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 28, 1996.
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.
----------------------------------
(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 January 24, 1997
was 13,093,619.
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
(unaudited)
Dec. 28, June 29,
1996 1996
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 5,302 $ 6,508
Short term investments 1,603 10,868
Accounts receivable 32,768 30,636
Inventories 8,863 8,675
Direct mail advertising and prepaid exps 5,022 5,176
Deferred income tax benefit 9,473 9,471
-------- --------
Total current assets 63,031 71,334
Property and equipment - net 31,219 31,012
Property Held for Sale 781 631
Other Assets - net 495 565
-------- --------
TOTAL ASSETS $ 95,526 $103,542
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 10,460 $ 8,575
Accrued expenses 22,507 18,698
------- -------
Total current liabilities 32,967 27,273
Deferred Income Taxes 402 353
STOCKHOLDERS' EQUITY
Preferred stock
Common stock 14,077 14,005
Additional paid in capital 14,723 13,603
Cumulative foreign currency translation
adjustment ( 1,405) ( 1,761)
Retained earnings 51,084 50,069
-------- --------
Total 78,479 75,916
Less: treasury stock ( 16,322) ( 0)
-------- --------
Stockholders' Equity 62,157 75,916
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 95,526 $103,542
======== ========
See Notes to Unaudited Consolidated Financial Statements
NEW ENGLAND BUSINESS SERVICE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
Dec. 28, Dec. 30, Dec. 28, Dec. 30,
1996 1995 1996 1995
-------- -------- --------- ---------
NET SALES $ 63,203 $ 67,158 $ 123,905 $ 130,946
OPERATING EXPENSES:
Cost of sales 20,646 22,880 42,607 45,110
Selling and advertising 22,062 25,426 44,431 50,311
General and administrative 12,832 12,471 23,028 23,890
Exit costs (158) 10 5,043 3,044
------- ------- -------- --------
Total operating expenses 55,382 60,787 115,109 122,355
INCOME FROM OPERATIONS 7,821 6,371 8,796 8,591
OTHER INCOME/(EXPENSE):
Investment income 71 241 243 542
Gain on pension curtailment 1,543 0 1,543 0
------- ------- -------- --------
INCOME BEFORE INCOME TAXES 9,435 6,612 10,582 9,133
PROVISION FOR INCOME TAXES:
Federal 2,704 1,998 3,071 2,682
State 1,031 702 1,133 996
------- ------- -------- --------
Total 3,735 2,700 4,204 3,678
------- ------- -------- --------
NET INCOME BEFORE LOSS ON
EQUITY METHOD INVESTMENT 5,700 3,912 6,378 5,455
Loss on equity method investment
0 0 0 ( 1,002)
------- ------- -------- --------
NET INCOME $ 5,700 $ 3,912 $ 6,378 $ 4,453
======= ======= ======== ========
PER SHARE AMOUNTS:
Net Income $ .43 $ . 26 $ .47 $ .30
======= ======= ======== ========
Dividends $ .20 $ .20 $ .40 $ .40
======= ======= ======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING 13,273 15,053 13,606 15,015
======= ======= ======== ========
See Notes to Unaudited Consolidated Financial Statements
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(unaudited)
Six Months Ended
----------------------
Dec. 28, Dec. 30,
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,378 $ 4,453
Adjustments to reconcile net income to cash:
Depreciation and amortization 4,915 9,778
Deferred income taxes 29 ( 2,022)
Gain on pension curtailment ( 1,543) 0
Other non-cash items 4,973 6,518
Changes in assets and liabilities:
Accounts receivable ( 3,522) ( 5,017)
Inventories, advertising mat'l and prepaid 16 ( 111)
Accounts payable 1,872 310
Accrued expenses 1,774 ( 881)
-------- --------
Net cash provided by operating activities 14,892 13,028
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ( 4,920) ( 4,339)
Purchase of investments ( 3,800) ( 18,195)
Proceeds from sale of investments 13,064 13,449
-------- --------
Net cash provided by (used in) investing
activities 4,344 ( 9,085)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debt ( 7,850) 0
Proceeds from credit line 7,850 0
Proceeds from issuing common stock 1,192 1,015
Purchase of treasury stock ( 16,322) 0
Dividends paid ( 5,363) ( 5,954)
-------- --------
Net cash used in financing activities ( 20,493) ( 4,939)
EFFECT OF EXCHANGE RATE ON CASH 51 182
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NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands)
(unaudited)
Six Months Ended
---------------------
Dec. 28, Dec. 30,
1996 1995
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NET DECREASE IN CASH AND CASH
EQUIVALENTS ( 1,206) ( 814)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 6,508 11,604
------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,302 $ 10,790
======= ========
See Notes to Unaudited 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 29,
1996 from the Company's 1996 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 29, 1996 from the Company's 1996 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 28, 1996 and June 29, 1996 consisted of:
(unaudited)
Dec. 28, June 29,
1996 1996
------------ -----------
Raw paper $ 686,000 $ 434,000
Business forms and related office products 8,177,000 8,241,000
------------ -----------
Total $ 8,863,000 $ 8,675,000
=========== ===========
4. Exit Costs
----------
During the first quarter of fiscal year 1997, the Company reached a
joint decision with Kinko's Corporation to pursue a new strategy for
its retail channel initiative. This decision resulted in the closure
of the Company's 75 existing NEBS manned print desks in Kinko's
stores, its administrative offices in Phoenix and its stationery
plant in Scottsdale, Arizona. The accompanying consolidated
statements of income include a $5,201,000 pretax charge for exit costs
associated with this plan recognized in the first quarter ended
September 28, 1996.
The $5,201,000 pretax charge for exit costs consisted of estimated
costs related to facility closures of $1,160,000, estimated equipment
write-offs of $1,815,000 and estimated termination benefits of
$2,226,000. Approximately 230 employees have been terminated as a result
of the restructuring plan.
During the second quarter of fiscal year 1997, the Company substantially
completed a portion of its exit plan associated with the first quarter
fiscal year 1997 charge. Accordingly, the above mentioned estimates were
revised. These revisions include a $500,000 pretax exit credit to
reflect a successful sub-lease arrangement of the Scottsdale, Arizona
facility and an additional $342,000 pretax exit charge for higher than
expected employee termination benefits recognized in the second quarter
of fiscal year 1997.
The balance of the reserve for exit costs at December 28, 1996 of
$3,950,000 represents specifically identified employee termination
benefits, equipment write-offs and facility closure costs. Cash payment
related to these costs are expected to be made during fiscal year 1997.*
5. Pension Plan
------------
During the second quarter of fiscal year 1997, the Company amended its
defined benefit pension plan which provides benefits to the majority
of its domestic employees. The amendment specifically freezes plan
participation at December 31, 1996 and eliminates further benefit
accruals after June 28, 1997. The Company currently expects to terminate
the plan during calendar year 1997.* The Company recorded a plan
curtailment gain of $1,543,000 in the second quarter ended December 28,
1996 associated with the plan amendment.
6. Impairment of Long-Lived Assets
-------------------------------
As of June 29, 1996, the Company adopted SFAS No. 121, entitled
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The adoption of this standard did not have
a material effect on the accompanying consolidated financial statements.
7. Debt Obligation
---------------
The Company obtained a $10,000,000 uncommitted line of credit during
November 1996 from a major commercial bank, at rates to be quoted at
the time of borrowing. At December 28, 1996, no amounts were outstanding
under this line.
8. Subsequent Event
----------------
On January 8, 1997 the Company announced the completion of the
acquisition of Standard Forms Limited, a U.K. based company, for
$4.3 million. Standard Forms markets a line of business forms and
stationery by direct mail and through a direct sales force principally
to automotive accounts in the U.K. and in France. The acquisition will
be accounted for using the purchase method. Accordingly, the purchase
price will be allocated to assets acquired based on their fair values.
The total cost in excess of net assets acquired will be amortized over
a period of 25 years.
MANAGEMENT DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities for the six months ended December 28,
1996 was $14.9 million and represented an increase of $1.9 million from the
$13.0 million provided in the comparable period last year. The increase in
operating cash flow was primarily the result of a reduction in cash used to
fund the Company's non-cash working capital requirements.
Working capital at December 28, 1996 amounted to $30.1 million, including
$6.9 million of cash and short-term investments. This balance compares to
working capital of $51.6 million, including cash and short-term investment
balances of $26.9 million, at the same time last year. At June 29, 1996,
working capital amounted to $44.1 million, including cash and short-term
investments of $17.4 million. The $14 million reduction in working capital over
the course of the last six months was due principally to cash outflows of $16.8
million associated with the repurchase of 1,024,800 shares of the Company's
common stock, offset in part by an increase in accounts payable and accrued
expenses balances.
Capital expenditures of $4.9 million for the six months ended December 28,
1996 were slightly higher than the $4.3 million expended for the first six
months in fiscal 1996. The Company had no significant commitments for capital
projects at quarter end. The Company anticipates that capital outlays will
continue at the first half pace throughout fiscal year 1997.* Anticipated
capital outlays for fiscal year 1997 are primarily related to a plan to
upgrade the Company's order entry, financial and related systems.
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 unsecured lines of credit with a major
bank for $20.0 million. At present, there are no outstanding balances against
this line.
Results of Operations
- ---------------------
Net sales decreased 5.9% to $63.2 million in the second quarter of fiscal 1997
from $67.2 million in last year's second quarter. The sales decrease was
composed of approximately a $5.0 million or 7.4% decline attributable to
discontinuation of Kinko's retail activities and the divestiture of the
One-Write Plus product line, a $1.3 million or 1.9% decline attributable to
higher promotional discounting, offset by a $1.2 million or 1.8% effective price
increase and a $1.1 million or 1.6% unit volume increase.
Net sales for the six months ended December 28, 1996 decreased 5.3% to $123.9
million from $130.9 million in last year's comparable period. The sales decrease
was composed of a $6.0 million or 4.6% decline attributable to the
discontinuation of Kinko's retail activities and the divestiture of the
One-Write Plus product line, a $0.9 million or 0.6% unit volume decline and a
$1.3 million or 1.0% decline attributable to higher promotional discounting,
offset in part by a $1.2 million or 0.9% effective price increase.
For the quarter of fiscal 1997, cost of sales decreased to 32.7% of sales from
34.1% in last year's comparable period and remained level at 34.4% of sales
on a year to date basis. The second quarter decrease was due to improved
manufacturing efficiency, reduced material costs, reduced freight costs and
reduced manufacturing overhead expense during the quarter.
Selling and advertising expenses as a percentage of sales decreased to 34.9% in
the second quarter of fiscal 1997 from 37.9% in last year's comparable quarter.
On a year to date basis, selling and advertising expenses decreased to 35.9% of
sales in fiscal 1997 from 38.4% in fiscal 1996. These decreases were primarily
associated with reduced software technical support and development costs
following the divestiture of One-Write Plus and reduced selling expenses related
to the discontination of Kinko's retail activities. These cost savings were
partially offset by an increase in direct mail advertising expense.
General and administrative expenses increased to 20.3% of sales in the second
quarter of fiscal 1997 from 18.6% in last year's comparable quarter and to
18.6% in fiscal 1997 from 18.2% in fiscal 1996 on a year to date basis. The
second quarter increase was primarily due to increased costs related to the
Company's program to re-engineer its financial and operational information
systems. The year to date increase was also due primarily to the information
systems re-engineering cost increase offset by a reduction in expense
recognized due to the revaluation of certain software-related assets in the
first quarter of 1996.
During the first quarter of fiscal year 1997, the Company recorded a $5.2
million pre-tax charge, or $.21 per share, related to exit costs associated with
a plan to close the Company's 75 NEBS manned print desks in Kinko's stores, its
administrative offices in Phoenix and its stationery plant in Scottsdale,
Arizona. The $5,201,000 pretax charge for exit costs consisted of facility
closure costs of $1,160,000, equipment write-offs of $1,815,000 and
postemployment benefits of $2,226,000 in conjunction with the termination of
approximately 230 employees.
As a result of the successful negotiation of a sub-lease agreement on its
Scottsdale, Arizona manufacturing facility, the Company reduced its estimate of
facility closure costs and recognized a $500,000 exit credit in the second
quarter of fiscal 1997. In addition, the Company revised its estimate of
postemployment benefits due to its terminated employees and recognized an
additional $342,000 in related exit costs during the second quarter.
The Company also expects to incur an additional $700,000 of operating expense
during the remainder of fiscal year 1997 associated with the plan to restructure
operations.* As of December 28, 1996 approximately $3,950,000 remains in the
reserve. The restructuring plan is expected to be substantially completed
during fiscal year 1997.*
Investment income decreased from fiscal year 1996 to fiscal 1997 due to lower
investable balances.
The provision for income taxes as a percentage of pre-tax income has remained
constant from fiscal 1996 to fiscal 1997 at approximately 40%.
In 1996 the Company's adoption of Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", was not significant to the financial
statements.
- - - - - - -
* This statement is a forward-looking statement reflecting the Company's current
expectations. There can be no assurance that the Company's actual results will
not differ materially from those projected in such forward-looking statements
due to the important factors described in Exhibit 99 to this Quarterly Report
on Form 10-Q.
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.
(Incorporated by reference to Exhibit 10(a) of
the Company's Quarterly Report on Form 10-Q for
the Quarter ended December 31, 1995, filed
February 8, 1996.)
(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) Revolving Credit Agreement between the Company
and The First National Bank of Boston dated
August 30, 1996. (Incorporated by reference to
Exhibit 10(b) of the Company's Annual Report
on Form 10-K for the Year ended June 29, 1996,
filed September 11, 1996.)
(10)(b) Uncommitted Line of Credit Agreement between the
Company and The First National Bank of Boston
dated November 19, 1996.
(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.
(99) Safe Harbor for Forward Looking Statements
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 11, 1997 /s/John F. Fairbanks
- ----------------- --------------------------
Date John F. Fairbanks
Principal Financial and
Accounting Officer