-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TYr+OcjAHwefdfiJBfrZIjXr+1k3JoXqKcF59bhE8vITTLUw65XvmbVTW1FYSc1Y 3FmfbY7movfKz7rBKtx5tg== 0000205700-97-000001.txt : 19970221 0000205700-97-000001.hdr.sgml : 19970221 ACCESSION NUMBER: 0000205700-97-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961228 FILED AS OF DATE: 19970211 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW ENGLAND BUSINESS SERVICE INC CENTRAL INDEX KEY: 0000205700 STANDARD INDUSTRIAL CLASSIFICATION: MANIFOLD BUSINESS FORMS [2761] IRS NUMBER: 042942374 STATE OF INCORPORATION: DE FISCAL YEAR END: 0627 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11427 FILM NUMBER: 97523826 BUSINESS ADDRESS: STREET 1: 500 MAIN ST CITY: GROTON STATE: MA ZIP: 01471 BUSINESS PHONE: 5084486111 10-Q 1 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 -------- -------- 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 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 EX-11 2 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 ======= ======= ======= ======= EX-27 3
5 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. 1,000 3-MOS 6-MOS JUN-28-1997 JUN-28-1997 DEC-28-1996 DEC-28-1996 5,302 5,302 1,603 1,603 36,602 36,602 3,834 3,834 8,863 8,863 63,031 63,031 102,805 102,805 71,586 71,586 95,526 95,526 32,967 32,967 0 0 14,077 14,077 0 0 0 0 48,080 48,080 95,526 95,526 63,203 123,905 63,203 123,905 20,646 42,607 34,736 72,502 (1,614) (1,786) 781 1,455 11 11 9,435 10,582 3,735 4,204 5,700 6,378 0 0 0 0 0 0 5,700 6,378 .43 .47 .43 .47
EX-99 4 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. EX-10 5 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 -----END PRIVACY-ENHANCED MESSAGE-----