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 December 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 1-11427
NEW ENGLAND BUSINESS SERVICE, INC.
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(Exact name of the registrant as specified in its charter)
Delaware 04-2942374
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(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
--- ---
The number of common shares of the Registrant outstanding on December 31, 1995
was 14,909,676.
NEW ENGLAND BUSINESS SERVICE, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands Except Share Data)
Dec. 31, June 30,
1995 1995
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 10,790 $ 11,604
Short term investments 16,091 11,360
Accounts receivable 32,920 29,332
Inventories 10,872 9,880
Direct mail advertising 2,260 2,939
Prepaid expenses 2,356 2,716
Deferred income tax benefit 11,324 9,678
-------- --------
Total current assets 86,613 77,509
Property and Equipment
Land and buildings 29,589 35,796
Less: accumulated depreciation 16,745 18,833
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Net 12,844 16,963
Equipment 73,676 70,890
Less: accumulated depreciation 55,536 51,818
-------- --------
Net 18,140 19,072
Property and equipment - net 30,984 36,035
Property Held for Sale 4,422 2,587
Other Assets - net 4,491 8,415
-------- --------
TOTAL ASSETS $126,510 $124,546
======== ========
NEW ENGLAND BUSINESS SERVICE, INC.
CONSOLIDATED BALANCE SHEET (Continued)
(In Thousands Except Share Data)
Dec. 31, June 30,
1995 1995
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 7,469 $ 7,158
Federal and state income taxes 2,142 2,506
Accrued profit-sharing distribution 2,019 2,408
Accrued payroll expense 4,290 5,731
Accrued employee benefit expense 7,222 6,005
Accrued exit costs/restructuring charge 4,935 2,020
Other accrued expenses 6,971 6,341
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Total current liabilities 35,048 32,169
Deferred Income Taxes 474 854
STOCKHOLDERS' EQUITY
Preferred stock
Common stock 15,796 15,770
Additional paid in capital 12,921 12,450
Cumulative foreign currency translation
adjustment ( 1,734) ( 1,683)
Retained earnings 80,911 82,412
-------- --------
Total 107,894 108,949
Less: treasury stock ( 16,906) ( 17,426)
-------- --------
Stockholders' Equity 90,988 91,523
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $126,510 $124,546
======== ========
See Notes to Consolidated Financial Statements
NEW ENGLAND BUSINESS SERVICE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
Three Months Ended Six Months Ended
------------------ ----------------
Dec. 31, Dec. 23, Dec. 31, Dec. 23,
1995 1994 1995 1994
-------- -------- --------- ---------
NET SALES $ 67,158 $ 69,479 $ 130,946 $ 131,558
OPERATING EXPENSES:
Cost of sales 24,001 24,490 47,386 46,531
Selling and advertising 23,794 22,901 46,816 43,673
General and administrative 12,982 13,227 25,762 24,577
Exit costs 10 0 3,044 0
------- ------- -------- --------
Total operating expenses 60,787 60,618 123,008 114,781
INCOME FROM OPERATIONS 6,371 8,861 7,938 16,777
OTHER INCOME/(EXPENSE):
Investment income 241 341 542 664
------- ------- -------- --------
INCOME BEFORE INCOME TAXES 6,612 9,202 8,480 17,441
PROVISION FOR INCOME TAXES:
Federal 1,998 2,968 2,058 5,708
State 702 885 967 1,665
------- ------- -------- --------
Total 2,700 3,853 3,025 7,373
------- ------- -------- --------
NET INCOME BEFORE LOSS ON
EQUITY METHOD INVESTMENT 3,912 5,349 5,455 10,068
Loss on equity method investment,
net of income tax benefit of
$653 in 1995 0 ( 90) ( 1,002) ( 176)
------- ------- -------- --------
NET INCOME $ 3,912 $ 5,259 $ 4,453 $ 9,892
======= ======= ======== ========
PER SHARE AMOUNTS:
Net Income $ .26 $ . 34 $ .30 $ .64
======= ======= ======== ========
Dividends $ .20 $ .20 $ .40 $ .40
======= ======= ======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING 14,899 15,415 14,885 15,442
======= ======= ======== ========
See Notes to Consolidated Financial Statements
NEW ENGLAND BUSINESS SERVICE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
----------------------
Dec. 31, Dec. 23,
1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,453 $ 9,892
Adjustments to reconcile net income to cash:
Depreciation and amortization 9,778 6,038
Deferred income taxes ( 2,022) ( 1,896)
Other non-cash items 6,518 1,754
Changes in assets and liabilities:
Accounts receivable ( 5,017) ( 6,395)
Inventories and advertising material ( 330) ( 621)
Prepaid expenses 219 ( 572)
Accounts payable 310 1,342
Income taxes payable ( 364) ( 2,902)
Other accrued expenses ( 517) ( 408)
-------- --------
Net cash provided by operating activities 13,028 6,232
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ( 4,339) ( 5,996)
Purchase of investments ( 18,195) ( 14,956)
Proceeds from sale of investments 13,449 27,087
Other assets 0 ( 437)
Investment in unconsolidated subsidiary 0 ( 1,800)
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Net cash provided by (used in) investing
activities ( 9,085) 3,898
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payment) of debt 9 ( 36)
Proceeds from issuing common stock 495 382
Issuance (purchase) of treasury stock 520 ( 4,432)
Dividends paid ( 5,954) ( 6,182)
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Net cash (used in) financing activities ( 4,930) ( 10,268)
EFFECT OF EXCHANGE RATE ON CASH 173 141
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NEW ENGLAND BUSINESS SERVICE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands)
Six Months Ended
---------------------
Dec. 31, Dec. 23,
1995 1994
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NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ( 814) 3
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 11,604 3,456
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $10,790 $ 3,459
======= ========
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
Report of Independent Public Accountants incorporated by reference in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1995 from the Company's 1995 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 30, 1995 from the Company's 1995 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 December 31, 1995 and June 30, 1995 consisted of:
Dec. 31, June 30,
1995 1995
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Raw paper $ 656,000 $ 1,130,000
Business forms and related office products 10,216,000 8,750,000
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Total $ 10,872,000 $ 9,880,000
============ ===========
4. Equity Method Investment
------------------------
During the first quarter of fiscal year 1996, the Company revalued its
19 percent equity interest in GST Software, plc (GST). The decision to
revalue the equity interest was influenced by the continued operational
losses of GST and a change in the Company's software product strategy.
Accordingly, the Company's investment in GST was written down to $0 as of
September 30, 1995. The revaluation resulted in a $1,002,000 loss, net of
the related income tax benefit of $653,000, and was included in the
consolidated statements of income as loss on equity method investment.
Subsequent to December 31, 1995, the Company sold its 19 percent equity
interest in GST.
5. Exit Costs
----------
During the first quarter of fiscal year 1996, the Company implemented a
program to restructure operations, including a plan to close the Company's
Flagstaff, Arizona manufacturing facility. The program's objectives are
to improve manufacturing efficiency, to outsource select corporate functions
and to reduce fixed costs. The accompanying consolidated statements of
income include a $3,034,000 pretax charge recognized in the first quarter
ended September 30, 1995 for exit costs associated with the program. The
charge for exit costs reduced first quarter net income by $1,839,000 or
$.12 per share.
The $3,034,000 pretax charge for exit costs consisted of anticipated costs
of $1,214,000 related to the facility closure of the and related
termination benefits of $1,820,000. Approximately 110 employees will be
terminated as a result of the restructuring program. The Company also
expects to incur an additional $2,110,000 of operating expense during the
remainder of fiscal year 1996 associated with the program.
As of December 31, 1995, approximately $288,000 has been expended for
termination benefits. The restructuring program is expected to be
substantially complete by the end of fiscal year 1996.
6. Other Charges
-------------
During the first quarter of fiscal year 1996, the Company revalued
certain software-related assets resulting in a first quarter charge of
approximately $3,683,000 and an additional second quarter charge of
$316,000. The revaluation of the software-related assets followed an
impairment of their future realizable value resulting from changes in the
competitive environment and a change in the Company's software product
strategy. As a result of the revaluation, $316,000 was included in cost
of sales for the current quarter, and the amounts of $962,000, $2,030,000,
and $1,007,000 were included in cost of sales, selling and advertising, and
general and administrative expense, respectively, on a year to date basis.
In addition, $632,000 is expected to be charged to cost of sales over the
remainder of fiscal year 1996 as an on-going impact of the revaluation.
MANAGEMENT DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities for the six months ended December 31,
1995 was $13.0 million and represented an increase from the $6.2 million
provided in the same period last year. The increase was due primarily to
the non-cash expense related to the revaluation of certain software-related
assets, the current year's exit cost charge and changes in the balances of
non-cash assets and liabilities.
Working capital at December 31, 1995 amounted to $51.6 million including $26.9
million of cash and short term investments. This amount compares to working
capital of $52.9 million and cash and short term investment balance of $28.9
million at the same time last year. At the beginning of this fiscal year,
working capital amounted to $45.3 million and cash and short term investments
were $23.0 million. The increase in working capital from year end was due
primarily to increased receivable and cash and short term investment balances.
Capital expenditures for the six months amounted to $4.3 million and were
lower than the $6.0 million expended in 1994. The Company had commitments
for capital projects at quarter end of approximately $2.9 million. The
Company anticipates that capital outlays will continue at the first half pace
throughout fiscal year 1996. These outlays are associated with efforts to
upgrade existing systems, to increase capacity and address 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 borrowings
against this line.
Results of Operations
- ---------------------
In the quarter ended December 31, 1995, net sales decreased 3.3% to $67.2
million from $69.5 million; a decrease of $2.3 million over the same period
last year. This sales decrease was composed of volume decline of 8.6% or
$6.0 million offset by price increases of approximately 5.3% or $3.7 million.
On a year to date basis, net sales decreased 0.5% to $130.9 million from
$131.6 million. This decrease was the result of a volume decline of 4.4% or
$5.8 million offset by price increases of 3.9% or $5.1 million. For both the
quarter and year to date the primary source of the decline occurred in the
Company's business forms lines. The Company's priority for the remainder of
the fiscal year is to counter the decline in the business forms product lines
through increased spending for mail order customer acquisition and retention
programs. In addition, the Company has initiated a process to divest
ownership of the One-Write Plus software line in order to expand the Company's
opportunity to market a full range of third-party software and compatible
forms. Although the Company believes these initiatives will have a positive
impact on revenue trends, the Company's ability to completely reverse the
decline over the remainder of the fiscal year is limited.
For the quarter, cost of sales increased to 35.7% of sales from 35.2% last
year and to 36.2% from 35.4% on a year to date basis. This increase was due
primarily to one-time costs resulting from the revaluation of certain
software-related assets and investments in color printing technology. See
Note 6 in the Notes to Consolidated Financial Statements.
Selling and advertising expenses increased as a percentage of sales from
33.0% to 35.4% in the quarter. On a year to date basis, selling and
advertising expenses increased from 33.2% to 35.8% of sales. For the
quarter, this increase was due primarily to an operating charge related to
the ongoing restructuring program. For the year this increase was due
primarily to the aforementioned charge as well as to one-time costs resulting
from the revaluation of certain software-related assets. See Note 6 in the
Notes to Consolidated Financial Statements.
General and administrative expenses increased to 19.3% of sales from 19.0% for
the quarter and to 19.7% from 18.7% year to date. For the quarter, this
increase was due primarily to an operating charge related to the ongoing
restructuring program. For the year, this increase was due primarily to the
aforementioned charge as well as to costs resulting from the revaluation of
certain software-related assets. See Note 6 in the Notes to Consolidated
Financial Statements.
During fiscal 1994, the Company recorded a $5.5 million pretax charge related
to a restructuring program. As of December 31, 1995, approximately $.1
million is remaining in the reserve; these amounts will be expended pursuant
to severance and other agreements.
During the third quarter of fiscal 1995, the Company recorded a $2.0 million
pretax charge related to exit costs associated with the closure of the
Company's Wisconsin based SYCOM subsidiary. As of December 31, 1995
approximately $.6 million is remaining in the reserve, of which approximately
$.3 million will be expended pursuant to severance agreements and $.3 million
related to facility closure costs and equipment write-offs over the remainder
of fiscal 1996.
During the first quarter of fiscal 1996, the Company recorded a $3.0 million
pretax charge, or $.12 per share, related to exit costs associated with a
plan to restructure operations including the closure of the Company's
Flagstaff, Arizona manufacturing facility. The objectives of this program
are to improve manufacturing efficiency, to outsource select corporate
functions and to reduce fixed costs. The $3.0 million pretax charge consisted
of (i) approximately $1.8 million of anticipated cash payments related to
postemployment benefits in conjunction with the termination of approximately
110 employees of which approximately $1.5 million remains at December 31, 1995,
and (ii) approximately $1.2 million related to the anticipated non-cash
outflows associated with closure of the Flagstaff facility, all of which
remains at December 31, 1995. The Company also expects to incur an additional
$2.1 million of operating expense during the remainder of fiscal year 1996
associated with the plan to restructure operations. The restructuring program
is expected to be completed over the remainder of fiscal 1996.
Investment income decreased from 1995 to 1994 due to lower balances available
for investment as well as lower investment returns due to decreased interest
rates.
The provision for income taxes as a percentage of pretax income decreased
from 1994 to 1995 due to a decrease in the proportion of taxable income
resulting from the exit cost charge taken in the first quarter of fiscal 1996
in relation to non-taxable permanent differences.
The loss on investment resulted from the Company's revaluation of its
investment in GST Software, plc. See Note 4 in the Notes to Consolidated
Financial Statements.
PART II - OTHER INFORMATION
---------------------------
Item 1. LEGAL PROCEEDINGS
To the Company's knowledge, no material legal proceedings are pending
on the date hereof to which the Company is a party or to which any property of
the Company is subject.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No. Description
----------- -----------
(2) Not applicable.
(3)(a) Certificate of Incorporation of the Registrant.
(Incorporated by reference to the Company's
Current Report on Form 8-K dated October 31,
1986.)
(3)(b) Certificate of Merger of New England Business
Service, Inc. (a Massachusetts corporation) and
the Company, dated October 24, 1986 amending the
Certificate of Incorporation of the Company by
adding Articles 14 and 15 thereto.
(Incorporated by reference to the Company's
Current Report on Form 8-K dated October 31,
1986.)
(3)(c) Certificate of Designations, Preferences and
Rights of Series A Participating Preferred
Stock of the Company, dated October
27, 1989. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1995, filed
September 15, 1995.)
(3)(d) By-Laws of the Registrant, as amended.
(4)(a) Specimen stock certificate for shares of
Common Stock, par value $1.00 per share.
(Incorporated by reference to the Company's
Annual Report on Form 10-K for the fiscal
year ended June 30, 1995, filed September
15, 1995.)
(4)(b) Amended and Restated Rights Agreement, dated
October 27, 1989 as amended as of October 20,
1994 (the "Rights Agreement"), between New
England Business Service, Inc. and The First
National Bank of Boston, National Association,
as rights agent, including as Exhibit B the
forms of Rights Certificate Election to Exercise
(Incorporated by reference to Exhibit 4 of the
Company's current report on Form 8-K dated
October 25, 1994.)
(10)(a) Separation Agreement dated December 14, 1995
between the Company and William C. Lowe.
(11) Statement re computation of per share earnings.
(15) Not applicable.
(18) Not applicable.
(19) Not applicable.
(22) Not applicable.
(23) Not applicable.
(24) Not applicable.
(27) Article 5 Financial Data Schedule.
b. Reports on Form 8-K.
No reports on Form 8-K were filed during the Company's second
quarter.
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)
February 8, 1996 /s/Russell V. Corsini, Jr.
- ---------------- --------------------------
Date Russell V. Corsini, Jr.
Principal Financial and Accounting
Officer