance will be included in our annual report on Form 10-K for the year ending December 31, 2009.

Note 3: Supplemental balance sheet and cash flow information

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

		June 30,				December 31,
(in thousands)		2009				2008
Raw materials		$	4,325			$	4,047
Semi-finished goods			9,844				10,807
Finished goods			6,275				6,608
Total inventories			20,444				21,462
Supplies, primarily production			3,901				4,329
Inventories and supplies		$	24,345			$	25,791

          Asset held for sale — Asset held for sale as of June 30, 2009 consisted of our facility located in Thorofare, New Jersey, which previously housed manufacturing operations and a customer call center. This facility was closed in April 2009 and we are actively marketing this property. The expected selling price for this facility exceeds its carrying value.

          Intangibles - Intangibles were comprised of the following:

		June 30, 2009												December 31, 2008
		Gross								Net				Gross								Net
		carrying				Accumulated				carrying				carrying				Accumulated				carrying
(in thousands)		amount				amortization				amount				amount				amortization				amount
Indefinite-lived:
Trade name		$	19,100			$	—			$	19,100			$	24,000			$	—			$	24,000
Amortizable intangibles:
Internal-use software			324,342				(271,557	)			52,785				315,493				(260,320	)			55,173
Customer lists/relationships			128,148				(104,551	)			23,597				125,530				(96,963	)			28,567
Distributor contracts			30,900				(23,693	)			7,207				30,900				(22,792	)			8,108
Trade names			54,861				(22,969	)			31,892				54,861				(19,920	)			34,941
Other			8,542				(5,741	)			2,801				8,505				(5,213	)			3,292
Amortizable intangibles			546,793				(428,511	)			118,282				535,289				(405,208	)			130,081
Intangibles		$	565,893			$	(428,511	)		$	137,382			$	559,289			$	(405,208	)		$	154,081

          Total amortization of intangibles was $11.9 million for the quarter ended June 30, 2009 and $10.1 million for the quarter ended June 30, 2008. Amortization of intangibles was $23.1 million for the six months ended June 30, 2009 and $20.3 million for the six months ended June 30, 2008. Based on the intangibles in service as of June 30, 2009, estimated future amortization expense is as follows:

(in thousands)
Remainder of 2009		$	19,057
2010			29,307
2011			20,858
2012			9,131
2013			5,747

          Goodwill - Changes in goodwill during the six months ended June 30, 2009 were as follows:

		Small
		Business				Direct
(in thousands)		Services				Checks				Total
Balance, December 31, 2008		$	570,807			$	82,237			$	653,044
Impairment charge (see Note 4)			(20,000	)			—				(20,000	)
Currency translation adjustment			80				—				80
Balance, June 30, 2009		$	550,887			$	82,237			$	633,124

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

		June 30,				December 31,
(in thousands)		2009				2008
Contract acquisition costs (net of accumulated amortization of $109,249 and $99,502, respectively)		$	55,802			$	37,706
Deferred advertising costs			14,711				20,189
Other			24,427				21,980
Other non-current assets		$	94,940			$	79,875

          See Note 14 for discussion of the recoverability of contract acquisition costs. Changes in contract acquisition costs during the first six months of 2009 and 2008 were as follows:

		Six Months Ended June 30,
(in thousands)		2009				2008
Balance, beginning of year		$	37,706			$	55,516
Additions(1)			30,556				4,576
Amortization			(12,460	)			(12,442	)
Balance, end of period		$	55,802			$	47,650

          Accrued liabilities - Accrued liabilities were comprised of the following:

		June 30,				December 31,
(in thousands)		2009				2008
Cash held for customers		$	33,499			$	26,078
Customer rebates			22,171				29,113
Employee profit sharing and pension			16,005				15,061
Contract acquisition costs			13,425				4,326
Wages, including vacation			11,669				12,176
Restructuring (see Note 7)			10,042				20,379
Interest			5,234				5,394
Other			26,438				30,072
Accrued liabilities		$	138,483			$	142,599

          Supplemental cash flow disclosure - During the quarter ended June 30, 2009, we transferred $2.8 million to an escrow account in contemplation of an acquisition that was completed in July 2009 (see Note 15). While we retained ownership of these funds, they were not available for our use. As such, this amount was included in other investing activities in our consolidated statement of cash flows for the six months ended June 30, 2009.

          Nonrecurring fair value measurements - We evaluate the carrying value of our indefinite-lived trade name and goodwill on July 31^st of each year and between annual evaluations if events occur or circumstances change that would indicate a possible impairment. During the quarter ended March 31, 2009, we experienced continued declines in our stock price, as well as a continuing negative impact of the economic downturn on our expected operating results. Based on these indicators of potential impairment, we completed impairment analyses of our indefinite-lived trade name and goodwill as of March 31, 2009. No such impairment analyses were required during the quarter ended June 30, 2009, as there were no indicators of potential impairment during the quarter.

          The estimate of fair value of our indefinite-lived trade name is based on a relief from royalty method, which calculates the cost savings associated with owning rather than licensing the trade name. An assumed royalty rate is applied to forecasted revenue and the resulting cash flows are discounted. If the estimated fair value is less than the carrying value of the asset, an impairment loss is recognized. During the quarter ended March 31, 2009, we recorded a non-cash asset impairment charge in our Small Business Services segment of $4.9 million related to an indefinite-lived trade name.

          A two-step approach is used in evaluating goodwill for impairment. First, 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 the 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. During the quarter ended March 31, 2009, the carrying value of one of our reporting units exceeded its estimated fair value. As such, the second step of the goodwill impairment analysis required that we compare the implied fair value of the goodwill to its carrying amount. In calculating the implied fair value of the goodwill, we measured the fair value of the reporting

unit’s assets and liabilities, excluding goodwill. The excess of the fair value of the reporting unit over the amount assigned to its assets and liabilities, excluding goodwill, is the implied fair value of the reporting unit’s goodwill. Significant intangible assets of the reporting unit identified for purposes of this impairment analysis included the indefinite-lived trade name discussed above and a distributor contract intangible asset. The fair value of the distributor contract was measured using the income approach. A distributor retention rate based on historical experience was applied to estimated future cash flows. As a result of our analysis, we recorded a non-cash asset impairment charge in our Small Business Services segment of $20.0 million related to goodwill. See Note 14 for a related discussion of market risks.

          Information regarding the nonrecurring fair value measurements completed during the six months ended June 30, 2009 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

Impairment

(in thousands)

date

(Level 1)

inputs (Level 2)

(Level 3)

charge(2)

Goodwill(1)

$

20,245

$—

$—

$

20,245

$

20,000

Indefinite-lived trade name

19,100

—

—

19,100

4,900

          The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate fair value:

          Cash and cash equivalents, cash held for customers and short-term debt - The carrying amounts reported in the consolidated balance sheets approximate fair value because of the short-term nature of these items.

          Long-term investments - On a recurring basis, we measure at fair value a long-term investment in domestic mutual funds using 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 a liability under an officers’ deferred compensation plan which is not available to new participants and is fully funded by the mutual fund investments. The liability under the plan equals the fair value of the investment in mutual funds. Under SFAS No. 159, the investment is reported as a trading security, and changes in the fair value of both the plan asset and liability are netted within selling, general and administrative (SG&A) expense in the consolidated statements of income. Dividends earned by the mutual fund investments, as reported by the funds, realized gains and losses and permanent declines in value 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. We recognized net unrealized gains on the investment in mutual funds of $0.4 million during the quarter ended June 30, 2009 and $0.2 million during the quarter ended June 30, 2008. We recognized a net unrealized gain of $0.1 million during the six months ended June 30, 2009 and a net unrealized loss of $0.3 million during the six months ended June 30, 2008.

          Long-term debt - The fair value of our long-term debt is estimated based on quoted prices in active markets for identical liabilities, with the exception of our capital lease obligation which matures in September 2009.

          The estimated fair values of financial instruments were as follows as of June 30, 2009:

		Carrying
(in thousands)		amount				Fair value
Cash and cash equivalents		$	18,141			$	18,141
Cash held for customers			33,499				33,499
Long-term investment in mutual funds			1,903				1,903
Short-term debt			75,257				75,257
Long-term debt			742,888				600,720

          As discussed in Note 2, as of January 1, 2009, we adopted FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. As a result, we have restated earnings per share for the quarter and six months ended June 30, 2008 to comply with this new guidance. The following table reflects the calculation of basic and diluted earnings per share from continuing operations. 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								Six Months Ended
		June 30,								June 30,
(in thousands, except per share amounts)		2009				2008				2009				2008
Earnings per share — basic:
Income from continuing operations		$	27,776			$	33,409			$	40,280			$	61,185
Income allocated to participating securities			(212	)			(412	)			(312	)			(714	)
Income available to common shareholders			27,564				32,997				39,968				60,471
Weighted-average shares outstanding			50,824				51,005				50,767				51,047
Earnings per share — basic		$	0.54			$	0.65			$	0.79			$	1.18
Earnings per share — diluted:
Income from continuing operations		$	27,776			$	33,409			$	40,280			$	61,185
Income allocated to participating securities			(212	)			(412	)			(312	)			(714	)
Re-measurement of share-based awards classified as liabilities			97				(48	)			(63	)			(268	)
Income available to common shareholders		$	27,661			$	32,949			$	39,905			$	60,203
Weighted-average shares outstanding			50,824				51,005				50,767				51,047
Dilutive impact of options and employee stock purchase plan			66				24				39				21
Weighted-average shares and potential dilutive shares outstanding			50,890				51,029				50,806				51,068
Earnings per share — diluted		$	0.54			$	0.65			$	0.79			$	1.18
Antidilutive options excluded from calculation (weighted-average amount for six month periods)			2,315				3,645				2,742				3,677

Note 6: Discontinued operations

          Discontinued operations consisted of our Russell & Miller retail packaging and signage business, which we sold in January 2009. We evaluate our businesses and product lines periodically for strategic fit within our operations. In December 2008, we determined that this non-strategic business met the criteria to be classified as discontinued operations in our consolidated financial statements. On January 31, 2009, we completed the sale of this business for gross cash proceeds of $0.3 million plus a note receivable. Assets of discontinued operations were included in our Small Business Services segment and consisted of the following:

		December 31,
(in thousands)		2008
Trade accounts receivable		$	852
Inventories and supplies			36
Other current assets			120
Accounts payable and accrued liabilities			(330	)
Net assets of discontinued operations		$	678

          Revenue and loss from discontinued operations were as follows:

		Quarter Ended								Six Months Ended
		June 30,								June 30,
(in thousands)		2009				2008				2009				2008
Revenue		$	—			$	3,757			$	816			$	7,893
Loss from operations		$	—			$	(1,214	)		$	(155	)		$	(1,910	)
Gain from disposal			—				—				155				—
Income tax benefit			—				422				—				659
Net loss from discontinued operations		$	—			$	(792	)		$	—			$	(1,251	)

          2009 restructuring charges - During the quarter ended June 30, 2009, we recorded net restructuring charges of $1.1 million. This amount included expenses related to our restructuring activities, including items such as equipment moves, training and travel, as well as the net reversal of $0.1 million of restructuring accruals. The net restructuring accrual reversal included charges of $0.8 million related to employee reductions in various functional areas as we continue our cost reduction initiatives, as well as accrual reversals of $0.9 million as fewer employees received severance benefits than originally estimated. The restructuring charges were reflected as net restructuring charges of $0.8 million within cost of goods sold and net restructuring charges within other operating expenses of $0.3 million in the consolidated statement of income for the quarter ended June 30, 2009.

          During the six months ended June 30, 2009, we recorded net restructuring charges of $2.4 million. This amount included expenses related to our restructuring activities, including items such as equipment moves, training and travel, as well as net restructuring accruals of $0.2 million. The net restructuring accruals included charges of $1.8 million related to employee reductions in various functional areas as we continue our cost reduction initiatives, as well as operating lease obligations on two manufacturing facilities closed during the first quarter of 2009. These charges were reduced by the reversal of $1.6 million of previously recorded restructuring accruals as fewer employees received severance benefits than originally estimated. The restructuring charges were reflected as net restructuring charges of $2.3 million within cost of goods sold and net restructuring charges within other operating expenses of $0.1 million in the consolidated statement of income for the six months ended June 30, 2009.

          2008 restructuring charges - During the quarter ended June 30, 2008, we recorded restructuring charges of $2.1 million for employee severance related to the closing of a customer service call center, 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 151 employees. Also during the quarter ended June 30, 2008, we reversed $0.1 million of restructuring accruals due to fewer employees receiving severance benefits than originally estimated. These net restructuring charges were reflected as net restructuring charges within cost of goods sold of $0.4 million and net restructuring charges within other operating expenses of $1.6 million in our consolidated statement of income for the quarter ended June 30, 2008.

          During the six months ended June 30, 2008, we recorded restructuring charges of $2.4 million related to our cost savings initiatives, and we reversed $0.9 million of restructuring accruals as fewer employees received severance benefits than originally estimated. These net restructuring charges were reflected as net restructuring charges within cost of goods sold of $0.5 million and net restructuring charges within other operating expenses of $1.0 million in our consolidated statement of income for the six months ended June 30, 2008.

          Restructuring accruals - Restructuring accruals of $10.3 million as of June 30, 2009 are reflected in the consolidated balance sheet as accrued liabilities of $10.0 million and other non-current liabilities of $0.3 million. Restructuring accruals of $20.4 million as of December 31, 2008 are reflected in accrued liabilities in the consolidated balance sheet. The accruals consist of employee severance benefits and payments due under operating lease obligations for facilities that we have vacated. The remaining severance accruals relate to the closing of five manufacturing facilities and one customer call center, as well as employee reductions within our various shared services functions, including sales, marketing and information technology. Three of the manufacturing facilities and the customer call center were closed during the first half of 2009, one manufacturing facility was closed in July 2009, and we expect to close the remaining manufacturing facility later in 2009. The employee reductions

within our shared services functions are expected to be completed by the end of 2009. As such, we expect most of the related severance payments to be fully paid by the first half of 2010, utilizing cash from operations. As of June 30, 2009, 353 employees had not yet started to receive severance benefits. The remaining payments due under the operating lease obligations will be paid through early 2012. Further information regarding our restructuring accruals can be found under the caption “Note 6: Restructuring charges” in the Notes to Consolidated Financial Statements appearing in the 2008 Form 10-K.

          As of June 30, 2009, our restructuring accruals, by company initiative, were as follows:

		NEBS
		acquisition				2006				2007				2008				2009
(in thousands)		related				initiatives				initiatives				initiatives				initiatives				Total
Balance, December 31, 2008		$	19			$	195			$	335			$	19,830			$	—			$	20,379
Restructuring charges			—				—				—				886				956				1,842
Restructuring reversals			(19	)			—				(33	)			(1,544	)			—				(1,596	)
Payments, primarily severance			—				(133	)			(214	)			(9,801	)			(171	)			(10,319	)
Balance, June 30, 2009		$	—			$	62			$	88			$	9,371			$	785			$	10,306
Cumulative amounts:
Restructuring accruals		$	30,243			$	10,864			$	7,181			$	27,020			$	956			$	76,264
Restructuring reversals			(859	)			(1,671	)			(1,438	)			(3,075	)			—				(7,043	)
Payments, primarily severance			(29,384	)			(9,131	)			(5,655	)			(14,574	)			(171	)			(58,915	)
Balance, June 30, 2009		$	—			$	62			$	88			$	9,371			$	785			$	10,306

          As of June 30, 2009, 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, 2008		$	3,974			$	3,617			$	151			$	12,409			$	228			$	20,379
Restructuring accruals			555				183				18				221				865				1,842
Restructuring reversals			(502	)			(282	)			(3	)			(790	)			(19	)			(1,596	)
Inter-segment transfer			1,174				—				—				(1,174	)			—				—
Payments			(3,356	)			(1,923	)			(139	)			(4,567	)			(334	)			(10,319	)
Balance, June 30, 2009		$	1,845			$	1,595			$	27			$	6,099			$	740			$	10,306
Cumulative amounts for current initiatives(1):
Restructuring accruals		$	39,944			$	8,072			$	487			$	23,769			$	3,992			$	76,264
Restructuring reversals			(1,559	)			(1,323	)			(147	)			(3,443	)			(571	)			(7,043	)
Inter-segment transfer			2,185				1,117				93				(3,395	)			—				—
Payments			(38,725	)			(6,271	)			(406	)			(10,832	)			(2,681	)			(58,915	)
Balance, June 30, 2009		$	1,845			$	1,595			$	27			$	6,099			$	740			$	10,306

          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 a supplemental executive retirement plan (SERP) in the United States. We previously had both a pension plan and a SERP in Canada covering certain Canadian employees. The Canadian pension plan was settled during

the first quarter of 2009 and the Canadian SERP was settled in 2008. 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 2008 Form 10-K. See Note 14 for discussion of the plan assets of our postretirement benefit plan.

          Effective April 30, 2009, we amended our postretirement benefit plan to decrease the minimum age for eligibility to receive the maximum available benefits from age 58 to age 51 and to decrease the service requirement for maximum retiree cost sharing from 30 years to 25 years. As a result of this amendment, the plan assets and liabilities were re-measured as of April 30, 2009, reducing the underfunded amount of the plan from $60.4 million as of December 31, 2008 to $55.9 million as of April 30, 2009. The reduction in the underfunded amount was primarily due to a change in the discount rate assumption from 6.6% as of December 31, 2008 to 7.25% as of April 30, 2009. The other actuarial assumptions were consistent with those utilized in our determination of the benefit obligation and funded status as of December 31, 2008. Prior to the April 30, 2009 plan amendment and re-measurement, unrecognized actuarial gains and losses were being amortized over the average remaining service period of plan participants, which was 8.2 years as of December 31, 2008. Because the plan amendment increased the number of participants currently eligible to receive the maximum available benefits, almost all of the plan participants were classified as inactive subsequent to the plan amendment. As such, SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, requires that actuarial gains and losses be amortized over the average remaining life expectancy of inactive plan participants, which was 18.8 years as of April 30, 2009. This change will result in a $5.2 million decrease in postretirement benefit expense for 2009, as compared to the expense expected for 2009.

          Pension and postretirement benefit expense for the quarters ended June 30, 2009 and 2008 consisted of the following components:

		Postretirement benefit
		plan								Pension plans
(in thousands)		2009				2008				2009				2008
Service cost		$	—			$	24			$	—			$	—
Interest cost			2,140				1,989				51				128
Expected return on plan assets			(1,480	)			(2,183	)			—				(70	)
Amortization of prior service credit			(954	)			(990	)			—				—
Amortization of net actuarial losses			2,096				2,369				(1	)			3
Total periodic benefit expense		$	1,802			$	1,209			$	50			$	61

          Pension and postretirement benefit expense for the six months ended June 30, 2009 and 2008 consisted of the following components:

		Postretirement benefit
		plan								Pension plans
(in thousands)		2009				2008				2009				2008
Service cost		$	—			$	47			$	—			$	—
Interest cost			4,184				3,977				161				257
Expected return on plan assets			(2,940	)			(4,367	)			(58	)			(141	)
Amortization of prior service credit			(1,944	)			(1,979	)			—				—
Amortization of net actuarial losses			5,606				4,739				11				5
Total periodic benefit expense			4,906				2,417				114				121
Settlement loss			—				—				402				111
Net periodic benefit expense		$	4,906			$	2,417			$	516			$	232

          In March 2009, we utilized plan assets of $5.3 million to settle the benefits due under our Canadian pension plan. This included contributions of $0.1 million which we made to the plan during 2009. We anticipate that we will make benefit payments of approximately $0.3 million during 2009 for our remaining pension plan.

          Our effective tax rate for the six months ended June 30, 2009 was 39.5%, compared to our 2008 annual effective tax rate of 33.9%. Our 2009 effective tax rate included discrete items which increased our tax rate by 3.9 points, primarily the non-

deductible portion of the $20.0 million goodwill impairment charge (see Note 4), partially offset by favorable adjustments related to receivables for prior year tax returns. Our 2008 effective tax rate included favorable adjustments related to receivables for prior year tax returns, which lowered our effective tax rate 1.5 percentage points.

Note 10: Debt

          Total debt outstanding was comprised of the following:

		June 30,				December 31,
(in thousands)		2009				2008
5.0% senior, unsecured notes due December 15, 2012, net of discount		$	279,698			$	299,250
5.125% senior, unsecured notes due October 1, 2014, net of discount			263,190				274,646
7.375% senior, unsecured notes due June 1, 2015			200,000				200,000
Long-term portion of debt			742,888				773,896
Amounts drawn on credit facilities		$	75,257			$	78,000
Capital lease obligation due within one year			493				1,440
Short-term portion of debt			75,750				79,440
Total debt		$	818,638			$	853,336

          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 through a private placement under Rule 144A of the Securities Act of 1933. These notes were subsequently registered with the SEC via a registration statement that 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 to repay $325.0 million of unsecured notes plus accrued interest. The fair value of the notes issued in May 2007 was $165.0 million as of June 30, 2009, 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 through a private placement under Rule 144A of the Securities Act of 1933 and were subsequently registered with the SEC via a registration statement that became effective on November 23, 2004. Interest payments are due each April and October. Principal redemptions may be made at our election prior to the 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. During the quarter ended March 31, 2009, we retired $11.5 million of these notes, realizing a pre-tax gain of $4.1 million. As of June 30, 2009, the fair value of the $263.5 million remaining notes outstanding was $200.3 million, 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. During the quarter ended March 31, 2009, we retired $19.7 million of these notes, realizing a pre-tax gain of $5.7 million. As of June 30, 2009, the fair value of the $280.3 million remaining notes outstanding was $235.5 million, based on quoted market prices.

          As of June 30, 2009, we had a $275.0 million line of credit. The credit agreement governing the line of credit contains customary covenants regarding limits on the level of subsidiary indebtedness, as well as requiring a ratio of earnings before interest and taxes to interest expense of 3.0 times, as measured quarterly on an aggregate basis for the preceding four quarters. The daily average amount outstanding under our line of credit during the six months ended June 30, 2009 was $75.1 million at a weighted-average interest rate of 0.81%. As of June 30, 2009, $75.3 million was outstanding at a weighted-average interest rate of 0.76%. During 2008, the daily average amount outstanding under our lines of credit was $82.6 million at a weighted-average interest rate of 3.05%. As of December 31, 2008, $78.0 million was outstanding at a weighted-average interest rate of 0.91%. As of June 30, 2009, amounts were available for borrowing under our committed line of credit as follows:

		Total				Expiration				Commitment
(in thousands)		available				Date				Fee
Five year line of credit		$	275,000			July 2010					.175	%
Amounts drawn on line of credit			(75,257	)
Outstanding letters of credit			(10,125	)
Net available for borrowing as of June 30, 2009		$	189,618

          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 11: 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 2008 Form 10-K. No significant changes in these items occurred during the six months ended June 30, 2009.

Note 12: 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 6.4 million shares remain available for purchase under this authorization as of June 30, 2009. During the six months ended June 30, 2009, we repurchased 0.1 million shares for $1.3 million. 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.

          Changes in shareholders’ equity during the six months ended June 30, 2009 were as follows:

																		Accumulated
		Common shares								Additional								other				Total
		Number				Par				paid-in				Retained				comprehensive				shareholders’
(in thousands)		of shares				value				capital				earnings				loss				equity
Balance, December 31, 2008			51,131			$	51,131			$	54,207			$	12,682			$	(64,954	)		$	53,066
Net income			—				—				—				40,280				—				40,280
Cash dividends			—				—				—				(25,621	)			—				(25,621	)
Common shares issued			182				182				860				—				—				1,042
Tax impact of share-based awards			—				—				(2,262	)			—				—				(2,262	)
Common shares repurchased			(120	)			(120	)			(1,199	)			—				—				(1,319	)
Other common shares retired			(56	)			(56	)			(580	)			—				—				(636	)
Share-based compensation			—				—				3,481				—				—				3,481
Re-measurement of postretirement benefit plan, net of tax			—				—				—				—				1,435				1,435
Amortization of postretirement prior service credit, net of tax			—				—				—				—				(1,201	)			(1,201	)
Amortization of postretirement net actuarial losses, net of tax			—				—				—				—				4,247				4,247
Amortization of loss on derivatives, net of tax			—				—				—				—				997				997
Currency translation adjustment			—				—				—				—				1,341				1,341
Balance, June 30, 2009			51,137			$	51,137			$	54,507			$	27,341			$	(58,135	)		$	74,850

          Accumulated other comprehensive loss was comprised of the following:

		June 30,				December 31,
(in thousands)		2009				2008
Postretirement and defined benefit pension plans:
Unrealized prior service credit		$	21,657			$	22,858
Unrealized net actuarial losses			(75,337	)			(81,019	)
Postretirement and defined benefit pension plans, net of tax			(53,680	)			(58,161	)
Loss on derivatives, net of tax			(6,501	)			(7,498	)
Currency translation adjustment			2,046				705
Accumulated other comprehensive loss		$	(58,135	)		$	(64,954	)

Note 13: Business segment information

          We operate three reportable business segments: Small Business Services, Financial Services and Direct Checks. Small Business Services sells business checks, printed forms, promotional products, web services, payroll services, marketing materials and related services and products to small businesses and home offices through direct response marketing, referrals from financial institutions and telecommunications companies, independent distributors, the internet and sales representatives. Financial Services sells personal and business checks, check-related products and services, customer loyalty programs, fraud monitoring and protection services, and stored value gift cards 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 and Europe.

          The accounting policies of the segments are the same as those described in the Notes to Consolidated Financial Statements included in the 2008 Form 10-K. We allocate corporate costs for our shared services functions 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. Because we use a shared services approach for 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 June 30, 2009 and 2008:

						Reportable Business Segments
						Small
						Business				Financial				Direct
(in thousands)						Services				Services				Checks				Corporate				Consolidated
Revenue from external customers:			2009			$	191,938			$	100,472			$	39,659			$	—			$	332,069
			2008				207,733				110,064				46,195				—				363,992
Operating income:			2009				20,589				19,288				13,206				—				53,083
			2008				30,321				18,779				13,415				—				62,515
Depreciation and amortization expense:			2009				14,155				2,685				1,061				—				17,901
			2008				12,040				2,377				1,079				—				15,496
Total assets:			2009				750,858				65,891				96,015				290,132				1,202,896
			2008				725,263				61,284				99,921				276,744				1,163,212
Capital asset purchases:			2009				—				—				—				13,779				13,779
			2008				—				—				—				9,396				9,396

          The following is our segment information as of and for the six months ended June 30, 2009 and 2008:

						Reportable Business Segments
						Small
						Business				Financial				Direct
(in thousands)						Services				Services				Checks				Corporate				Consolidated
Revenue from external customers:			2009			$	385,220			$	202,475			$	83,894			$	—			$	671,589
			2008				419,446				223,995				97,628				—				741,069
Operating income:			2009				13,961				38,849				27,455				—				80,265
			2008				52,181				37,749				28,111				—				118,041
Depreciation and amortization expense:			2009				27,502				5,195				2,057				—				34,754
			2008				23,995				4,767				2,178				—				30,940
Asset impairment charges:			2009				24,900				—				—				—				24,900
			2008				—				—				—				—				—
Total assets:			2009				750,858				65,891				96,015				290,132				1,202,896
			2008				725,263				61,284				99,921				276,744				1,163,212
Capital asset purchases:			2009				—				—				—				23,737				23,737
			2008				—				—				—				15,198				15,198

Note 14: Market risks

          Due to failures and consolidations of companies within the financial services industry in 2008 and early 2009, as well as 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.

          Economic conditions – As discussed in Note 4, during the quarter ended March 31, 2009, we completed impairment analyses of goodwill and our indefinite-lived trade name. No such impairment analyses were required during the quarter ended June 30, 2009, as there were no indicators of potential impairment during the quarter. As a result of the impairment analyses completed during the quarter ended March 31, 2009, we recorded a goodwill impairment charge of $20.0 million in our Small Business Services segment related to one of our reporting units, as well as an impairment charge of $4.9 million in our Small Business Services segment related to an indefinite-lived trade name. The fair value of the reporting unit for which goodwill was impaired exceeded its carrying value by $12 million as of March 31, 2009, subsequent to the impairment charge. The calculated fair values of our other reporting units exceeded their carrying values by amounts between $17 million and $209 million as of March 31, 2009. Due to the ongoing uncertainty in market conditions, which may continue to negatively impact our expected operating results, we will continue to monitor whether additional impairment analyses are required with respect to the carrying value of goodwill and the indefinite-lived trade name.

          Postretirement benefit plan – The plan assets of our postretirement benefit plan 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 saw a significant decline in value. As such, the fair value of our plan assets decreased significantly during the year, resulting in a $29.9 million increase in the unfunded status of our plan as compared to the end of the previous year. This affected the amounts reported in the consolidated balance sheet as of December 31, 2008 and also contributes to an expected increase in postretirement benefit expense of $2.4 million in 2009, as compared to 2008. If the equity and bond markets continue to decline, the funded status of our plan could continue to be materially affected. This could result in higher postretirement benefit expense in the future, as well as the need to contribute increased amounts of cash to fund the benefits payable under the plan, although our obligation is limited to funding benefits as they become payable.

          Financial institution clients – Continued turmoil in the financial services industry, including further bank failures and consolidations, could have a significant impact on our consolidated results of operations if we were to lose a significant contract and/or we were unable to recover the value of an unamortized contract acquisition cost or accounts receivable. As of June 30, 2009, contract acquisition costs totalled $55.8 million, while liabilities for contract acquisition costs not paid as of June 30, 2009 were $20.6 million. 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. Additionally, if two of our financial institution clients were to consolidate, the increase in general negotiating leverage possessed by the consolidated entities could result in a new contract which is not as favorable to us as those historically negotiated with the clients individually. We may also lose significant business if one of our financial institution clients were taken over by a financial institution which is not one of our clients. In this situation, we may be able to collect a contract termination payment. Conversely, further bank consolidations could positively impact our results of operations if we were to obtain business from a non-client financial institution that merges with one of our clients. We may also generate non-recurring conversion revenue when obsolete checks have to be replaced after one financial institution merges with or acquires another. We presently do not have specific information that indicates that we should expect to generate significant income from conversions.

Note 15: Subsequent events

          During July 2009, we purchased all of the common stock of Abacus America, Inc., a wholly-owned subsidiary of APlus Holdings Inc., a web hosting and internet services provider. This transaction will bring to our customer base more than 80,000 small business subscribers of shared web hosting, hosted e-commerce stores, managed e-mail services, domain name registration and a variety of website management applications. Also during July 2009, we purchased substantially all of the assets of MerchEngines.com, a search engine marketing firm. MerchEngines.com provides ad agencies, traditional media companies, online publishers and local aggregators a hosted and fully managed search engine marketing solution. The results of operations of both companies will be included in our Small Business Services segment. We expect to pay approximately $30 million for these companies.

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 57.4% of our consolidated revenue for the first six months of 2009. This segment has sold business checks, printed forms, promotional products, web services, payroll services, marketing materials and related services and products to more than six million small businesses and home offices in the past five years through direct response marketing, referrals from financial institutions and telecommunications companies, independent distributors, the internet and sales representatives. Of the more than six million customers we have served in the past five years, nearly 3.5 million have ordered our products or services in the last 24 months. Our Financial Services segment generated 30.1% of our consolidated revenue for the first six months of 2009. This segment sells personal and business checks, check-related products and services, customer loyalty programs, fraud monitoring and protection services, and stored value gift cards to approximately 6,500 financial institution clients nationwide, including banks, credit unions and financial services companies. Our Direct Checks segment generated 12.5% of our consolidated revenue for the first six months of 2009. 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 and Europe.

          Our business has been negatively impacted by the effects of a severe downturn in the economy and by turmoil in the financial services industry. We have experienced a reduction in demand for many of our products in Small Business Services as small business owners have reduced their discretionary spending. Additionally, check orders from several of our financial institution clients have been lower due to interruptions related to financial institution consolidations and consumer uncertainty related to the impact on their financial institutions of government bailouts and consolidations. At the same time, we have accelerated many of our cost reduction actions and have identified additional opportunities to improve our cost structure. In addition, we have continued to invest in our transformation with acquisitions that we expect to bring higher growth business service offerings into our portfolio. We are focused on capitalizing on transformational opportunities available to us in this difficult environment and believe that we will be better positioned to consistently deliver strong margins once the economy begins to recover.

          Our net income for the first half of 2009, as compared to the first half of 2008, benefited from the following:

	•		Various initiatives to reduce our cost structure, primarily within sales and marketing, information technology and manufacturing;
	•		Net pre-tax gains of $9.3 million from the retirement of long-term notes, including additional interest expense of $0.5 million related to accelerating the amortization of a portion of the loss on a derivative associated with the notes;
	•		Increased sales of fraud protection services by Direct Checks and Small Business Services; and
	•		Direct Checks price increases.