UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 29549 FORM 10Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 24, 1993. OR TRANSITION REPORT PURSUANT TO SECTION 13 OF 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_________ to _______ Commission file number 0-8564 NEW ENGLAND BUSINESS SERVICE, INC. (Exact name of the registrant as specified in its charter) Delaware 04-2942374 (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 500 Main Street, Groton, Massachusetts 01471 (Address of principal executive offices) (Zip Code) (508) 448-6111 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 and 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. Yes ____X_____ No__________ The number of common shares of the Registrant outstanding on December 24, 1993 was 15,364,333. NEW ENGLAND BUSINESS SERVICE, INC. CONSOLIDATED BALANCE SHEET (In Thousands Except Share Data) Dec. 24,June 25, ASSETS 1993 1993 Current Assets Cash & cash equivalents $ 2,590 $10,061 Short term investments - at cost 31,663 18,057 Accounts receivable (less allow. for doubtful accounts: $2,991 at December 1993 and $2,944 at June 1993) 28,977 26,707 Inventories 8,470 8,663 Direct mail advertising materials 2,161 1,391 Prepaid expense 2,353 1,925 Deferred income tax benefit 4,761 2,162 Total current assets 80,975 68,966 Property and Equipment Land & buildings 37,798 37,778 Less: accumulated depreciation 17,892 17,144 Net 19,906 20,634 Equipment 66,547 64,621 Less: accumulated depreciation 47,921 44,145 Net 18,626 20,476 Property and equipment - net 38,532 41,110 Other Assets (less accumulated amortization: $7,896 at Dec. 1993 and $6,719 at June 1993) 9,851 10,548 TOTAL ASSETS $129,358 $120,624 LIABILITIES Current liabilities Accounts payable $ 7,455 $ 7,039 Accrued Federal and state income taxes 2,662 1,580 Accrued profit-sharing distribution 1,809 2,114 Accrued payroll expense 4,266 5,454 Accrued employee benefit expense 6,144 5,237 Sales tax payable 282 222 Accrued restructuring program costs 4,544 0 Other accrued expenses 4,991 3,647 Total current liabilities 32,153 25,293 Deferred Grants 318 317 Deferred Income Taxes 2,091 346 STOCKHOLDERS' EQUITY Preferred stock, par value $1 per share; authorized and unissued 1,000,000 shares Common stock, par value $1 per share; authorized 40,000,000 shares; issued 15,472,799 shares at Dec. 1993 and 15,408,979 shares at June 1993 15,473 15,409 Additional paid in capital 7,981 7,090 Cumulative foreign currency translation adjustment (1,623) (1,057) Retained earnings 74,640 75,033 Total 96,471 96,475 Less: treasury stock (at cost, 108,466 shares at Dec. 1993 and 117,795 at June 1993) ( 1,675) (1,807) Stockholders' Equity (outstanding 15,364,333 shares at Dec. 1993 and 15,291,184 shares at June 1993) 94,796 94,668 TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $129,358 $120,624 See Notes to Consolidated Financial Statements NEW ENGLAND BUSINESS SERVICE, INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands Except Per Share Data) Three Months Ended Six Months Ended Dec. 24, Dec. 25, Dec. 24, Dec. 25, 1993 1992 1993 1992 NET SALES $ 65,550 $ 60,284 $125,370 $117,606 COSTS AND EXPENSES: Cost of Sales (inc'l shipping costs) 22,865 23,360 45,916 45,083 Selling and Advertising 18,746 18,285 35,627 36,571 General and Administrative 15,391 13,354 28,180 25,740 Restructuring Charge 0 0 6,000 0 Total operating expenses 57,002 54,999 115,723 107,394 INCOME FROM OPERATIONS 8,548 5,285 9,647 10,212 OTHER INCOME/EXPENSES: Investment income 343 261 549 627 INCOME BEFORE TAXES 8,891 5,546 10,196 10,839 PROVISION FOR INCOME TAXES: Federal 2,984 1,717 3,308 3,328 State 940 497 1,159 973 Total 3,924 2,214 4,467 4,301 NET INCOME $ 4,967 $ 3,332 $ 5,729 $ 6,538 PER SHARE AMOUNTS: Net Income $ . 32 $ .22 $ .37 $ .43 Dividends $ .20 $ .20 $ .40 $ .40 WEIGHTED AVERAGE SHARES OUTSTANDING 15,323 15,264 15,310 15,257 See Notes to Consolidated Financial Statement NEW ENGLAND BUSINESS SERVICE, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (In Thousands) Six Months Ended Dec. 24, Dec. 25, 1993 1992 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,729 $ 6,538 Adjustments to reconcile net income to cash: Depreciation and amortization 6,018 4,789 Deferred income taxes ( 916) 0 Provision for losses on accounts receivable 1,215 1,329 Provision for pension cost 138 90 Deferred grants ( 3) 9 Restructuring charge 6,000 0 Changes in assets and liabilities: Accounts receivable ( 3,976) ( 2,309) Inventories and advertising material ( 677) 318 Other assets ( 443) 627 Accounts payable 459 ( 1,312) Income taxes payable 1,080 ( 2,315) Other accrued expenses ( 545) ( 2,126) Net cash provided by operating activities 14,079 5,638 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment ( 2,557) ( 3,976) Short term investments ( 13,900) ( 2,195) Net cash (used in) investing activities ( 16,457) ( 6,171) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of debt ( 30) ( 70) Proceeds from issuing common stock 955 96 Sale of treasury stock 132 394 Dividends paid ( 6,122) ( 6,102) Net cash (used in) financing activities ( 5,065) ( 5,682) EFFECT OF EXCHANGE RATE ON CASH ( 28) ( 175) NET (DECREASE) IN CASH AND CASH EQUIVALENTS ( 7,471) ( 6,390) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,061 10,936 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,590 $ 4,546 See Notes to Consolidated Financial Statements Form 10Q New England Business Service, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The consolidated financial statements contained in this report are unaudited but reflect all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair statement of the results of the interim periods reflected. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to applicable rules and regulations of the Securities and Exchange Commission. The results of operations for the interim period reported herein are not necessarily indicative of results to be expected for the full year. 2. Accounting Policies The consolidated financial statements included herein should be read in conjunction with the financial statements and notes thereto, and the Report of Independent Public Accountants incorporated by reference in the Company's Annual Report on Form 10K for the fiscal year ended June 25, 1993 from the Company's 1993 Annual Report to Shareholders. Reference is made to the accounting policies of the Company described in the notes to consolidated financial statements incorporated by reference in the Company's Annual Report on Form 10K for the fiscal year ended June 25, 1993 from the Company's Annual Report to Shareholders. The Company has consistently followed those policies in preparing this report. Inventories are carried at the lower of first-in, first-out cost or market. Inventories at December 24, 1993 and June 25, 1993 consisted of: Dec. 24, 1993 June 25, 1993 Raw paper $ 775,000 $ 81,000 Business forms and related office prods. 7,695,000 7,882,000 Total $ 8,470,000 $8,663,000 3. Stock Plans The increase in outstanding shares reflects the issuance of 15,126 shares pursuant to the employee benefit program under Section 401(k) of the Internal Revenue Code and 58,023 shares pursuant to the Company's Key Employee Stock Option and Stock Appreciation Rights Plan. 4. Net Income Per Share Net income per common share was based on the weighted average of such shares outstanding during each period: 15,310,000 for the six months ended December 24, 1993 and 15,257,000 for the six months ended December 25, 1992. 5. Restructuring Program During the first quarter, the Company recorded a $6 million pretax charge related to a restructuring program to be implemented over the ensuing 12 months. This charge primarily includes personnel costs associated with staff reductions involving 5% of the Company's 2,200 employees. 6. Accounting for Income Taxes. As of June 26, 1993, the Company adopted SFAS No. 109, entitled "Accounting for Income Taxes." The cumulative effect of adopting SFAS No. 109 was not significant to the Company's financial statements. The adoption did result in certain reclassifications of deferred tax assets and liabilities. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. During the first quarter, Federal tax legislation was enacted. A principal provision of the new tax law was an increase in the overall tax rate. This had no material effect on the Company's results year-to-date. MANAGEMENT DISCUSSION AND ANALYSIS Liquidity and Capital Resources Cash provided by operating activities was $14.1 million in 1993, representing an increase from the $5.6 million provided in 1992. This increase was due primarily to improved operating results (excluding the non-cash portion of the restructuring charge), and changes in the balances of non-cash assets and liabilities. Working capital at December 24, 1993 amounted to $48.8 million, including $34.3 million of cash and short term investments. This compares to working capital of $43.7 million and cash and short term investment balances of $28.1 million at the end of the fiscal year. The increase in working capital is due to an increase in cash generated from operations, an increase in accounts receivable due to an increase in sales volume, and partially offset by an increase in current liabilities attributable to the Company's restructuring program. As a result of general cost containment activities, capital expenditures of $2.6 million were less than the $4.0 million expended in 1992. The Company had no significant commitments for capital projects at quarter end. The Company expects that the cash savings anticipated from the restructuring program during fiscal year 1994, will approximate and be adequate to fund the $5 million cash portion of the total restructuring charge. In addition to its present cash and investment balances, the Company has consistently generated sufficient cash internally to fund its needs for working capital, dividends and capital expenditures. However, should the Company need additional funds, it has an unsecured line of credit with a major bank for $10 million. At present, there are no outstanding balances against this line. Results of Operations The following discussion is reflective of both quarter and year to date amounts as presented in the Consolidated Statements of Income. Net sales increased from $117.6 million in 1992 to $125.4 million in 1993 or 6.6%. This increase in net sales was the result of increases in the volume of incoming orders which amounted to approximately 4.3% or $4.6 million. Price increases of approximately 2.3% or $3.2 million accounted for the remainder of the sales increase. Most business units and product lines reflected improving sales performances. In particular, strong growth was recorded in the computer forms, software, checks and custom forms product lines. Cost of sales decreased from 38.3% in 1992 to 36.6% of net sales in 1993. Imprinting costs were lower due to the operating efficiencies achieved on stronger than expected order volume, while material costs remained stable. Selling and advertising expenses decreased as a percentage of sales from 31.1% in 1992 to 28.4% in 1993. More effective promotional programs and better targeted mail to customers as well as the effect of the restructuring program resulted in reduced selling and advertising expenses. General and administrative costs increased as a percent of net sales from 21.9% in 1992 to 22.5% in 1993. The increase was due primarily to increased costs associated with technical support for the Company's software products. During the first quarter, the Company recorded a $6 million pretax charge, or $.23 per share, related to a restructuring program. The objectives of this program are to increase the Company's competitiveness, permit investments in new business development and strengthen margins. The restructuring program includes the realignment of the Company's marketing and manufacturing organizations, staff reductions throughout the Company totaling 5% of the 2,200 employee work force, and plans to close a small administrative facility. The restructuring program proceeded smoothly in the second quarter and the Company now expects the program to be completed in less than twelve months instead of the 18 months originally planned. When the program is fully implemented the Company expects it to generate cost savings of about $7 million annually. The restructuring program generated cost savings of $1.7 million in the second quarter. All of the savings were associated with reduced staffing levels throughout the Company. The Provision for income taxes as a percentage of pre-tax income increased from 39.7% in 1992 to 43.8% in 1993 due to a lower percentage of tax exempt income resulting from lower interest rates, and changes in Federal tax laws creating a higher corporate tax rate and less favorable treatment of certain foreign source income. PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS a. Annual Meeting of Stockholders October 22, 1993. b. The stockholders fixed the number of Directors to be elected at nine and elected the following as directors: Peter A. Brooke Frank L. Randall, Jr. Bartley H. Calder Jay R. Rhoads, Jr. Benjamin H. Lacy Richard H. Rhoads William C. Lowe Robert Ripp Robert J. Murray c. To ratify the selection of Deloitte & Touche as independent auditors of the Company for the fiscal year ending June 24, 1994: Affirmative Votes Negative Votes 14,497,320 30,093 Item 6. REPORTS ON FORM 8-K On October 15, 1993 the Company filed a Form 8-K to report a restructuring program. Form 10Q New England Business Service, Inc. 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 thereunto duly authorized. New England Business Service, Inc. February 4, 1994 /s/Thomas W. Freeze Date Secretary & Treasurer