UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995.
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
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(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
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The number of common shares of the Registrant outstanding on March 31, 1995
was 15,041,556.
NEW ENGLAND BUSINESS SERVICE, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands Except Share Data)
Mar. 31, June 24,
1995 1994
--------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 6,405 $ 3,456
Short term investments 21,956 37,532
Accounts receivable 30,605 27,963
Inventories 9,136 7,740
Direct mail advertising materials 2,968 1,698
Prepaid expenses 2,751 1,439
Deferred income tax benefit 7,465 5,460
-------- --------
Total current assets 81,304 85,288
Property and Equipment
Land and buildings 39,521 38,417
Less: accumulated depreciation 19,813 18,849
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Net 19,708 19,568
Equipment 73,077 66,648
Less: accumulated depreciation 53,618 48,525
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Net 19,459 18,123
Property and equipment - net 39,167 37,691
Other Assets - net 9,183 8,712
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TOTAL ASSETS $129,654 $131,691
======== ========
NEW ENGLAND BUSINESS SERVICE, INC.
CONSOLIDATED BALANCE SHEET (Continued)
(In Thousands Except Share Data)
Mar. 31, June 24,
1995 1994
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 8,790 $ 6,702
Accrued Federal and state income taxes 2,385 2,519
Accrued profit-sharing distribution 2,073 2,627
Accrued payroll expense 3,767 5,466
Accrued employee benefit expense 8,259 5,637
Accrued exit costs 1,947 0
Accrued restructuring charge 508 1,887
Other accrued expenses 5,881 5,254
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Total current liabilities 33,610 30,092
Deferred Grants 340 326
Deferred Income Taxes 938 1,794
STOCKHOLDERS' EQUITY
Preferred stock
Common stock 15,651 15,572
Additional paid in capital 10,656 9,480
Cumulative foreign currency translation adjustment ( 1,809) ( 2,152)
Retained earnings 81,573 78,306
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Total 106,071 101,206
Less: treasury stock ( 11,305) ( 1,727)
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Stockholders' Equity 94,766 99,479
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $129,654 $131,691
======== ========
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 Nine Months Ended
------------------------- -------------------------
Mar. 31, Mar. 25, Mar. 31, Mar. 25,
1995 1994 1995 1994
--------- --------- --------- ---------
NET SALES $ 68,832 $ 63,424 $ 200,390 $ 188,794
OPERATING EXPENSES:
Cost of sales 24,620 23,312 71,151 69,228
Selling and advertising 20,102 17,016 54,461 52,643
General and administrative 18,073 14,813 51,964 43,005
Exit costs 1,964 0 1,964 0
Restructuring charge 0 0 0 6,000
--------- --------- --------- ---------
Total operating expenses 64,759 55,141 179,540 170,876
--------- --------- --------- ---------
INCOME FROM OPERATIONS 4,073 8,283 20,850 17,918
OTHER INCOME/(EXPENSE):
Investment income 314 326 978 887
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 4,387 8,609 21,828 18,805
--------- --------- --------- ---------
PROVISION FOR INCOME TAXES:
Federal 1,326 2,733 7,035 6,041
State 423 957 2,087 2,116
--------- --------- --------- ---------
Total 1,749 3,690 9,122 8,157
--------- --------- --------- ---------
NET INCOME BEFORE EQUITY IN LOSSES
OF INVESTMENT 2,638 4,919 12,706 10,648
Equity in losses of investment ( 68) 0 ( 244) 0
--------- --------- --------- ---------
NET INCOME $ 2,570 $ 4,919 $ 12,462 $ 10,648
========= ========= ========= =========
PER SHARE AMOUNTS:
Net Income $ . 17 $ .32 $ .81 $ .69
========= ========= ========= =========
Dividends $ .20 $ .20 $ .60 $ .60
========= ========= ========= =========
WEIGHTED AVERAGE SHARES
OUTSTANDING 15,142 15,393 15,340 15,337
========= ========= ========= =========
See Notes to Consolidated Financial Statements
NEW ENGLAND BUSINESS SERVICE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
-------------------------
Mar. 31, Mar. 25,
1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,462 $ 10,648
Adjustments to reconcile net income to cash:
Depreciation and amortization 9,061 8,995
Deferred income taxes ( 2,785) ( 910)
Other non-cash items 4,541 8,017
Changes in assets and liabilities:
Accounts receivable ( 4,854) ( 3,972)
Inventories and advertising material ( 2,687) ( 729)
Prepaid expenses ( 1,319) 466
Accounts payable 2,128 817
Income taxes payable ( 137) 607
Other accrued expenses ( 408) ( 1,263)
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Net cash provided by operating activities 15,727 22,676
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ( 8,958) ( 3,760)
Purchase of investments ( 24,461) ( 33,364)
Proceeds from sale of investments 39,981 16,059
Other assets ( 386) ( 208)
Investment in unconsolidated subsidiary ( 1,800) 0
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Net cash provided by (used in) investing activities 4,376 ( 21,273)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debt ( 36) ( 37)
Proceeds from issuing common stock 1,516 2,045
Issuance (purchase) of treasury stock ( 9,578) ( 124)
Dividends paid ( 9,195) ( 9,199)
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Net cash (used in) financing activities ( 17,293) ( 7,315)
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EFFECT OF EXCHANGE RATE ON CASH 139 ( 53)
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NEW ENGLAND BUSINESS SERVICE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands)
Nine Months Ended
-------------------------
Mar. 31, Mar. 25,
1995 1994
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,949 ( 5,965)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,456 10,061
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,405 $ 4,096
======== ========
See Notes to Consolidated Financial Statements
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 adjustments, 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 Independent Auditors' Report incorporated by reference in the
Company's Annual Report on Form 10-K for the fiscal year ended June 24,
1994 from the Company's 1994 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 10-K for the fiscal
year ended June 24, 1994 from the Company's 1994 Annual Report to
Shareholders. The Company has consistently followed those policies
in preparing this report.
3. Inventories
-----------
Inventories are carried at the lower of first-in, first-out cost or
market. Inventories at March 31, 1995 and June 24, 1994 consisted
of:
Mar. 31, June 24,
1995 1994
----------- -----------
Raw paper $ 727,000 $ 721,000
Business forms and related office products 8,409,000 7,019,000
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Total $ 9,136,000 $ 7,740,000
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4. Accounting for Income Taxes
---------------------------
During the first quarter of fiscal year 1995, the Internal Revenue Service
completed an examination of the Company's federal income tax returns for
years 1989 through 1992 and proposed various adjustments to increase
taxable income in these periods. The most significant adjustments involve
disallowances of current deductions in favor of future deductions.
Accordingly, because of the nature of these adjustments, there was no
significant impact on the Company's current year effective tax rate.
5. Investment in Unconsolidated Subsidiary
---------------------------------------
On July 8, 1994, the Company acquired a 19 percent equity interest in GST
Software, plc (GST) for $1,800,000 together with an option to acquire the
balance of GST shares. GST is a privately held company based in the United
Kingdom which develops and markets desktop publishing graphic design
software which the Company will market under an exclusive distribution
agreement in North America. The Company has elected to treat its investment
under the equity method of accounting due to the degree of control it
can exercise over GST's operations. Accordingly, it is recording a share of
GST's losses for the period. The difference between the Company's
underlying equity in net tangible assets of GST and its investment has been
recorded as goodwill.
6. Postemployment Benefits
-----------------------
As of June 25, 1994, the Company adopted SFAS No. 112, entitled
"Employers' Accounting for Postemployment Benefits." The adoption of this
standard did not have a material effect on the accompanying consolidated
financial statements.
7. Investments in Debt and Equity Securities
-----------------------------------------
As of June 25, 1994, the Company adopted SFAS No. 115, entitled
"Accounting for Certain Investments in Debt and Equity Securities."
Adoption of this standard resulted in the Company classifying the
investments held in its portfolio as "available-for-sale securities."
The adoption of this standard did not have a material effect on the
accompanying consolidated financial statements as the market value of
the underlying investments approximated the amount carried on the balance
sheet at March 31, 1995.
8. Exit Costs
----------
During the third quarter of fiscal year 1995, the Company made the decision
to close its Wisconsin based SYCOM subsidiary and to integrate SYCOM's
activities into other of the Company's operations. The accompanying
consolidated statements of income include a $1,964,000 pretax charge for
exit costs associated with the SYCOM closure recognized in the third
quarter ended March 31, 1995. The charge for exit costs reduced third
quarter net income by $1,119,000, or $.07 per share.
8. Exit Costs (Continued)
----------------------
The $1,964,000 pretax exit cost charge consisted of facilities and
equipment write-offs of $792,000 and termination benefits of $1,172,000.
Approximately 103 employees will be terminated as a result of the facility
closing.
As of March 31, 1995, approximately $17,000 has been expended related to
termination benefits. The closure of the facility is expected to be
substantially completed by the end of fiscal 1995.
9. Other Items
-----------
On October 20, 1994, the Company announced a plan to repurchase up to
$22,000,000 of its common stock in the open market. Unless renewed or
completed earlier, the repurchase will terminate on June 30, 1995. As
of March 31, 1995, the Company had purchased 563,050 shares at a
cumulative cost of approximately $10,599,000.
On October 20, 1994, the Company announced an amendment to the Company's
Rights Agreement. The material changes in the agreement include the
deletion of the Adverse person provision, the lowering of the threshold
at which an acquiring person will trigger the rights from 20% to 15%, and
the inclusion of a one common share per right exchange feature.
On October 28, 1994, the stockholders approved The NEBS 1994 Key Employee
and Eligible Director Stock Option and Stock Appreciation Rights Plan.
Under the "1994 Plan," options or stock appreciation rights for up to
1,200,000 shares of common stock may be granted.
On October 28, 1994 the stockholders approved the New England
Business Service, Inc. Stock Compensation Plan (the "Plan"). The purpose
of the Plan is to provide for the mandatory or voluntary receipt of shares
of the Company's common stock in lieu of an equivalent amount of cash, in
payment in whole or in part for certain types of regular, bonus or other
special compensation. There are a total of 300,000 shares available for
issuance under the Plan.
MANAGEMENT DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities during the nine months ended March 31,
1995 was $15.7 million and represented a $7.0 million decrease from the $22.7
million provided during the same period last year. The decrease was primarily
the result of a payment of additional taxes resulting from the Company's most
recent Federal audit, increased inventory investment and cash payments related
to the restructuring charge taken during the first quarter of fiscal year 1994.
Working capital at March 31, 1995 amounted to $47.7 million and included $28.4
million of cash and short term investments. The balances compare to working
capital of $52.5 million and cash and short term investments of $38.9 million
at March 25, 1994 and working capital of $55.2 million and cash and short term
investments of $41.0 million at June 24, 1994. The decrease in cash and short
term investments is due in part to the repurchase of $10.6 million of the
Company's stock in accordance with the authorization to purchase up to $22.0
million of the Company's stock announced in October, 1994. In addition, the
decrease is due in part to the Company's acquisition of a 19 percent equity
interest in GST Software, plc (GST) for $1.8 million together with an option to
purchase the balance of GST shares.
Capital expenditures for the nine months totaled $9.0 million and represented a
significant increase over the $3.8 million expended during the first nine
months of fiscal year 1994 which were lower due to cost containment activities.
The Company expects that capital outlays will continue at about the same pace
for the remainder of fiscal year 1995. These outlays are designed to upgrade
existing systems, increase capacity and meet the needs of strategic initiatives
throughout the Company.
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
$10.0 million. At present, there are no outstanding balances against this
line.
Results of Operations
- ---------------------
The quarter ended March 31, 1995 included fourteen weeks as compared to
thirteen weeks in prior year's third quarter. Net sales for the quarter
increased 8.5% to $68.8 million; an increase of $5.4 million over the same
period last year. The sales increase was composed of the impact of the
additional week of 4.2% or $2.7 million, volume growth of 2.4% or $1.5 million
and price increases of approximately 1.9% or $1.2 million.
On a year to date basis, net sales increased 6.1% to $200.4 million from $188.8
million. This increase was the result of increased volume of 2.7% or $5.1
million, price increases of 2.0% or $3.8 million and the impact of the
additional week in fiscal year 1995 of 1.4% or $2.7 million. The primary
source of growth during the quarter was from the computer forms and software
product lines as well as the Company's Image product lines. Sales related to
these product lines each accounted for approximately 35% of the growth in sales
for the quarter. For the year, computer forms and software product lines have
accounted for approximately 50% of the Company's growth.
For the quarter, cost of sales decreased from 36.8 % to 35.8% of sales during
last year's third quarter. This decrease was caused primarily by a shift in
product mix as well as stable material costs. It is expected that the cost of
paper will increase in the foreseeable future due to strong demand and limited
capacity in the paper industry. The Company has taken steps necessary to
mitigate the impact including the acceleration of paper purchases. Paper cost
increases are expected to have little impact to the Company during the
remainder of fiscal year 1995, and the Company anticipates being able to offset
the impact of the cost increase with price increases and cost reduction
initiatives during fiscal year 1996.
Year to date, cost of sales improved from 36.7% to 35.5% of sales. This
improvement was the result of price increases in several product lines as well
as stable material costs and reduced spoilage.
Selling and advertising expenses increased from 26.8% of net sales to 29.2%
during the quarter. The increase was caused primarily by costs related to
software development and by marketing channel development costs. On a year to
date basis, selling and advertising expenses decreased from 27.9% to 27.2% of
net sales. More effective promotional programs, better targeted mail to
customers and the impact of last year's restructuring program were primarily
responsible for the improvement. The United States Postal Service increased
third class postage rates by approximately 14% in January, 1995. The Company
has reduced the size and weight of some mail pieces and eliminated marginal
mailings to compensate for the postage increase in the short term. The Company
anticipates being able to raise prices to offset the cost increase in the
longer term.
General and administrative expenses increased from 23.4% of sales to 26.2% for
the quarter and from 22.8% to 25.9% on a year to date basis. These increases
were the result of costs associated with servicing the Company's expanded
software product line, capital improvements to the Company's order processing
system, and the impact of decreased profit sharing in the first quarter of last
year.
During the first quarter of last year the Company recorded a $6.0 million
pretax charge related to a restructuring program. As of March 31, 1995
approximately $.5 million is remaining in the reserve; these amounts will be
expended pursuant to severance and other agreements.
During the third quarter, the Company recorded a $2.0 million pretax charge, or
$.07 per share, related to exit costs associated with the closure of the
Company's Wisconsin based SYCOM subsidiary. The Company also incurred
additional pretax integration expense of approximately $.4 million, and expects
to incur additional fourth quarter pretax integration expense of approximately
$1.6 million. The additional integration expense includes systems conversion,
personnel and equipment relocation and related transition expenditures. The
objectives of the closure are to integrate the activities of the SYCOM
subsidiary into several of the Company's other facilities to achieve operating
efficiencies as well as improve service to SYCOM's customers. The $2.0 million
pretax charge for exit costs consisted of (i) approximately $1.2 million of
anticipated cash payments related to postemployment benefits in conjunction
with the termination of approximately 103 employees, and (ii) approximately $.8
million related to the anticipated non-cash outflows associated with facilities
and equipment write-offs. The
integration program is expected to be completed over the next three months.
When fully completed, the integration is expected to save the Company about
$1.8 million annually.
The provision for income taxes as a percentage of pretax income decreased from
1994 to 1995 due primarily to the completion of a series of tax audits as well
as higher tax free interest yields on the Company's marketable securities
portfolio for both the quarter and year to date.
In fiscal year 1995, the Company's adoption of Statement of Financial Accounting
Standards (SFAS) No. 112, "Employers' Accounting for Post Employment Benefits"
and SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" were not significant to the financial statements.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No. Description
----------- -----------
(11) Statement re computation of per share
earnings.
(27) Article 5 Financial Data Schedule
b. Reports on Form 8-K
None
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 thereunto duly authorized.
NEW ENGLAND BUSINESS SERVICE, INC.
----------------------------------
(Registrant)
May 11, 1995 /s/Russell V. Corsini, Jr.
- ---------------- ----------------------------------
Date Russell V. Corsini, Jr.,
Principal Financial and Accounting
Officer