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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
-------- --------
<PAGE>
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands)
(unaudited)
Six Months Ended
---------------------
Dec. 28, Dec. 30,
1996 1995
-------- --------
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
<PAGE>
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
=========== ===========
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
New England Business Service, Inc.
Statement Re Computation of Per Share Earnings
(In Thousands Except Per Share Data)
Exhibit 11
----------
Three Months Ended Six Months Ended
December 28, 1996 December 28, 1996
------------------ ------------------
Fully Fully
Primary Diluted Primary Diluted
------- ------- ------- -------
Shares
- ------
Weighted Average Shares
of Common Stock 13,111 13,111 13,448 13,448
Add:
Common Stock Equivalents
in the form of Stock Options 162 246 158 246
------- ------- ------- -------
Weighted Average Common Stock
and Common Stock Equivalents 13,273 13,357 13,606 13,694
======= ======= ======= =======
Earnings
- --------
Earnings per Consolidated
Statement of Income $ 5,700 $ 5,700 $ 6,378 $ 6,378
======= ======= ======= =======
Earnings per Share $ .43 $ .43 $ .47 $ .47
======= ======= ======= =======
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF NEW ENGLAND BUSINESS SERVICE, INC. AND ITS
SUBSIDIARIES AS OF DECEMBER 28, 1996 AND THE RELATED STATEMENTS OF CONSOLIDATED
INCOME AND CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-28-1997 JUN-28-1997
<PERIOD-END> DEC-28-1996 DEC-28-1996
<CASH> 5,302 5,302
<SECURITIES> 1,603 1,603
<RECEIVABLES> 36,602 36,602
<ALLOWANCES> 3,834 3,834
<INVENTORY> 8,863 8,863
<CURRENT-ASSETS> 63,031 63,031
<PP&E> 102,805 102,805
<DEPRECIATION> 71,586 71,586
<TOTAL-ASSETS> 95,526 95,526
<CURRENT-LIABILITIES> 32,967 32,967
<BONDS> 0 0
<COMMON> 14,077 14,077
0 0
0 0
<OTHER-SE> 48,080 48,080
<TOTAL-LIABILITY-AND-EQUITY> 95,526 95,526
<SALES> 63,203 123,905
<TOTAL-REVENUES> 63,203 123,905
<CGS> 20,646 42,607
<TOTAL-COSTS> 34,736 72,502
<OTHER-EXPENSES> (1,614) (1,786)
<LOSS-PROVISION> 781 1,455
<INTEREST-EXPENSE> 11 11
<INCOME-PRETAX> 9,435 10,582
<INCOME-TAX> 3,735 4,204
<INCOME-CONTINUING> 5,700 6,378
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,700 6,378
<EPS-PRIMARY> .43 .47
<EPS-DILUTED> .43 .47
</TABLE>
Exhibit 99. Additional Exhibits - Safe Harbor for Forward Looking Statements
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing, in 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.
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing the following
cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those projected in such
forward looking statements:
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 may 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
would 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.
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 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 proven to be relatively slow adapters of new technology
which has minimized the adverse impact of these technological trends. However,
the Company may 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 may 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 competency 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 will include 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 will 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 may 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, nor 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) institution 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 may 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. 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 an acquired
enterprise. If any of such potential risks materialize, the Company's future
net sales and net income could be materially adversely affected.
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.
Exhibit 10
Date: November 19, 1996
Mr. John Fairbanks, CFO
New England Business Service, Inc.
500 Main Street
Groton, MA 01471
Dear John:
We are pleased to inform you that the necessary internal approval has
been obtained for the establishment of an informal "money market" lending
arrangement with NEBS. Loans under this arrangement will be at fixed rates
quoted by the The First National Bank of Boston with maturities of up to thirty
days. Prepayment of loans will not be permitted and if any loans are paid on
a date other than the maturity date thereof (whether by acceleration or
otherwise), you shall compensate us for any funding losses and other costs
(including lost profits) incurred as a result of such payment. Each loan must
be at least $1,000,000 and aggregate loans under this arrangement may not exceed
$10,000,000. This arrangement is not a commitment to lend, and from time to time
the Bank may not quote rates on some or all maturities.
We agree that upon your advice by telephone from time to time to our
Money Market Desk at (617) 434-7725 that you wish to borrow money under this
facility and our agreement to lend, we will forthwith lend you such amount at
the quoted rate of interest by crediting such an amount to your demand deposit
account with us, or, upon your instructions, by wiring such amount to such other
account as you may direct. Borrowings shall be evidenced by a Promissory Note in
the form attached hereto. Each borrowing and the corresponding information (see
attached note schedule) will be recorded the day of the telephone call. Our
corresponding advices of credit and debit will be additional evidence of
borrowings. You authorize us to keep the official record of all borrowings under
this "money market" lending arrangement in the format described above, and you
agree that this record shall be prima facie evidence of the amount of the
borrowings under this facility.
This letter and the Promissory Note evidence your promise to pay all
such borrowings with interest on their respective maturity dates.
This "money market" lending arrangement remains in force until
October 31, 1997.
If the foregoing satisfactorily sets forth the terms and conditions of this
lending arrangement, please indicate your acceptance thereof by executing and
returning the attached copy of this letter and the attached Promissory Note,
along with a $5,000 facility set-up fee.
Sincerely,
/s/Christopher D. Francis
-------------------------
Christopher D. Francis
Vice President
Accepted:
BY: /s/John F. Fairbanks
--------------------
TITLE: Vice President & CFO
Date: November 20, 1996
