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 period ended December 27, 1997
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
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(Address of principal executive offices)
(Zip Code)
(978) 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 February 5, 1998
was 13,783,195.
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
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NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
(unaudited)
Dec. 27, June 28,
1997 1997
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ASSETS
Current Assets
Cash and cash equivalents $ 3,957 $ 7,365
Short term investments 1,011 469
Accounts receivable - net 46,984 34,147
Inventories 19,281 11,569
Direct mail advertising and prepaid expenses 9,459 6,976
Deferred income tax benefit 9,460 7,900
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Total current assets 90,152 68,426
Property and equipment - net 46,686 32,419
Property held for sale 631 631
Goodwill - net 67,309 31,795
Other Assets - net 33,761 7,925
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TOTAL ASSETS $238,539 $141,196
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LIABILITIES AND STOCKHOLDERS'EQUITY
Current Liabilities
Accounts payable $ 15,133 $ 13,872
Accrued expenses 28,160 19,455
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Total current liabilities 43,293 33,327
Revolving Line of Credit 104,500 27,000
Deferred Income Taxes 17 288
STOCKHOLDERS'EQUITY
Common stock 14,693 14,616
Additional paid-in capital 28,997 26,537
Cumulative foreign currency translation adj. (1,970) (1,762)
Retained earnings 64,998 58,024
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Total 106,718 97,415
Less: Treasury stock (15,989) (16,834)
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Stockholders' Equity 90,729 80,581
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $238,539 $141,196
======== ========
See Notes to Unaudited Consolidated Financial Statements
NEW ENGLAND BUSINESS SERVICE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Six Months Ended
Dec. 27, Dec. 28, Dec. 27, Dec. 28,
1997 1996 1997 1996
--------- --------- --------- ---------
NET SALES $ 81,651 $ 63,203 $157,266 $123,905
OPERATING EXPENSES:
Cost of sales 30,457 20,646 59,468 42,607
Selling and advertising 27,740 22,062 52,596 44,431
General and administrative 12,478 12,832 24,638 23,028
Exit costs - (158) - 5,043
-------- -------- -------- --------
Total operating expenses 70,675 55,382 136,702 115,109
INCOME FROM OPERATIONS 10,976 7,821 20,564 8,796
OTHER INCOME/(EXPENSE):
Interest income 42 71 107 243
Interest expense (477) - (954) -
Gain on pension settlement - 1,543 556 1,543
-------- -------- -------- --------
INCOME BEFORE TAXES 10,541 9,435 20,273 10,582
PROVISION FOR INCOME TAXES 4,058 3,735 7,829 4,204
-------- -------- -------- --------
NET INCOME $ 6,483 $ 5,700 $ 12,444 $ 6,378
======== ======== ======== ========
PER SHARE AMOUNTS:
Basic Earnings Per Share $ .47 $ .43 $ .91 $ .47
======== ======== ======== ========
Diluted Earnings Per Share $ .46 $ .43 $ .89 $ .47
======== ======== ======== ========
Dividends $ .20 $ .20 $ .40 $ .40
======== ======== ======== ========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 13,707 13,111 13,677 13,448
Plus incremental shares from assumed
conversion of stock options 364 84 314 68
-------- -------- -------- --------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 14,071 13,195 13,991 13,516
======== ======== ======== ========
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. 27, Dec. 28,
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 12,443 $ 6,378
Adjustments to reconcile net income to cash:
Depreciation and amortization 6,846 4,915
Deferred income taxes (28) 29
Gain on pension settlement 556 (1,543)
Other non-cash items 668 4,973
Changes in assets and liabilities:
Accounts receivable (4,185) (3,522)
Inventories and prepaid expenses (1,343) 16
Accounts payable (2,964) 1,872
Accrued expenses 2,088 1,774
--------- ---------
Net cash provided by operating activities 14,081 14,892
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (7,332) (4,920)
Purchase of investments (1,039) (3,800)
Proceeds from sale of investments 468 13,064
Acquisition of business (82,782) -
Other assets (330) -
--------- ---------
Net cash provided by (used in) investing
activities (91,015) 4,344
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debt (7,000) -
Proceeds from credit line 84,500 -
Proceeds from issuing common stock 1,569 1,192
Purchase of treasury stock - (16,322)
Dividends paid (5,466) (5,363)
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Net cash provided by (used in) financing
activities 73,603 (20,493)
EFFECT OF EXCHANGE RATE ON CASH (77) 51
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NET DECREASE IN CASH AND CASH EQUIVALENTS (3,408) (1,206)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,365 6,508
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,957 $ 5,302
========= =========
See Notes to Unaudited Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
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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 in the Company's Annual Report on Form 10-K
for the fiscal year ended June 28, 1997.
Reference is made to the accounting policies of the Company described in
the notes to the consolidated financial statements in the Company's Annual
Report on Form 10-K for the fiscal year ended June 28, 1997. The Company
has consistently followed those policies in preparing this report.
3. Acquisitions
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On December 23, 1997, the Company acquired all of the outstanding common
stock of Rapidforms, Inc. ("Rapidforms") for consideration of approximately
$82,518,000 in cash. The Company also incurred acquisition fees of
approximately $264,000 associated with the acquisition. Rapidforms and its
subsidiaries collectively sell business forms, stationery, merchandising
products and office supplies primarily by direct mail to small businesses
throughout the United States. The acquisition was accounted for under the
purchase method of accounting. Accordingly, Rapidform's results of operations
are included in the accompanying financial statements from the date of
acquisition. The purchase price including acquisition costs was allocated to
the net assets acquired based on the fair value of such assets and liabilities.
The excess cost over fair value of the net tangible assets acquired was
$63,877,000 of which $24,900,000 was allocated to Rapidform's customer list and
the balance of $38,977,000 to goodwill. These allocations are still subject to
final valuations. The goodwill is being amortized on a straight line basis
over a period of 40 years while customer lists and any other intangibles
arising from this transaction will be amortized over their respective useful
lives when determined. The impact of the Rapidforms acquisition on the
Company's second quarter results was not significant.
The following table of unaudited pro forma financial information reflects the
consolidated results of operations of the Company for the six months ended
December 27, 1997 and December 28, 1996 as though the acquisition had occurred
on the first day of the respective fiscal year. This pro-forma information for
the six months ended December 28, 1996 also includes the results of Standard
Forms and Chiswick as if these acquisitions had been consummated on June 30,
1996. The pro forma operating results are presented for comparative purposes
only and do not purport to present the Company's actual operating results had
the acquisition been consummated on June 30, 1996, or results which may occur
in the future.
(unaudited)
Six Months Ended
Dec. 27, Dec. 28,
1997 1996
---------- ----------
Net Sales $ 200,626 $ 194,833
Net income 12,953 5,756
Earnings per common share
Basic earnings per share $ 0.95 $ 0.42
Diluted earnings per share 0.93 0.41
As part of the purchase accounting for the Rapidforms acquisition and
included in the allocation of the acquisition cost, a liability of $4,000,000
was recorded to cover the anticipated costs related to a plan to close
redundant Rapidform's manufacturing and warehouse facilities and to reduce
manufacturing personnel. Approximately $3,700,000 of the liability is
allocated for employee termination benefits and approximately $300,000 for
termination of certain contractual obligations.
4. Inventories
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Inventories are carried at the lower of first-in, first-out cost or market.
Inventories at December 27, 1997 and June 28, 1997 consisted of:
(unaudited)
Dec. 27, June 28,
1997 1997
----------- -----------
Raw paper $ 1,311,000 $ 586,000
Business forms, related office products
and shipping, warehouse and packaging
supplies 17,970,000 10,983,000
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Total $19,281,000 $11,569,000
=========== ===========
5. Exit Costs
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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 $5,043,000 pretax
charge for exit costs associated with this plan recognized in the first
six months ended September 28, 1996.
The $5,043,000 pretax charge for exit costs was subsequently revised during
fiscal year 1997. The pre-tax charge for the year was reduced to $3,803,000
(which reduction was reflected separately in the Company's third quarter 1997
10-Q under the "exit cost" heading)and consisted of estimated costs related to
facility closures of $485,000, estimated equipment write-offs of $1,105,000 and
estimated termination benefits of $2,213,000. Approximately 230 employees were
terminated as a result of the restructuring plan.
6. Pension Plan
- ---------------
During the second quarter of fiscal year 1997, the Company amended its
defined benefit pension plan which provided benefits to the majority of its
domestic employees. The amendment froze plan participation at December 31,
1996 and eliminated further benefit accruals after June 28,1997. The Company
recorded a plan curtailment gain of $1,543,000 in the second quarter of fiscal
1997. Subsequently during fiscal year 1997, the actuarial estimate of the plan
curtailment was revised, resulting in a total gain of $2,187,000 for the year.
The Company settled the plan obligations during the first quarter of fiscal
year 1998 and recorded a plan settlement gain of $556,000 during the period.
7. Debt Obligation
- ---------------------
Effective December 18, 1997, the Company amended the terms of its five year,
committed, unsecured revolving line of credit agreement with two major
commercial banks, principally to increase the line of credit from $60,000,000
to $135,000,000. Subsequent to the end of the second quarter, the line of
credit agreement was amended to expand the number of participating commercial
banks from two to ten. Under this credit agreement, the Company has the
option to borrow at the Eurodollar rate plus a spread or the agent bank's base
lending rate prevailing from time to time. The effective Eurodollar based
interest rate at December 27, 1997 was 6.5%. Principal amounts are not
required to be paid on advances under this facility until maturity.
Accordingly, amounts outstanding under the revolver have been classified as
long term in nature. The credit agreement contains various restrictive
covenants which, among other things, require the Company to maintain certain
minimum levels of consolidated net worth and specific consolidated debt and
fixed charge ratios. At December 27, 1997, $104,500,000 was outstanding under
this line. Deferred debt issue costs are amortized over the term of the
agreement.
8. Earnings Per Share
- ---------------------
As of December 27, 1997 the Company adopted SFAS No. 128, entitled "Earnings
Per Share". Such adoption caused the primary and fully-diluted earnings per
share figures of $0.43 and $0.47 for the three and six month periods ending
December 28, 1996 to be modified to conform to the definitions in the new
Standard.
9.New Accounting Pronouncements
- -------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information." The Company will adopt these
statements during fiscal year 1999 and does not expect that the adoption of
these statements will have a material impact on the consolidated financial
statements.
Item 2. Management's Discussion and Analysis of Financial Condition
- -------------------------------------------------------------------
and Results of Operations
- ---------------------------------
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities for the six months ended December 27,
1997 was $14.1 million and represented a decrease of $.8 million from the $14.9
million provided in the comparable period last year. While net income increased
by approximately $6.1 million or approximately 95%, it was not significant
enough in absolute terms to offset the changes in non-cash working capital
balances during fiscal year 1998.
Working capital at December 27, 1997 amounted to $46.9 million, including
$5.0 million of cash and short term investments. At June 28, 1997, working
capital amounted to $35.1 million, including cash and short term investments of
$7.8 million. The $11.8 million increase in working capital during the first
six months of fiscal 1998 was caused in large part by the acquisition of
Rapidforms, Inc.'s working capital balances of $7.6 million during the period.
The acquisition of Rapidforms in the second quarter required cash outflows of
approximately $80.0 million in the second quarter. This acquisition was
financed through an enhanced credit arrangement with two major commercial
banks.
Capital expenditures for the six months ended December 27, 1997 were $7.3
million versus the $4.9 million expended during last year's comparable period.
Capital expenditures in the first six months of fiscal 1997 and fiscal 1998
included significant expenditures related to a plan to upgrade the Company's
information systems. In addition to this increased investment in information
systems, the Company completed the construction of a $3.2 million telemarketing
facility in Flagstaff, Arizona during the second quarter of fiscal 1998. The
Company anticipates that total capital outlays will approximate $15.0 million
in fiscal year 1998, an increase of $5.4 million or 57% over the $9.6 million
expended during fiscal year 1997.*
Dividends paid during the six months ended December 27, 1997 amounted to $5.5
million, slightly higher than the $5.4 million paid in the corresponding period
of the previous year due to a small increase in the number of Company shares
outstanding. During the six months ended December 28, 1996, the Company
repurchased 1,023,000 shares of Company stock on the open market for total
consideration of $16.3 million. The Company is authorized to repurchase an
additional 1,959,000 Company shares on the open market, but has not repurchased
any shares during the first two quarters of fiscal 1998.
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 a five-year, committed, senior, unsecured, revolving
line of credit with ten major banks for $135.0 million. At December 27, 1997,
$104.5 million was outstanding against this line, reflecting additional
borrowing during the first six months of fiscal year 1998 of $80 million to
fund the acquisition of Rapidforms, Inc., offset by repayment of $2.5 million
of outstanding debt during the same period. In order to effectively fix the
interest rate on a portion of the outstanding debt, the Company has entered
into interest rate swap agreements with notional principal amounts and other
terms determined with respect to the Company's forecast of future borrowing
levels. At December 27, 1997 the notional principal amount outstanding of such
swaps was $15 million. Subsequent to the end of the second quarter of fiscal
1998, the Company entered into an additional swap agreement with a notional
principal amount of $65 million.
In order to minimize the exposure to foreign currency fluctuations with
respect to intercompany loans to foreign business units, the Company has
entered into forward exchange rate contracts in amounts corresponding to the
loan amounts. At December 27, 1997, the Company has outstanding forward rate
contracts for $1.8 million worth of Pound Sterling and $92,000 worth of French
Francs.
The Company anticipates that its current cash on hand, cash flow from
operations and additional availability under the line of credit will be
sufficient to meet the Company's liquidity requirements for its operations and
capital expenditures through the remainder of the year.* If the Company
chooses to pursue additional acquisitions in the future, the acquisitions would
likely be funded through cash, issuance of stock, the obtaining of additional
funds through long-term borrowing or any combination thereof.*
Results of Operations
- ---------------------
Net sales increased $18.4 million or 29.2% to $81.7 million in the second
quarter of fiscal 1998 from $63.2 million in last year's second quarter. The
sales increase was composed of a $3.3 million or 5.2% effective price increase
and a $16.4 million or 26.0% increase associated with the acquisition of
Standard Forms Limited and Chiswick Trading, Inc. during fiscal year 1997.
These increases were offset in part by a $0.2 million or 0.3% decline
attributable to the discontinuation of Kinko's retail initiative and a $1.1
million or 1.7% decline attributable to higher promotional discounting.
Net sales for the six months ended December 27, 1997 increased 26.9% to
$157,266 million from $123,905 million in last year's comparable period. The
sales increase was composed of a $2.8 million or 2.3% unit volume increase, a
$5.2 million or 4.2% effective price increase, and a $29.9 million or 24.1%
increase associated with the acquisition of Standard Forms Limited and Chiswick
Trading, Inc. during fiscal year 1997. These increases were offset in part by
a $1.8 million or 1.5% decline attributable to the discontinuation of Kinko's
retail initiative and a $2.7 million or 2.2% decline attributable to higher
promotional discounting.
For the second quarter of fiscal 1998, cost of sales increased to 37.3% of
sales from 32.7% of sales in last year's comparable period. This increase was
due primarily to an increase in revenue generated by lower margin products
associated with recently acquired businesses. Cost of sales as a percent of
sales is anticipated to increase slightly during the remaining quarters of
fiscal 1998 due principally to the impact of the acquisition of Rapidforms,
Inc.* On a year-to-date basis, cost of sales increased from 34.4% of sales in
fiscal 1997 to 37.8% in fiscal 1998. This increase was caused by increased
revenues generated by lower margin products associated with recently acquired
businesses, as well as an increase in transportation costs resulting from the
UPS strike in the first quarter of fiscal 1998.
Selling and advertising expense decreased slightly to 34.0% of sales in the
second quarter of fiscal 1998 from 34.9% of sales in last year's comparable
quarter. On a year-to-date basis, selling and advertising expense as a percent
of sales decreased from 35.9% in fiscal 1997 to 33.4% in fiscal 1998. The
second quarter decrease was due to slightly lower selling and advertising costs
as a percent of sales associated with the recently acquired businesses and
maintenance of relatively flat spending levels from year to year in the
Company's core businesses. Selling and advertising expense as a percent of
sales is expected to remain at the second quarter level of 34% throughout the
remainder of the fiscal year.*
General and administrative expense decreased to 15.3% of sales in the second
quarter of fiscal 1998 from 20.3% in last year's comparable quarter. The
decline was principally the result of a lower ratio of general and
administrative expense to sales associated with the Company's newly acquired
businesses. During the second quarter, the Company continued to increase
spending levels associated with its program to reengineer financial and
operational information systems. General and administrative expense as a
percent of sales is expected to decline slightly as a percent of sales
throughout the remainder of the fiscal year, however on an absolute dollar
basis, the Company will be spending more as a result of the Rapidforms
acquisition.*
Investment income decreased from $71,000 in the second quarter of fiscal year
1997 to $42,000 in the second quarter of fiscal 1998 due to lower investable
cash balances. Interest expense of $954,000 or 0.6% of sales has been recorded
in fiscal 1998 due to borrowings principally associated with the acquisition of
Chiswick Trading, Inc. during the fourth quarter of fiscal 1997.
The provision for income taxes as a percentage of pre-tax income decreased to
38.5% in the second quarter of 1998 from 39.6% in the comparable quarter in
fiscal year 1997 due principally to changes in the overall effective state tax
rate.
During fiscal year 1996, the Company established a five year plan to upgrade
the majority of its operational information systems. The information systems
reengineering plan was developed to enhance system performance and to address
year 2000 date related issues. The plan has been and will continue to be
revised to incorporate the operational systems of newly acquired businesses.
In addition, the Company is communicating with suppliers and customers to
specifically coordinate year 2000 compliance activities. The Company's cash
outlays for capital improvements and period expense associated with the
information systems reengineering project and for year 2000 compliance are
projected to total $21 million over fiscal 1997, 1998 and 1999, of which
approximately $9 million has been spent to date.* The Company does not expect
the year 2000 issue, in and of itself, to have a material effect on its
financial position and results of operations.*
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", which
became effective during the second quarter of the Company's 1998 fiscal year.
SFAS No. 128 required the Company to restate all previously reported earnings
per share information to conform with the new pronouncement's requirements.
_________________________
* This forward-looking statement reflects the Company's current expectations.
There can be no assurance the Company's actual performance will not differ
materially from those projected in such forward-looking statements due to
important factors including those described in the section to this Management's
Discussion and Analysis of Financial Condition and Results of Operations titled
"Forward-Looking Information and Risk Factors to Future Performance."
Forward-Looking Information and Risk Factors to Future Performance
- ------------------------------------------------------------------
From time to time, the Company or its representatives have made or may make
forward-looking statements that reflect the Company's current expectations,
orally or in writing, in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, elsewhere in the quarterly report on Form
10-Q, in other reports filed under the Securities Act of 1934, as amended, in
press releases or in statements made with the approval of an authorized
executive officer. The words or phrases "is expected," "will continue,"
"anticipates," "estimates," or similar expressions in any of these
communications are intended to identify "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A
of the Securities Act of 1933, as enacted by the Private Securities Litigation
Reform Act of 1995.
There can be no assurance the Company's actual performance will not differ
materially from that projected in such forward-looking statements due to
important factors including those described below. These factors include
increasing competition, economic cycles, technological change, paper and postal
costs, customer preferences, response rates, prospect lists, governmental
regulations, inherent risks in acquisitions, disruptions to the Company's
operating systems and reliance on vendors, all of which are described in
further detail below.
Increasing Competition; Pressure on Price and Margins
The Company operates in a highly competitive marketplace, in which it
competes with a variety of mail order marketers, retailers, dealers,
distributors and local printers in the marketing of business forms, stationery
and supplies to small businesses. Over the course of the past decade, mail
order providers of business forms and stationery have experienced growth in
excess manufacturing capacity. In addition, the Company has faced increasing
competition from low-price, high-volume office supply chain stores.
Improvements in the cost and quality of printing technology have increasingly
allowed dealers, distributors and local printers to gain access to products of
complex design and functionality at competitive prices. The Company currently
anticipates that these trends will continue. No assurance can be given that
competition will not have an adverse effect on the Company's business. In
addition, if any of the Company's mail order competitors were to seek to gain
or retain market share by reducing prices or increasing promotional
discounting, the Company could be compelled to reduce its prices or match the
discounts and thereby reduce its gross margin and profitability.
Economic Cycles; Variability of Performance.
The Company's standardized forms and check business accounts for a large
majority of its sales and profitability. The forms and check industry is
highly competitive and generally characterized by mature products designed
within well-established industry standards. The Company relies, in part, on
net small business formations for growth in demand for its standardized form
and check products. As a result, the Company's growth rate is closely
correlated to the strength of its target small business market. The Company's
revenue trends and operating profitability have been materially adversely
affected by recession-related contractions in the small business economy in the
past. The Company will continue to experience quarterly and annual variations
in net sales and net income as a result of changes in the levels of small
business formations and failures or from other economic events having an impact
on small businesses generally.
Technological Change; Product Obsolescence and Risks to Competitive Advantage.
The Company's standardized business forms and related products are designed
to provide small businesses with the financial and business records required to
manage a business. Steady technological improvements have provided small
businesses in several market segments with alternative means to enact and
record business transactions. PC-based, point-of-sale, electronic form and
electronic transaction systems have been designed to automate several of the
functions performed by the Company's products. The price and performance
characteristics of personal laser and ink-jet printing equipment have improved
markedly in the recent past, thereby allowing small businesses a cost-
competitive means to print low-quality versions of Company forms on plain
paper. In addition, the Internet has the potential to eliminate the Company's
advantage of scale in direct marketing by providing all competitors with equal
access to customers who purchase products over the Internet. In response, the
Company has focused resources on the acquisition, development and procurement
of new products less susceptible to technological obsolescence and has
aggressively moved to develop a comprehensive electronic catalog of products to
be utilized in retail-based kiosks, PC-based software and over the Internet.
It should be noted that the Company's small business customers have to-date
proven to be relatively slow adapters of new technology which has minimized the
adverse impact of these technological trends. However, the Company can give no
assurance that continued technological change will not have a material adverse
impact on the long-term prospects for the Company's business.
Paper Costs and Postal Rates; Risks to Margins.
The cost of paper used to produce the Company's products, catalogs and
advertising materials constitutes, directly or indirectly, approximately 20% of
consolidated revenues. In addition, the Company is reliant on the U.S. Postal
Service for delivery of most of the Company's promotional materials. Coated
paper costs for promotional materials and postal rates for third class mail
have increased significantly over the past decade. In addition, certain
segments of the paper market have demonstrated considerable price volatility
over the past five years. The Company has been able to counteract the impact
of postal and paper cost increases with cost reduction programs and selected
product price increases. Due to increased competition in the small business
forms, stationery and supplies marketplace, no assurance can be given that the
Company will be able to increase product pricing to compensate for future paper
or postal cost increases. The inability to raise prices in response to paper
or postal cost increases could reduce the Company's operating profitability and
net income.
Customer Preferences; Investment Requirements & Sales Risk.
The Company's core business is the direct marketing, manufacturing and
distribution of standardized forms and related products to small businesses.
Newly-formed small business owners are increasingly demanding custom and color-
coordinated products to create an image in addition to enabling the management
of business transactions. The relative prices charged by local printers,
contract printers and dealers for providing these custom and full-color printed
products have been declining due to technological advances in composition
systems and printing equipment. As a direct result, the cost advantage
inherent to the Company's standardized forms and related printed products has
declined. The Company is responding with focused investment in the
infrastructure required to sell, compose, print and distribute custom and full-
color products. This effort includes installation of an integrated and
flexible information system architecture and the re-engineering of many of the
Company's basic business functions. In addition, the Company expects to
continue to invest in its dealer and technology-based channels that more
readily support the interactive marketing required to sell custom and full-
color products. However, the Company can give no assurance that the rate of
decline in demand for standardized forms and related printed products will not
accelerate, that the interactive marketing investments will prove successful,
or that the information systems re-engineering effort will not result in
operating inefficiencies or unplanned expense. If any of such potential risks
materialize, the Company's future net sales and net income could be materially
adversely affected.
Response Rates and Customer Retention; Sales Risk.
Customer and prospect response rates to the Company's catalogs and
promotional materials have remained relatively stable over time. Continued
stability in prospect response and customer retention is primarily dependent on
the continued relevancy of the range of the Company's products to the small
business marketplace. New product introductions, to date, have generally
offset declines in response rates and retention attributable to product
obsolescence. However, the Company can make no assurances that its new product
introductions will continue to offset the rate of obsolescence of its
standardized forms products in the future. An increase in the rate of product
obsolescence or a decline in new product introductions could negatively impact
response rates and customer retention which, in turn, would have a materially
adverse impact on the Company's long-term financial performance.
Prospect Lists; Sales Risk.
The Company's direct mail business has been characterized by a consistent
level of average annual sales per customer. As such, net sales growth is
dependent, in part, on an increase in customers served by the Company. Growth
in the total number of direct mail customers served by the Company depends upon
continued access to high-quality lists of newly-formed small businesses. In
the past, the Company's ability to compile proprietary prospect lists was a
distinct competitive advantage. However, the external list compilation
industry has grown more sophisticated and currently markets comprehensive lists
of newly-formed businesses to the Company and its competitors. At present, the
Company relies on the speed of its delivery of promotional materials to
prospective customers to gain advantage over competitors. However, the Company
can make no assurances that its promotional material delivery advantage will be
maintained over time. A deterioration in the Company's delivery advantage
could have a materially adverse impact on the Company's business and financial
performance.
Governmental Regulations; Sales Risk.
Future governmental legislation or regulation including, but not limited to,
the following potential regulatory actions have the potential to have a
material adverse impact on the Company's business prospects: 1) enactment of
privacy laws could constrain the Company's ability to mail promotional
materials or to telemarket to small businesses; 2) modification to U.S. Postal
Service regulations with the effect of increasing postal rates or reducing
postal delivery efficiency could have an adverse impact on the Company's
marketing efforts; and 3) institution of a "general sales tax", "value added
tax" or similar national tax could reduce demand for the Company's products.
Although the Company has no current knowledge or belief that such adverse
regulation, or similar governmental regulation is pending or imminent, it can
make no assurance that adverse governmental regulation will not have a material
adverse impact on the Company's business in the future.
Acquisitions; Inherent Risk.
From time to time the Company has acquired, or may acquire in the future, a
majority ownership position in a company or substantially all of the assets
related to a specific line of business. During fiscal year 1997, the Company
acquired Standard Forms Limited and the assets of Chiswick Trading, Inc. which,
in the aggregate have recently comprised approximately 20% of the Company's
consolidated revenues and will comprise approximately 15% of the Company's
consolidated revenues on an ongoing basis. On December 23, 1997, the Company
announced the completion of the acquisition of Rapidforms, Inc., which will
comprise approximately 20% of the Company's consolidated revenues on an ongoing
basis. Such acquisitions are undertaken to enhance the Company's competitive
position in the marketplace or to gain access to new markets, products,
competencies or technologies. The Company has performed in the past and will
perform in the future a business, financial and legal due diligence review in
advance of an acquisition to corroborate the assumptions critical to projected
future performance of an acquired entity and to identify the risks inherent to
such projections. However, the Company can make no assurances that its due
diligence review will identify all potential risks associated with the
purchase, integration or operation of any acquired enterprise. If any of such
potential risks materialize, the Company's future net sales and net income
could be materially adversely affected.
Operating Systems; Disasters and Disruptions.
The Company has become increasingly dependent upon its manufacturing,
administrative and computer processing infrastructure and operations to process
its high volume of small dollar value orders on an efficient, cost competitive
and profitable basis. The Company has implemented commercially reasonable
safeguards to reduce the likelihood of property loss or service disruptions and
has secured property and business interruption insurance to minimize the
adverse financial consequences arising from a select group of risks. However,
the Company can make no assurances that its infrastructure and operations are
not susceptible to loss or disruption, whether caused by (i) intentional or
unintentional acts of Company personnel or third party service providers, or
(ii) natural disasters including, but not limited to, earthquakes, fire or
severe storms. In addition, the Company can make no assurance that its
insurance coverage will adequately respond to all potential causes of property
loss or service disruption. In the event that any such acts or disasters lead
to property loss or operating system disruption for which property and business
interruption insurance coverage is unavailable or insufficient, the Company's
financial performance and long-term prospects could be materially adversely
affected.
Computer Systems; Year 2000 Impact
The Company and its vendors have become increasingly reliant on computer
systems to process transactions and to provide relevant business information.
The majority of computer systems designed prior to the mid-1990s are
susceptible to a well publicized problem associated with an inability to
process date related information beyond the year 2000. Without proactive
modifications to routines and programs, many systems of the Company and its
vendors could be rendered useless as early as June of 1999. The Company has
created a comprehensive plan to address the year 2000 issue with respect to
both internal systems and to systems employed by critical vendors. However,
the Company can make no assurance that all year 2000 risks to Company and
critical vendor systems can be identified and successfully negated through
modification of existing programs prior to June of 1999. In the event that any
year 2000 program deficiencies remain undetected, or in the event that any
programming modifications do not adequately address the year 2000 issues, the
Company or its vendors could experience critical operating system failure. Any
such operating system failure could have a material adverse impact on the
Company's financial performance and long-term prospects.
Raw Materials and Services; Reliance on Certain Vendors
The Company has become increasingly reliant on certain individual third-party
vendors to provide raw materials and services critical to the Company's
operations in order to gain the advantage of volume-related favorable pricing
and, in some instances, favorable contract terms. Such critical vendors and
the nature of the products or services provided include, but are not limited
to, governmental postal services for the delivery of marketing materials and in
some countries, customer packages, MCI Telecommunications Corporation for the
provision of toll-free telephone services, R.R. Donnelley and Sons, Inc. for
printing and processing of marketing materials, Appleton Papers, Inc. for
carbonless paper, and United Parcel Service of America, Inc. for product
delivery services. In the past, the Company has been adversely affected by
disruption in the services provided or lack of availability of the products
produced by its critical vendors resulting from a variety of factors including
labor actions, inclement weather, disasters, systems failures and market
conditions. The Company can make no assurance that its critical vendors will
remain capable of providing the level of service or quantity of product
required to support the Company's business, nor that the Company could
immediately identify alternative sources for provision of the product or
service on a similar cost basis. Any such service disruption or product
shortage could have a material adverse impact on the Company's operating
performance and net income.
Other Risks; Variability of Performance.
The Company has experienced in the past and will experience in the future
quarterly and annual variations in net sales and net income as a result of many
factors, including, but not limited to, the timing of catalog mailings, catalog
response rates, product mix, the timing and levels of selling, general and
administrative expenses, cost reduction programs, timing of holidays and
inclement weather. The Company's planned operating expenses are based on sales
forecasts. If net sales performance falls below expectations in any given
quarter or year, the Company's operating results could be materially adversely
affected.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
Not applicable
PART II - OTHER INFORMATION
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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 AND USE OF PROCEEDS
- --------------------------------------------------
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
See Part II, Item 4 of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 27, 1997 filed November 7, 1997 for information
regarding the Annual Meeting of Stockholders on October 24, 1997.
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) Stock Purchase Agreement by and among New England
Business Service, Inc. and CSS Industries, Inc. dated as of
December 5, 1997. (Incorporated by reference to the
Company's Current Report on Form 8-K dated January 7, 1998)
(10)(b) Revolving Credit Agreement dated as of December 18, 1997,
by and among New England Business Service, Inc., BankBoston
N.A. and Fleet National Bank (together with certain other
financial institutions, the "Banks"), BankBoston, N.A.,
as agent for the Banks, and Fleet National Bank, as
documentation agent for the Banks (Incorporated by
reference to the Company's Current Report on Form 8-K dated
January 7, 1998)
(10)(c) Agreement dated as of September 19, 1995 between New
England Business Service, Inc. and Appleton Papers, Inc.,
as amended as of August 26, 1997.
(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) Financial Data Schedule
(99) Not applicable
b. Reports on Form 8-K.
On January 7, 1998, on Form 8-K, the Company (i) filed financial
statements and pro forma financial information relative to the acquisition of
all of the outstanding common stock of Rapidforms, Inc., and (ii) reported an
amendment to its revolving line of credit, effectively increasing the available
line from $60 million to $135 million.
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.
----------------------------------
(Registrant)
February 10, 1998 /s/John F. Fairbanks
- ----------------- --------------------
Date John F. Fairbanks
Vice-President-Chief
Financial Officer
(Principal Financial and
Accounting Officer