SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 2, 2003
NEW ENGLAND BUSINESS SERVICE, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-11427 04-2942374
- -------- ------------- -------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
500 Main Street, Groton, MA 01471
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (978) 448-6111
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<PAGE 1>
Item 2. Acquisition or Disposition of Assets.
-------------------------------------
On June 2, 2003, the merger (the "Merger") of Centurion Sub, Inc. ("Centurion
Sub"), an indirect wholly-owned subsidiary of New England Business Service,
Inc. (the "Company"), with and into Safeguard Business Systems, Inc.
("Safeguard Business Systems"), as contemplated by the Merger Agreement,
dated as of April 23, 2003 (the "Merger Agreement"), by and among the
Company, Centurion Sub and Safeguard Business Systems, was consummated. As a
result of the Merger, Safeguard Business Systems is now an indirect wholly-
owned subsidiary of the Company.
In the Merger, each share of common stock of Safeguard Business Systems was
converted into the right to receive (1) an immediate cash payment of $8.1821
per share, and (2) at the times stated in and subject to the terms and
conditions of the payment and escrow agreement entered into in connection
with the Merger, possible additional cash payments up to an aggregate amount
currently estimated to be $1.4246 per share.
The Company obtained financing for the payment of the merger consideration in
the Merger and the retirement of certain indebtedness of Safeguard Business
Systems through a loan in the ordinary course of business under a committed
credit facility with Fleet National Bank and certain other financial
institutions. Safeguard Business Systems manufactures checks, checkwriting
systems and business forms, and sells such products, together with other
printed products, promotional items and corporate apparel, through a network
of approximately 360 distributors in the U.S. and Canada.
The foregoing description of the Merger, Merger Agreement and the related
payment and escrow agreement is qualified in its entirety by reference to the
full text of such agreements and to the press release issued by the Company
on June 2, 2003, which are filed as Exhibits 2.1, 2.2 and 99 to its Current
Report on Form 8-K dated June 2, 2003 which are incorporated herein by
reference.
<PAGE 2>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
- ----------------------------------------------------------------------------
(a) Financial Statements of Business Acquired
Financial statements required by this item appear beginning on page F-1 of
this Current Report on Form 8-K/A.
(b) Pro Forma Financial Information
Pro forma financial information required by this item appear beginning on
page F-26 of this Current Report on Form 8-K/A.
(c) Exhibits.
- --------------
* 2.1 Merger Agreement, dated as of April 23, 2003, by and among New England
Business Service, Inc., Centurion Sub, Inc. and Safeguard Business
Systems, Inc.
* 2.2 Payment and Escrow Agreement, dated as of June 2, 2003 by and among
New England Business Service, Inc., Joann McNiff, as Representative, and
SunTrust Bank.
23 Independent Auditors Consent
* 99 Press release dated June 2, 2003.
*Previously filed on Form 8-K dated June 2, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NEW ENGLAND BUSINESS SERVICE, INC.
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(Registrant)
August 15, 2003 DANIEL M. JUNIUS
- --------------- ----------------------------
Date Daniel M. Junius
Executive Vice President, Chief
Financial Officer and Treasurer
<PAGE 3>
Index to Consolidated Financial Statements
Safeguard Business Systems, Inc. and Subsidiaries Page
- ------------------------------------------------- ----
Report of Independent Public Accountants F-2
Consolidated Financial Statements for the Year Ended
December 31, 2002 F-3
Unaudited Consolidated Financial Statements for the Three Months Ended
March 31, 2003 F-22
<PAGE F-1>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Safeguard Business Systems, Inc. and Subsidiaries
Dallas, Texas
We have audited the accompanying consolidated balance sheet of
Safeguard Business Systems, Inc. and Subsidiaries (Company) as of
December 31, 2002, and the related consolidated statements of
operations and comprehensive income, changes in stockholders' equity,
and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company at
December 31, 2002, and the results of its operations and its cash flows
for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note B to the financial statements, in 2002 the Company
changed its method of accounting for intangible assets to conform to
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
February 18, 2003
(June 2, 2003 as to Note Q)
<PAGE F-2>
SAFEGUARD BUSINESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002
(Dollars in thousands)
ASSETS 2002
------ ---------
Current assets:
Cash $ 600
Marketable securities 375
Trade receivables, net of allowance of $253 18,512
Distributor receivables, net of discount and allowance of $620 537
Other receivables 405
Inventories 4,215
Deferred income taxes 188
Other current assets 987
---------
Total current assets 25,819
Distributor receivables, net of discount and allowance of $1,406 1,218
Property, plant and equipment, net of accumulated depreciation of $3,909 8,589
Deferred income taxes 6,093
Other assets 108
Intangible assets, net of accumulated amortization of $4,007 36,384
---------
Total assets $ 78,211
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current debt obligations $ 7,170
Accounts payable 10,342
Accrued expenses 9,379
---------
Total current liabilities 26,891
Long term debt 8,168
Other liabilities 4,553
Commitments and contingencies -
---------
Total liabilities 39,612
---------
Stockholders' equity:
Common stock, par value $.01 a share:
Authorized 8,000,000 shares,
Issued and outstanding 5,296,618 shares 53
Additional paid-in capital 31,318
Deferred stock compensation (211)
Retained earnings 7,691
Accumulated other comprehensive loss (252)
---------
Total stockholders' equity 38,599
---------
Total liabilities and stockholders' equity $ 78,211
=========
See notes to consolidated financial statements.
<PAGE F-3>
SAFEGUARD BUSINESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 2002
(Dollars in thousands)
2002
---------
Net sales $ 158,194
Operating costs and expenses:
Cost of sales 77,134
Selling expense 59,393
General and administrative
expense 14,000
Amortization expense 1,844
---------
Total operating costs and
expenses 152,371
---------
Operating income 5,823
Other expense, net (78)
---------
Income before income taxes 5,745
Income tax provision (1,777)
---------
Net income 3,968
Other comprehensive loss, net of
tax benefit:
Foreign currency translation
adjustment (18)
---------
Comprehensive income $ 3,950
=========
See notes to consolidated financial statements.
<PAGE F-4>
SAFEGUARD BUSINESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2002
(Dollars in thousands)
Additional Deferred Other
Common Shares Paid In Stock Retained Comprehensive
Shares Amount Capital Compensation Earnings Loss Total
------- ------ ---------- ------------ ---------- ------------- -------
Balance -
December 31, 2001 5,294 $ 53 $ 31,199 $ (230) $ 3,723 $ (234) $34,511
Amortization of
deferred
compensation 135 135
Grant of stock
options 121 (121) -
Cancellation of
stock options (5) 5 -
Exercise of stock
options 3 3 3
Net income 3,968 3,968
Other comprehensive
loss (18) (18)
------- ------ --------- ----------- --------- ------------ ------
Balance -
December 31, 2002 5,297 $ 53 $ 31,318 $ (211) $ 7,691 $ (252) $38,599
======= ====== ========= =========== ========= =========== =======
See notes to consolidated financial statements.
<PAGE F-5>
SAFEGUARD BUSINESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
(Dollars in thousands)
2002
------------
Cash flows from operating activities:
Net income $ 3,968
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization 1,844
Depreciation 2,281
Gains from demutualization (522)
Deferred income tax provision 1,777
Amortization of deferred stock compensation 135
Non-cash interest 264
Changes in operating assets and liabilities:
Receivables 685
Inventories (125)
Distributor receivables 803
Other assets (171)
Accounts payable (25)
Accrued restructuring expense (673)
Accrued reorganization costs (872)
Accrued expenses and other liabilities (230)
------------
Net cash provided by operating activities 9,139
------------
Cash flows from investing activities:
Purchase of machinery and equipment (1,738)
Proceeds from sale of marketable securities 147
------------
Net cash used in investing activities (1,591)
------------
Cash flows from financing activities:
Repayment of long-term debt and capital lease obligations (6,023)
Net borrowings (repayments) under revolving loans (1,757)
Proceeds from exercise of stock options 3
------------
Net cash used in financing activities (7,777)
------------
Effect of exchange rates on cash 2
------------
Net decrease in cash (227)
Cash at beginning of year 827
------------
Cash at end of period $ 600
============
Supplemental disclosure of non-cash investing and financing activities:
Capital lease obligations of $1,120 were incurred during 2002 to
acquire certain machinery and equipment.
Receipt of marketable securities with a value of $522 as a result of
demutualization of insurance providers.
Supplemental disclosure of cash flow information:
Cash paid during the year for interest: $ 2,183
Cash paid during the year for taxes: $ 171
See notes to consolidated financial statements.
<PAGE F-6>
SAFEGUARD BUSINESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002
(Dollars in thousands)
A. Description of the business
Safeguard Business Systems, Inc (the "Company" or "Safeguard") provides a
broad selection of printed, imaging and marketing solutions through its
independent distributor network. The Company's customers are primarily local
businesses located throughout North America.
The Company markets all of its products through a network of independent
distributors who are compensated on a commission basis. The Company sells
and ships its products directly to the end-users. The invoicing and
collection functions related to these customers are performed by the Company.
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of trade receivables. Credit risk on trade
receivables is minimized as a result of the large number of customers,
relatively low dollar value of individual customer account balances, and the
dispersion among different businesses and geographic regions. As of December
31, 2002, the Company had no significant concentrations of credit risk.
B. Summary of Significant Accounting Policies
FRESH START ACCOUNTING - The Company's Consolidated Financial Statements
presented herein reflect the application of "fresh start" accounting
effective January 2, 2001, the Effective Date of the Company's
reorganization. Accordingly, a new accounting basis for reported asset and
liability amounts has been established as of the Effective Date. See Note P
for additional discussion.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Safeguard Business Systems, Inc. and subsidiaries. All
material inter-company accounts and transactions have been eliminated.
MARKETABLE SECURITIES - The Company classifies marketable securities as
available-for-sale and values them at fair market value as of the date of the
balance sheet. At December 31, 2002, the fair market value of securities
owned by the Company was $375.
DISTRIBUTOR RECEIVABLES - The Company recognizes distributor receivables,
discounted to reflect the present value of future cash flows, and net of
allowances. See additional discussion in Note F.
INVENTORIES - Inventories are stated at the lower of cost (first-in, first-
out method) or market. See additional information in Note D.
<PAGE F-7>
PROPERTY, PLANT AND EQUIPMENT:
On January 2, 2001, the Effective Date, the Company revalued all property,
plant and equipment at its estimated fair value as part of fresh start
accounting. Assets added subsequent to the Effective Date are stated at
cost. The provision for depreciation is based on the estimated useful lives,
ranging from 3 to 12 years, of the related assets computed by the straight-
line method. See additional information in Note E.
The Company applies the guidance of Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" to costs related to the development of a new Customer Support
System. The capitalized costs were incurred after the preliminary project
stage was completed, and it was determined that the project would be
completed and used to perform its intended function.
INTANGIBLE ASSETS - Based on an independent valuation at the Effective Date,
intangible assets were recognized on the Company's consolidated balance
sheet. The Customer and Distributor Base is amortized on a straight line
basis over 15 years. See further discussion in Note C.
ACCOUNTS PAYABLE - Included in accounts payable are $2,553 of outstanding
checks at December 31, 2002.
REVENUE RECOGNITION - Revenues are recognized as products are shipped and
title passes or as services are performed.
SHIPPING AND HANDLING FEES - In accordance with Emerging Issues Task Force
Bulletin 00-10, "Accounting for Shipping and Handling Fees and Costs," the
Company has included amounts billed to customers for shipping and handling in
net sales and the costs incurred for shipping and handling as costs of sales.
The amount of shipping and handling included in net sales is $9,499.
COMPENSATORY STOCK PLANS - At December 31, 2003, the Company has four stock-
based employee compensation plans, which are described more fully in Note K.
The Company accounts for those plans under the recognition and measurement
principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations. Because the
exercise prices of the options issued were below the market values of the
stock on the dates of grant, the Company has recognized compensation cost
arising from the stock options granted. The total compensation recognized
from 2002 options issued was $121, and $135 was expensed in 2002, as the
related options from 2002 and past years vested. Deferred compensation of
$211 on the Consolidated Balance Sheet at December 31, 2002 reflects future
compensation costs to be incurred as a result of these option plans. The
following table illustrates the effect on net income if the Company had
applied the fair value recognition provisions of Financial Accounting
Standards Board ("FASB") Statement No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.
2002
------------
Net income, as reported $ 3,968
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (133)
------------
Pro forma net income $ 3,835
============
<PAGE F-8>
BILL ONLY DISTRIBUTOR PAY - The Company earns a fee on certain items sold by
distributors which are not part of the Safeguard Business Systems product
line. Under this plan, the distributor arranges the sale of the product to
the customer and the distributor directly pays the vendor for the product.
The Company then bills the customer and earns a fee. This fee is included in
other expense, net on the Consolidated Statement of Operations. See Note M
for further information regarding other expense.
INCOME TAXES - Income taxes are determined in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, which requires recognition
of deferred income tax liabilities and assets for the expected future tax
consequences of events that have been included in the consolidated financial
statements or tax returns. Under this method, deferred income tax liabilities
and assets are determined based on the difference between financial statement
and tax basis of liabilities and assets using enacted tax rates in effect for
the year in which the differences are expected to reverse. SFAS 109 also
provides for the recognition of deferred tax assets if it is more likely than
not that the assets will be realized in future years. A valuation allowance
has been established for deferred tax assets for which realization is not
likely. See Note N for further information relating to income taxes.
COMPREHENSIVE INCOME - The accumulated other comprehensive loss in the
consolidated balance sheet as of December 31, 2002 consists of foreign
currency translation adjustments.
MANAGEMENT'S USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
of America requires the use of estimates and assumptions by management that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities, and the reported amounts of revenues and
expenses. Actual results could differ from those estimates.
ACCOUNTING PRONOUNCEMENTS - In June 2001, the FASB issued SFAS No. 142,
"Goodwill and Other Intangible Assets," which addresses financial accounting
and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, "Intangible Assets." SFAS No. 142 addresses
how intangible assets that are acquired individually or with a group of other
assets should be accounted for in financial statements upon their acquisition
and after they have been initially recognized in the financial statements.
SFAS No. 142 requires that goodwill and intangible assets that have
indefinite useful lives not be amortized but rather tested at least annually
for impairment, and intangible assets that have finite useful lives be
amortized over their useful lives. SFAS No. 142 provides specific guidance
for testing intangible assets that will not be amortized for impairment.
In addition, SFAS No. 142 expands the disclosure requirements about goodwill
and other intangible assets in the years subsequent to their acquisition.
SFAS No. 142 was adopted by the Company effective January 1, 2002. As a
result, the Tradename is no longer systematically amortized, but is subject
to independent valuation and tested for impairment. The Company has elected
September 30 as the measurement date for annual valuation and impairment
consideration.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which is effective for fiscal years
beginning after December 15, 2001. The adoption of SFAS No. 144 did not have
a significant effect on the Company's financial position or results of
operations.
<PAGE F-9>
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The provisions of this statement related to the rescission of
SFAS No. 4 are effective for fiscal years beginning after May 15, 2002.
Certain provisions of the statement relating to SFAS No. 13 are effective for
transactions occurring after May 15, 2002. All other provisions of the
statement are effective for financial statements issued on or after May 15,
2002. The adoption of SFAS No. 145 did not have a significant effect on the
Company's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit disposal activity. SFAS
No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company does not expect the adoption
of SFAS No. 146 to have a significant effect on the Company's financial
position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including indirect
Guarantees of Indebtedness of Others." This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken
in issuing the guarantee. This Interpretation also incorporates, without
change, the guidance in FASB Interpretation No. 34, "Disclosure of Indirect
Guarantees of Indebtedness of Others," which is being superseded. The
initial recognition and initial measurement provisions of this Interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure provisions of this Interpretation are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company is in the process of evaluating the impact
this Interpretation will have on its financial statements when adopted in
2003.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities." The Interpretation clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"
to certain entities in which equity investors do not have the characteristics
of a controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional subordinated
financial support from other parties. The Company is not a party to any
variable interest entities covered by the Interpretation.
FOREIGN CURRENCY TRANSLATION - The Company's Canadian operations use the
Canadian dollar as the functional currency. Accordingly, assets and
liabilities of the Canadian operations are translated to the U.S. dollar at
year-end exchange rates. As a percentage of consolidated total assets, the
Company's Canadian operations were 3% at December 31, 2002. The income and
expenses of the Canadian operations are translated at average exchange rates
during the year. The Company's Canadian operations comprised 2% of
consolidated total net sales in 2002, and 0% of net income in 2002. Gains or
losses resulting from foreign currency translation are recorded in other
comprehensive income.
<PAGE F-10>
C. Intangible Assets
Intangible assets consist of a Distributor and Customer Base and Tradename.
These intangible assets were recognized, based upon independent appraisal, as
part of the fresh start accounting on January 2, 2001. The Distributor and
Customer Base is being amortized over a 15 year period, and is reflected on
the Consolidated Balance Sheet at $23,962 at December 31, 2002, net of
accumulated amortization of $3,695. The Tradename is reflected on the
Consolidated Balance Sheet at $12,422 at December 31, 2002, net of
accumulated amortization of $312. Amortization of the Tradename ceased
December 31, 2001 pursuant to SFAS No. 142. See Note B for further
information regarding accounting pronouncements.
D. Inventories
Included in inventories at December 31:
2002
------------
Raw materials $ 2,793
Work-in-process 182
Finished goods 1,240
------------
Total inventories $ 4,215
============
E. Property, Plant and Equipment
Included in property, plant and equipment December 31:
Depreciable
2002 Lives
---------- -----------
Land $ 70 N/A
Building and improvements 1,083 1-5 years
Machinery and equipment 11,345 3-7 years
---------- -----------
12,498
Less accumulated depreciation (3,909)
----------
Total property, plant and equipment $ 8,589
==========
<PAGE F-11>
F. Distributor Receivables
The Company's independent distributors have contracts granting them either
exclusive geographic or account protection rights. The distributors holding
these rights may, at some point, desire and be eligible to transfer their
commission rights to buyers who agree to make payments out of future
commissions or who accept reduced commissions. Prior to 1986, the Company
facilitated the transfer of selling distributors' rights, (primarily sellers
with exclusive geographic territories) to buyers who were granted account
protection rights, by offering the sellers incentives to transfer their
commission rights. Most often the incentives consisted of down payments or
guaranteed payments to the sellers. The transfers between the buyers and
sellers typically relate solely to account protection rights.
The Company's goal in facilitating the transfer of or in acquiring
distributors' rights was to obtain the opportunity to increase the number of
distributors marketing its products. The Company, for the same business
purpose, also made cash advances to distributors, who agreed to repay all
such amounts from future commissions. The Company's distributor receivables
associated with account protection rights at December 31, 2002 totaled
$1,755, net of deferred interest income of $1,021 and reserves of $1,005.
$537, net of deferred interest, is recognized as current receivables at
December 31, 2002. The Company anticipates substantially all of these
receivables to be collected within 4 years, with minimal amounts extending
beyond 4 years.
G. Accrued Expenses
At December 31, 2002, accrued expenses consist of $5,703 of accrued
commissions and $3,676 of accrued personnel related costs and other accrued
expenses.
H. Employee Benefit Plans
The Company has a contributory savings plan for employees meeting certain
requirements. The plan allows eligible employees to contribute from 2% to
15% of their compensation, including overtime, bonuses and shift
differential. The Company contributes a matching amount equal to 100% of the
first 3% of an employee's salary contributed under the Plan. Employees
become eligible for the Company matching contribution after one year of
employment. Contributions are invested in various fixed income, security or
equity funds as designated by the employee. The Company's matching
contributions were $548 in 2002. The Company also has a noncontributory
profit-sharing plan for the benefit of eligible full-time employees. The
Company's contributions are voluntary and at the discretion of the Board of
Directors. No contributions were made to the plan in 2002.
<PAGE F-12>
I. Debt
The Company's debt outstanding at December 31:
2002
----------
Collateralized revolving loan - Foothill Capital Corporation $ 7,613
Term loan - Foothill Capital Corporation 2,800
Term loan - Foothill Income Trust, LP 3,917
Capital lease obligations 1,008
----------
$ 15,338
Less current debt obligations (7,170)
----------
Total long-term debt $8,168
==========
The Company entered into a Term Loan and Security Agreement with Foothill
Capital Corporation ("FCC"), which includes a Revolving Loan and a Term Loan.
The Revolving Loan allows for borrowing against eligible accounts receivable
and inventories up to a maximum of $23,000. The agreement provided the
Company with a term loan for $4,000. Borrowings under the Loan and Security
Agreement bear interest at a variable rate, based on a formula using prime or
LIBOR, with a minimum annual rate of 7.0%. The annual rate in effect at
December 31, 2002 was 7.0%. Amounts borrowed under this agreement mature on
December 31, 2005. At December 31, 2002, the Company had $4,016 in
additional borrowing capacity under the Revolving Loan. The agreement
provided for principal payments under the term loan in monthly installments
of $100 from January 1, 2002 through September 1, 2003, $433 on October 1,
2003, $525 on November 1, 2003, and $942 on December 1, 2003.
A Term Loan and Security Agreement was entered into by the Company and
Foothill Income Trust, under the Plan of Reorganization. The agreement
provided $12,317 under a term loan which bears interest at the rate of 13%
per annum. Principal payments in monthly installments of $425 from January
1, 2003 to September 1, 2003 and $92 on October 1, 2003 are required.
The Term Loan and Security Agreements contain, among others, financial
covenants related to the maintenance of certain financial ratios, including
minimum earning levels and fixed charge coverage. Other contractual terms
limit outstanding letters of credit to $3,000 and impose termination fees on
the FCC facility if terminated prior to the termination date.
The following table represents future payments of debt as of December 31,
2002:
Capital Leases Term Loans Revolving Loan Total
-------------- ---------- -------------- ------
2003 $ 512 $ 6,717 $7,229
2004 333 333
2005 243 243
2006 11 7,613 7,624
Thereafter 4 4
Less amount representing
interest (95) (95)
------------ --------- ----------- -------
Total $ 1,008 $ 6,717 $ 7,613 $15,338
============ ========= =========== =======
<PAGE F-13>
J. Other Liabilities
In April 1986, the Company entered into agreements with eight of its then
executive officers, providing certain payments in the event of termination of
employment occurring after a change in ownership or control. Employment of
those officers terminated subsequent to a change in control of the Company in
December 1986. Payments are due to the former officers in varying amounts
through 2008. Aggregate payments due during the next five years are: 2003 -
$50; 2004 - $750; 2005 - $50; 2006 - $936; 2007 - $0; and $3,191 thereafter.
The present value of these payments, $2,923, is included in the Company's
balance sheet. The Company has purchased life insurance policies to
neutralize cash flows over the respective lives of the former employees.
The Company provides health care benefits to certain retired employees
through an unfunded plan. Only a limited number of retired employees are
eligible to participate in this plan. No additional employees or retirees may
enter this plan. The plan guarantees health insurance coverage for the
retiree and their spouses (where applicable) for the remainder of their
lives. The retiree is required to contribute a nominal amount toward their
coverage. The following table sets forth a reconciliation of the benefit
obligation and accrued benefit costs related to this plan for 2002:
2002
--------
Service cost - benefits earned during this period $ -
Interest cost on the accumulated obligation 53
--------
Net periodic postretirement expense 53
========
Accumulated benefit obligation at January 1, 2002 $ 707
Service cost -
Interest cost 58
Benefit payments (67)
--------
Accumulated benefit obligation recognized at December 31 $ 698
========
Assumptions:
Discount rate 7.5%
Rate of annual benefit increases 12.0%
<PAGE F-14>
K. Common Stock
The Company has 8 million shares authorized, with a stated value of $0.01 per
share. At December 31, 2002, there were 5,296,618 shares outstanding,
including 294,118 restricted to the United Safeguard Distributors Association
("USDA"). These restricted shares will vest equally over three years.
Warrants - Warrants were issued to former San Jacinto shareholders with the
right to acquire 653,595 shares of Safeguard stock at $15.31 per share. The
warrants expire in 2011.
Stock option plans - As of December 31, 2002, the Company had established
four stock option plans. In the first plan, 294,118 shares have been
reserved for option grants to Company management. Options to purchase
285,000 of these shares were granted on the Effective Date, at an exercise
price of $1.26. These shares vest equally over three years. Stock
compensation expense of $109 was recognized during 2002 for this first grant.
From this initial grant, 42,500 options have been cancelled. Another 51,000
of these options were granted in October 2002, at an exercise price of $1.26.
These shares vest equally over three years. Stock compensation expense of $7
was recognized during 2002 for this second grant.
In the second plan, options to purchase up to 147,059 shares may be granted
to the USDA and allocated among its members. In the third option plan,
options to purchase up to 147,059 shares may be granted to certain members of
the Company's management. In both the second and third option plans, 29,412
shares are available to be granted as options as of December 31 of each year
for up to five of the first seven consecutive fiscal years beginning with
2001 in which the Company exceeds certain income goals for such year. If
these goals are not met, the options may never be granted. In 2002 no
options were granted pursuant to these plans. Options granted under these
plans vest either immediately or over three years, and expire January 2,
2011.
In February 2002, the Company created a fourth stock option plan for the
benefit of the non-employee members of its Board of Directors. Granted under
this plan were options to purchase 250,000 shares of the Company's stock, at
an exercise price of $2.75 per share. These shares vest in the following
manner: 50% at December 31, 2002; 25% at December 31, 2003; and 25% at
December 31, 2004.
In accordance with Accounting Principles Board Opinion No. 25, the Company
has recognized compensation cost arising from the February 2002 stock options
granted at a discount to the fair value of the stock. The total deferred
stock compensation recognized in 2002 was $38, of which $19 has been expensed
through December 31, 2002.
<PAGE F-15>
The following table summarizes grant activity during the year:
Number of
Shares
-----------
Outstanding, beginning of year (weighted average price
of $1.26 per share) 260,000
Granted February 2002 (weighted average price of $2.75
per share) 250,000
Granted October 2002 (weighted average price of $1.26
per share) 51,000
Cancelled (17,500)
Exercised (2,500)
----------
Outstanding, December 31 (weighted average price
of $1.95 per share) 541,000
==========
Exercisable, December 31, 2002 205,000
==========
L. Leases
The Company conducts a portion of its operations using leased facilities,
machinery and equipment. Operating leases expire at various dates through
2006. Leased property under capital lease at December 31, 2002 has a net
carrying value of $1,098, and consists principally of machinery and
equipment.
The Company is obligated under a lease for a facility in Tustin, California,
which is not used in Company operations. The facility has been subleased.
Since the Company's lease obligation is greater than the sublease, the
Company's balance sheet includes a liability of $1,051 at December 31, 2002,
which represents the net present value of the shortfall of the sublease
income, as compared to the Company's lease obligations. At December 31,
2002, the current portion, or $310 of this liability, is recorded as other
accrued expenses, and $741 is recorded as other long-term liabilities. The
amounts due from the sublessee are $420, and $433 for 2003 and 2004,
respectively. Commitments for this lease are $720, $743, and $571 for 2003,
2004 and 2005, respectively. The Company entered into agreements in February
2003 to terminate the sublease and re-sublease the facility to a new
sublessee. The present value of the payments under the new sublease will be
greater than the present value of the payments under the old sublease.
Total rental expense for all operating leases (including leases with initial
or remaining terms of one year or less) was $3,282 in 2002. The following
table represents future minimum lease payments as of December 31, 2002:
Operating
Leases
----------
2003 $ 3,056
2004 2,652
2005 1,767
2006 102
----------
$ 7,577
==========
<PAGE F-16>
M. Other Expense, net
Other expense, net consists of the following at December 31:
2002
---------
Interest income - distributor receivables $ 345
Interest expense (2,410)
BODP income 291
Other income, net 1,696
---------
Total other expense, net $ (78)
=========
N. Income Taxes
The components of income before income taxes for the year
ended December 31, 2002 consists of:
2002
--------
Domestic $ 5,750
Foreign (5)
--------
Total $ 5,745
========
The income tax provision for the year ended December 31, 2002
consists of:
Current: 2002
--------
Federal $ (165)
State 7
--------
Total current (158)
--------
Deferred:
Federal $ 2,061
State (126)
--------
Total deferred 1,935
--------
Total provision $ 1,777
========
<PAGE F-17>
N. Income Taxes (continued)
Income taxes recorded by the Company differ from the amounts computed by
applying the statutory U.S. federal income tax rate to the income before
income taxes. The following schedule reconciles the income tax provision at
the statutory rate and the actual income tax provision as reflected in the
Consolidated Statement of Operations:
2002
---------
Income before income taxes $ 5,745
---------
Tax provision at federal statutory rate 1,953
State income taxes, net of federal benefit (79)
Limitation of foreign tax benefits 2
Alternative minimum taxes (165)
Other permanent items 66
---------
Tax provision $ 1,777
=========
The tax effects of the significant temporary differences giving rise to the
Company's deferred tax assets (liabilities) at December 31, 2002 are as
follows:
Current 2002
--------
Various reserves and accruals $ 463
Valuation allowance (275)
--------
Total current 188
--------
Non-current
Net operating losses ("NOL's") 47,002
Intangible assets (13,775)
Distributor receivables (664)
Deferred compensation 1,107
Fixed assets 1,582
Other assets 934
Valuation allowance (30,093)
--------
Total non-current 6,093
--------
Total net deferred tax asset $ 6,281
========
<PAGE F-18>
N. Income Taxes (continued)
Management has concluded, after considering all available evidence, including
the Company's history of earnings from prior years (after adjustments for
nonrecurring items, restructuring charges, permanent differences, and other
appropriate adjustments), it is more likely than not that the Company will
generate sufficient taxable income in the appropriate carryforward periods to
realize the benefit of certain net operating losses and future deductible
temporary differences. The total net deferred tax assets (both current and
non-current) have been reduced to the amount management considers realizable
by establishing valuation allowances aggregating $30,368 as of December 31,
2002. Based on the weight of available evidence, management has concluded
that more likely than not, its future taxable income will be sufficient to
support the current recognition of total net deferred tax asset of $6,281 at
December 31, 2002.
The valuation allowances have been established due to management's analysis
indicating that certain federal and state NOL's and tax credit carryforwards,
the use and life of which are limited under the income tax laws, may expire
prior to their full utilization. During 2002, the valuation allowance
decreased by $148.
As of December 31, 2002, the Company had domestic NOL's for federal income
tax purposes of approximately $132,180, after consideration of the statutory
reductions prescribed by Internal Revenue Code ("IRC") Section 382(l)(5) and
IRC Section 108(b) during 2001. The Company's NOL's are available to reduce
future federal taxable income and expire in varying amounts from the years
2005 through 2017.
Under IRC Section 108(a), the discharge of liabilities subsequent to a
Chapter 11 proceeding results in income that is excluded from the Company's
taxable income. However, the amount excluded must be applied to, and reduce,
the Company's NOL's. The resulting reduction in the Company's NOL's was
$43,495.
Since the creditors acquired more than 50% of the common stock of the
Company, an ownership change under Section 382 of the IRC occurred which
could limit the utilization of the Company's NOL's. However, under the
bankruptcy exception IRC Section 382(l)(5), the Company's NOL's should not be
limited. Under this exception the Company reduced the NOL by the sum of all
interest paid or accrued on the indebtedness converted to stock during: (i)
the year in which the indebtedness was converted to stock, and (ii) the three
years preceding the year in which the reorganization occurred. The total
amount of such interest is $18,751.
O. Contingencies
The Company is involved in various legal proceedings arising in the normal
course of its business. The determination of the legal proceedings on the
results of operations or the financial condition of the Company cannot be
determined at this time, but in the opinion of management are not, singularly
or in the aggregate, material to the Company's financial position or results
of operations.
<PAGE F-19>
P. Bankruptcy Proceedings and Basis of Presentation
San Jacinto Holdings Inc. ("San Jacinto"), former parent of the Company,
filed a Voluntary Petition for Relief under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") on May 12, 2000 with the United
States Bankruptcy Court for the Northern District of Texas (the "Bankruptcy
Court"), case number 00-33175-HCA-11. Under Chapter 11 of the Bankruptcy
Code, San Jacinto had an exclusive right to file a plan of reorganization for
the first 120 days. On September 1, 2000 San Jacinto filed its Initial Plan
of Reorganization under Chapter 11. On December 28, 2000, the Bankruptcy
Court confirmed the Amended Plan of Reorganization, with supplemental
modifications, ("Plan of Reorganization") which was effective January 2,
2001.
Under the Plan of Reorganization, San Jacinto was merged into Safeguard
Business Systems, Inc. on the Effective Date. Safeguard Business Systems,
Inc. is the surviving corporation. Under the Plan of Reorganization, the
Company satisfied the liabilities subject to compromise. An intercompany
receivable due from San Jacinto was forgiven by the Company on the Effective
Date. Holders of San Jacinto's 12% Senior Subordinated Notes received
4,750,000 shares of common stock, $.01 par value, in the Company,
representing 89.7% of the total initial common stock issued. Holders of San
Jacinto's 8% Senior Subordinated Notes and 8% Subordinated Debentures
received a pro rata share of $104 in cash.
The distributor network for the Company was issued 294,118 shares of common
stock, representing 5.6% of the total initial common stock issued by the
Company. These shares of common stock will be issued as restricted stock
grants with one-third of such shares to vest on each of the first three
anniversaries of the Effective Date.
Additionally, the Company established three stock option plans. See
discussion of these plans at Note K.
Loan Modifications and Amendments
As part of the Plan of Reorganization, Safeguard Business Systems Inc.
modified and amended its loan agreements with Foothill Capital Corporation
and Foothill Income Trust, LP, as of the Effective Date. Refer to Note I for
balances outstanding on these debt agreements. The significant terms and
amendments of these loans are discussed in Note I.
<PAGE F-20>
P. Bankruptcy Proceedings and Basis of Presentation (continued)
Pro Forma Financial Information and Fresh Start Reporting
The Company adopted "fresh start" reporting upon its merger with San Jacinto,
in accordance with guidance from Statement of Position No. 90-7. Such
reporting was required since holders of San Jacinto's existing voting shares
immediately before the confirmation received 5% of the voting shares of
Safeguard, and the fair value of Safeguard's assets immediately prior to the
confirmation date was less than the total of all post-petition liabilities
and allowed claims, as shown below:
Post-petition liabilities $ 57,248
Liabilities subject to compromise 72,946
--------
Total post-petition liabilities and allowed claims 130,194
Reorganization value (60,000)
--------
Excess of liabilities over reorganization value $ 70,194
========
The reorganization value of the Company was determined by independent
valuation, considering several factors and various valuation methods,
including discounting cash flow and price/earnings and other applicable
ratios. The factors considered included: forecasted operating and cash flow
results; discounted residual value at the end of the forecast period based on
the capitalized cash flows for the last year of that period; market share and
position; competition and general economic considerations; projected sales;
and potential profitability. The balance sheet at the Effective Date was
prepared using a $60,000 enterprise value of the Company, based upon the
independent valuation.
Q. Subsequent Event - Merger Agreement
On April 24, 2003, Safeguard entered into a definitive agreement to be
acquired by New England Business Service, Inc. for $72.5 million in cash. The
transaction was completed on June 2, 2003, following a merger of Centurion
Sub, Inc., an indirect wholly-owned subsidiary of New England Business
Service, Inc., with and into the Company, as contemplated under the merger
agreement. As a result of the merger, the Company is now an indirect wholly-
owned subsidiary of New England Business Service, Inc. The proceeds were used
to satisfy existing debt, including term and revolving balances ($17.2
million at June 2, 2003), and for distribution to the Company's existing
securityholders. The transaction will be accounted for as a purchase of all
of the Company's stock. These financial statements do not reflect any
potential adjustments to the assets, liabilities and stockholders' equity
that may arise as a result of this pending agreement.
<PAGE F-21>
SAFEGUARD BUSINESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2003
(Dollars in thousands)
(unaudited)
March 31,
2003
-----------
ASSETS (unaudited)
Current assets:
Cash $ 495
Marketable securities -
Trade receivables, net of allowances of
$220 at March 31, 2003 17,469
Distributor receivables, net of discount and allowances
of $482 at March 31, 2003 489
Other receivables 348
Inventories 4,453
Deferred income taxes 188
Other current assets 1,319
-----------
Total current assets 24,761
Distributor receivables, net of discount and allowances
of $1,079 at March 31, 2003 1,094
Property, plant and equipment, net of accumulated depreciation
of $4,589 at March 31, 2003 8,178
Deferred income taxes 5,951
Other assets 179
Intangible assets, net of accumulated amortization
of $4,468 at March 31, 2003 35,923
-----------
Total assets $ 76,086
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current debt obligations $ 5,576
Accounts payable 11,517
Accrued expenses 8,627
-----------
Total current liabilities 25,720
Long term debt 6,459
Other liabilities 4,540
Commitments and contingencies -
-----------
Total liabilities 36,719
-----------
Stockholders' equity:
Common stock, par value $.01 a share:
Authorized 8,000,000 shares,
Issued and outstanding 5,296,618 shares 53
Additional paid-in capital 31,318
Deferred stock compensation (179)
Retained earnings 8,364
Accumulated other comprehensive loss (189)
-----------
Total stockholders' equity 39,367
-----------
Total liabilities and stockholders' equity $ 76,086
===========
See notes to consolidated financial statements
<PAGE F-22>
SAFEGUARD BUSINESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(Dollars in thousands)
(unaudited)
Three months ended
March 31,
2003
-------------------
Net sales $ 39,610
Operating costs and expenses:
Cost of sales 19,153
Selling expense 15,150
General and administrative
expense 3,870
Amortization expense 461
----------------
Total operating costs and
expenses 38,634
----------------
Operating income 976
Other income, net 43
----------------
Income before income taxes 1,019
Income tax provision (346)
----------------
Net income 673
Other comprehensive income,
net of tax benefit:
Foreign currency translation
adjustment 63
----------------
Comprehensive income $ 736
================
See notes to consolidated financial statements
<PAGE F-23>
SAFEGUARD BUSINESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Three months ended
March 31, 2003
----------------
Cash flows from operating activities:
Net income $ 673
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization 461
Depreciation 676
Deferred income tax provision 346
Amortization of deferred stock compensation 32
Non-cash interest 69
Loss on sale of marketable securities 15
Changes in operating assets and liabilities:
Receivables 1,100
Inventories (238)
Distributor receivables 172
Other assets (403)
Accounts payable 1,175
Accrued expenses and other liabilities (981)
--------------
Net cash provided by operating activities 3,097
--------------
Cash flows from investing activities:
Purchase of machinery and equipment (234)
Proceeds from sale of marketable securities 360
--------------
Net cash provided by (used in) investing activities 126
--------------
Cash flows from financing activities:
Repayment of long-term debt and capital lease obligations (1,708)
Net repayments under revolving loans (1,630)
--------------
Net cash used in financing activities (3,338)
--------------
Effect of exchange rates on cash 10
--------------
Net decrease in cash (105)
Cash at beginning of year 600
--------------
Cash at end of period $ 495
==============
Cash paid for interest expense was $439 for the three months ended March 31,
2003.
Cash paid income taxes was $158 for the three months ended March 31, 2003.
The Company acquired $35 of equipment during the three months ended March 31,
2003 utilizing capital leases.
See notes to consolidated financial statements
<PAGE F-24>
SAFEGUARD BUSINESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(Unaudited)
----------------------------------------------------------
1. BASIS OF PRESENTATION
The financial statements for the three months ended March 31, 2003 are
unaudited but reflect all adjustments, consisting only of normal recurring
adjustments, which are, in the opinion of management, necessary for a fair
statement of the results of the interim period reflected. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. The results of operations for the interim
period reported herein are not necessarily indicative of results to be
expected for the full year.
The financial statements included herein should be read in conjunction with
the financial statements and notes thereto, and the Independent Auditors'
Report included elsewhere in this Form 8-K/A for Safeguard Business Systems,
Inc. and Subsidiaries (the "Company") for the year ended December 31, 2002.
Reference is made to the accounting policies of the Company described in the
notes to such financial statements. The Company has consistently followed
those policies in preparing these financial statements.
2. Subsequent Event - Merger Agreement
On April 24, 2003, Safeguard entered into a definitive agreement to be
acquired by New England Business Service, Inc. for $72.5 million in cash. The
transaction was completed on June 2, 2003, following a merger of Centurion
Sub, Inc., an indirect wholly-owned subsidiary of New England Business
Service, Inc., with and into the Company, as contemplated under the merger
agreement. As a result of the merger, the Company is now an indirect wholly-
owned subsidiary of New England Business Service, Inc. The proceeds were used
to satisfy existing debt, including term and revolving balances ($17.2
million at June 2, 2003), and for distribution to the Company's existing
securityholders. The transaction will be accounted for as a purchase of all
of the Company's stock. These financial statements do not reflect any
potential adjustments to the assets, liabilities and stockholders' equity
that may arise as a result of this pending agreement.
<PAGE F-25>
Index to Unaudited Pro Forma Combined
Consolidated Condensed Financial Information
Safeguard Business Systems, Inc. and Subsidiaries Page
- ------------------------------------------------- ----
Pro Forma Discussion F-27
Pro Forma Combined Condensed Consolidated Balance Sheet as of
March 29, 2003 F-28
Pro Forma Combined Consolidated Statement of Income for the
Year Ended June 29, 2002 F-29
Pro Forma Combined Consolidated Statement of Income for the
Nine Months Ended March 29, 2003 F-30
Notes to Pro Forma Combined Condensed Financial Statements F-31
<PAGE F-26>
PRO FORMA COMBINED CONSOLIDATED CONDENSED FINANCIAL INFORMATION
On June 2, 2003, New England Business Service, Inc. (the "Company")
acquired all of the outstanding stock of Safeguard Business Systems, Inc. and
all of the assets of Safeguard Business Systems of Canada, Inc. (collectively
"Safeguard")for consideration of approximately $73,400,000 in cash, net of
cash acquired. The Company also incurred fees of approximately $1,230,000 in
connection with the acquisition.
The following Pro Forma Combined Condensed Financial Information is
unaudited and have been prepared to give effect to (i) the acquisition of
Safeguard under the purchase method of accounting, (ii) the arrangements
required to finance such acquisition consisting of a loan to the Company of
$74,630,000 under its revolving line of credit, and (iii) adjustments based
on available information and upon certain assumptions management believes are
reasonable under the circumstances, as if this transaction had occurred on
March 29, 2003 in the case of the combined condensed balance sheet, or on
July 1, 2001 in the case of the pro forma combined condensed statements of
income.
The pro forma information does not purport to be indicative of the
financial position or results of operations that would have been attained had
the transaction occurred on the dates indicated, nor to project the Company's
results of operations for any future period. The Pro Forma Combined
Condensed Financial Information should be read in conjunction with the
separate audited financial statements and notes thereto of the Company
included in its Form 10-K for the year ended June 29, 2002 and the audited
financial statements and notes thereto of Safeguard included in this Form
8-K/A.
Certain reclassifications have been made to the Safeguard financial
information in order to conform to the manner in which it is presented by the
Company.
<PAGE F-27>
PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET
March 29, 2003
(Unaudited)
(In Thousands)
Pro Forma
NEBS Safeguard Adjustments Pro Forma
(1) (1) (2)(3) Combined
-------- -------- ----------- ---------
ASSETS
Current Assets
Cash and cash equivalents $ 5,728 $ 495 $ $ 6,223
Accounts receivable - net 52,795 17,469 70,264
Inventories 35,036 4,453 39,489
Direct mail advertising and other current assets 13,107 2,156 128 (f) 15,391
Deferred income tax benefit 11,474 188 1,345 (c) 13,007
-------- ------- ------- --------
Total current assets 118,140 24,761 1,473 144,374
Property and Equipment - net 70,478 8,178 586 (e) 79,242
Property Held for Sale 328 328
Deferred Income Tax Benefit 19,368 5,951 (5,951) (c) 19,368
Goodwill - net 68,066 68,066
Other Intangible Assets - net 47,233 35,923 (35,923) (g) 47,233
Other Assets 2,909 1,273 283 (f) 4,465
Excess of Purchase Price over Net Asset Value 67,711 (3) 67,711
-------- ------- -------- -------
TOTAL ASSETS $326,522 $76,086 $ 28,179 $430,787
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 12,779 $11,517 $ 1,230 (d) 25,526
Accrued expenses 44,207 13,167 3,951 (d,h) 61,325
Obligations under capital lease-
current portion 514 434 948
Current portion of long-term debt 5,142 (5,142) (j) -
-------- ------- ------- -------
Total current liabilities 57,500 30,260 39 87,799
Long-Term Debt 96,177 6,459 67,507 (a,j) 170,143
Deferred Income Taxes 18,008 18,008
STOCKHOLDERS' EQUITY
Common stock 15,888 53 (53) (b) 15,888
Additional paid-in capital 59,214 31,318 (31,318) (b) 59,214
Unamortized value of restricted stock awards (633) (179) 179 (b) (633)
Accumulated other comprehensive loss (3,845) (189) 189 (b) (3,845)
Retained earnings 143,875 8,364 (8,364) (b) 143,875
-------- ------- ------- -------
Total Stockholders' Equity 214,499 39,367 (39,367) 214,499
Less: Treasury stock (59,662) (59,662)
-------- ------- ------- -------
Stockholders' Equity 154,837 39,367 (39,367) 154,837
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $326,522 $ 76,086 $ 28,179 $430,787
======== ======= ======== ========
See Notes to Pro Forma Combined Condensed Financial Information
<PAGE F-28>
PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended June 29, 2002
(unaudited)
(in thousands except per share amounts)
Pro Forma
NEBS Safeguard Adjustments Pro Forma
(1) (1) (4) Combined
-------- --------- --------- ---------
NET SALES $557,539 $159,382 $ $716,921
COST OF SALES INCLUDING SHIPPING COSTS 241,908 69,011 310,919
-------- -------- -------- --------
GROSS PROFIT 315,631 90,371 406,002
OPERATING EXPENSES:
Selling and advertising 188,487 66,051 1,452 (a,b) 255,990
General and administrative 72,188 16,336 88,524
Exit costs 700 700
-------- -------- -------- --------
Total operating expenses 261,375 82,387 1,452 345,214
INCOME FROM OPERATIONS 54,256 7,984 (1,452) 60,788
OTHER INCOME/(EXPENSE):
Interest income 185 384 569
Interest expense (13,447) (2,690) (1,575) (b) (17,712)
-------- -------- -------- --------
Total other expense (13,262) (2,306) (1,575) (17,143)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 40,994 5,678 (3,027) 43,645
PROVISION FOR INCOME TAXES 15,742 2,123 (1,162) (c) 16,703
-------- -------- -------- --------
INCOME BEFORE THE EFFECT OF A CHANGE 25,252 3,555 (1,865) 26,942
IN ACCOUNTING PRINCIPLE
EFFECT OF A CHANGE IN ACCOUNTING (2,792) (2,792)
PRINCIPLE
NET INCOME $ 22,460 $ 3,555 $(1,865) $ 24,150
======== ======== ======== ========
PER SHARE AMOUNTS:
Basic earnings per share
before the effect of a change in
accounting principle $ 1.99 $ 2.12
======== ========
Effect of a change in accounting
Principle $ (.22) $ (.22)
-------- --------
Basic earnings per share $ 1.77 $ 1.90
======== ========
Diluted earnings per share
before the effect of a change in
accounting principle $ 1.94 $ 2.07
======== ========
Effect of a change in accounting
Principle $ (.21) $ (.21)
-------- --------
Diluted earnings per share $ 1.73 $ 1.86
======== ========
BASIC WEIGHTED AVERAGE SHARES
0UTSTANDING 12,723 12,723
Plus incremental shares from
assumed conversion of stock
options 283 283
-------- --------
DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 13,006 13,006
======== ========
See Notes to Pro Forma Combined Condensed Financial Information
<PAGE F-29>
PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended March 29, 2003
(unaudited)
(in thousands except per share amounts)
Pro Forma
NEBS Safeguard Adjustments Pro Forma
(1) (1) (4) Combined
-------- --------- --------- ---------
NET SALES $408,717 $119,233 $ $527,950
COST OF SALES INCLUDING SHIPPING COSTS 172,182 50,090 222,272
-------- -------- -------- --------
GROSS PROFIT 236,535 69,143 305,678
OPERATING EXPENSES:
Selling and advertising 140,117 52,819 1,209 (a,b) 194,145
General and administrative 55,908 11,822 67,730
-------- -------- -------- --------
Total operating expenses 196,025 64,641 1,209 261,875
INCOME FROM OPERATIONS 40,510 4,502 (1,209) 43,803
OTHER INCOME/(EXPENSE):
Interest income 110 218 328
Interest expense (6,677) (1,654) (1,518) (b) (9,849)
Loss on settlement of interest rate swaps (3,277) (3,277)
Gain on sale of long-term investment 11,424 11,424
-------- -------- -------- --------
Total other income (expense) 1,580 (1,436) (1,518) (1,374)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 42,090 3,066 (2,727) 42,429
PROVISION FOR INCOME TAXES 16,309 906 (1,055) (c) 16,160
-------- -------- -------- --------
NET INCOME $ 25,781 $ 2,160 $(1,672) $ 26,269
======== ======== ======== ========
PER SHARE AMOUNTS:
Basic earnings per share $ 1.98 $ 2.02
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Diluted earnings per share $ 1.93 $ 1.97
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BASIC WEIGHTED AVERAGE SHARES
0UTSTANDING 12,991 12,991
Plus incremental shares from
assumed conversion of stock
options 333 333
-------- --------
DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 13,324 13,324
======== ========
See Notes to Pro Forma Combined Condensed Financial Information
<PAGE F-30>
Notes to Pro Forma Combined Condensed Consolidated Financial Information
1. On June 2, 2003, New England Business Service, Inc. (the "Company")
acquired all of the outstanding stock of Safeguard Business Systems, Inc. and
all of the assets of Safeguard Business Systems of Canada, Inc. (collectively
"Safeguard")for consideration of approximately $73,400,000 in cash, net of
cash acquired. The source of the cash component of the purchase price was a
loan made to NEBS in the ordinary course of business under a revolving line
of credit with Fleet National Bank, as lenders and agents thereunder, and
certain other financial institutions. The Company also incurred fees of
approximately $1,230,000 in connection with the acquisition.
Safeguard manufactures and markets a line of checks, check-writing systems
and business forms to small businesses through a network of approximately 360
distributors in the U.S. and Canada. Safeguard is headquartered in Dallas,
Texas, and has operating facilities in Fort Washington, Harleysville,
Landsdale and North Wales, Pennsylvania, City of Commerce, California,
Tucker, Georgia and Brampton, Ontario.
The Pro Forma Combined Condensed Balance Sheet has been prepared based on the
Company's March 29, 2003 unaudited consolidated balance sheet and Safeguard's
unaudited consolidated balance sheet as of March 31, 2003. The Pro Forma
Combined Consolidated Statements of Income include the Company's historical
results for the applicable periods as previously reported and Safeguard's
results for the same periods, derived from management's internal financial
statements.
2. The pro forma adjustments to the Combined Condensed Balance Sheets are
set forth below:
a.) The gross purchase price plus fees of $73,400,000 was funded by the
borrowing of that amount in cash under a five year, committed, unsecured,
revolving line of credit.
b.) The stockholders' equity amounts of Safeguard have been eliminated as
required under the purchase method of accounting.
c.) Historical Safeguard current and deferred tax balances have been
eliminated, as they were not part of the acquisition. Deferred taxes
aggregating $1,533,000 have been created based on asset and liability
balances established as part of the acquisition accounting that are treated
differently under accounting principles generally accepted in the United
States of America and tax accounting rules.
d.) Estimated transaction costs of $1,230,000 and certain other
acquisition related liabilities including severance and facility closure
costs of $3,300,000 have been accrued and added to the excess of purchase
price over the net value of assets acquired.
e.) Fixed assets have been adjusted to reflect estimated fair market
values, resulting in a $586,000 increase in the book value of fixed assets at
the time of acquisition.
f.) Certain long-term receivable balances have been increased by $411,000
to reflect a fair valuation using current discount rates as of the
acquisition date.
g.) Intangible asset balances of Safeguard have been eliminated, as
required under the purchase method of accounting.
<PAGE F-31>
h.) Certain liabilities have been increased by $651,000 to reflect the
appropriate valuation using current discount rates as of the acquisition
date.
j.) Long-term debt of Safeguard, excluding capital leases, was repaid by
Safeguard concurrent with the acquisition. This debt was not assumed by the
Company.
3. For purposes of these Pro Forma Combined Condensed Consolidated Financial
Information, the excess of the purchase price over the net value of acquired
assets has been shown as a single item on the pro forma combined condensed
consolidated balance sheet. The final allocation of the excess of purchase
price over net assets acquired is subject to appraisals, evaluations and
other studies of the fair value of Safeguard's assets and liabilities. When
the actual valuations are completed, value is expected to be ascribed to
Safeguard's customer and distributor relationships, their tradename and
goodwill. The amortization periods for the customer and distributor
relationships is assumed to be 10 years, and the beginning balance has been
estimated to be $34,560,000. Tradenames and goodwill will not be amortized in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Other Intangible Assets."
4. The pro forma adjustments to the Combined Consolidated Statements of
Income for the year ended June 29, 2002 and the nine months ended March 29,
2003 are set forth below by line item:
a.) Selling and advertising - to record estimated amortization expense
of the customer and distributor relationships intangible asset (fiscal year
2002 - $3,456,000; nine months ended 3/29/03 - $2,592,000),
b.) Other Income/(Expense) - to eliminate interest expense related to
debt obligations not included in the purchase, (fiscal year 2002 -
$2,095,000, nine months ended 3/29/03 - $1,234,000), to eliminate
amortization expense on intangibles revalued as part of the purchase (fiscal
year 2002 - $2,004,000; nine months ended 3/29/03 - $1,383,000), to record
interest expense at 5.0% on debt required to complete the purchase based on
anticipated balances outstanding (fiscal year 2002 - $3,670,000; nine months
ended 3/29/03 - $2,752,000).
c.) Provision for Income Taxes - to record income taxes at the effective
marginal rate.
<PAGE F-32>