-----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, E/qck3DUTyZVU2q3yiJogcLgehGlwin+k4DsrYEVYdvG9jEuyz2QqFsycujh4fAZ rjnu0dGvqKWNQtBfaI3GuQ== 0000927016-98-003423.txt : 19980914 0000927016-98-003423.hdr.sgml : 19980914 ACCESSION NUMBER: 0000927016-98-003423 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980627 FILED AS OF DATE: 19980911 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-K SEC ACT: SEC FILE NUMBER: 001-11427 FILM NUMBER: 98708144 BUSINESS ADDRESS: STREET 1: 500 MAIN ST CITY: GROTON STATE: MA ZIP: 01471 BUSINESS PHONE: 5084486111 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 27, 1998 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 1-11427 -------------- NEW ENGLAND BUSINESS SERVICE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 04-2942374 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION INCORPORATION OR ORGANIZATION) NUMBER) 500 MAIN STREET 01471 GROTON, MASSACHUSETTS (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (978) 448-6111 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ----------------------- Common Stock ($1.00 par value) New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 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 [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the Registrant's Common Stock, par value $1.00 per share, held by stockholders who are not affiliates of the Registrant at August 28, 1998 as computed by reference to the closing price of such stock on that date was approximately $396,082,250. The number of shares of Registrant's Common Stock, par value $1.00 per share, outstanding at August 28, 1998 was 14,337,819. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement sent to stockholders in connection with the Annual Meeting to be held on October 23, 1998 are incorporated by reference into Items 10, 11, 12 and 13 (Part III) of this Report. Such Proxy Statement, except for the parts therein which have been specifically incorporated by reference, shall not be deemed "filed" for the purposes of this report on Form 10-K. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS New England Business Service, Inc. (the "Company"), a Delaware corporation founded in 1952, incorporated in Massachusetts in 1956 and reincorporated in Delaware in 1986, designs, produces and distributes business forms, checks, envelopes, labels, greeting cards, signs, stationery and related printed products and distributes packaging, shipping and warehouse supplies, software, work clothing and other business products through mail order, direct sales, telesales, dealers and the internet to small businesses throughout the United States, Canada, the United Kingdom and France. In December 1997, the Company acquired all of the outstanding common stock of Rapidforms, Inc. ("Rapidforms") for consideration of approximately $82,136,000 in cash (net of cash acquired). Rapidforms designs, produces and markets a line of business forms, business supplies, in-store retail merchandising supplies, holiday greeting cards and promotional products sold principally by direct mail to small businesses across the United States. In June 1998, the Company acquired all of the outstanding common stock of McBee Systems, Inc. and all of the assets of McBee Systems of Canada, Inc. (collectively "McBee") for consideration of approximately $48,529,000 in cash (net of cash acquired) and $12,600,000 in Company common stock. McBee manufactures and markets a line of checks and related products to small businesses in the United States and Canada through a dedicated field sales force. The Company reports its operations within one principal industry segment consisting of the direct marketing of printed products and business supplies to small businesses. The amounts of net sales, operating profit or loss and identifiable assets attributable to each of the Company's geographic areas for the last three fiscal years are shown in Note 14 to the Consolidated Financial Statements included in this Annual Report on Form 10-K. PRODUCTS The Company's product line consists of an extensive range of standardized imprinted manual and computer business forms, custom forms, checks and check writing systems, envelopes, labels, greeting cards, signs, stationery and other printed products principally designed and imprinted in-house. The Company also distributes a variety of industrial shipping and packaging products including corrugated boxes, polyethylene bags, tape, labels and shrink wrap and distributes retail packaging supplies such as bags, ribbons, gift wrap and bows. In addition, the Company distributes a variety of other business products commonly used by small businesses, including merchandising displays, presentation folders, promotional products, work clothing and software. Products are either specifically designed for individual lines of business or are of a type universally used by small businesses and professional offices. The Company's full range of products are enhanced by high quality, fast delivery, competitive prices and extensive product guarantees. The Company's standard manual business forms include billing forms, work orders, job proposals, purchase orders, invoices and personnel forms. Standard manual business forms are designed to provide small businesses with the financial and other business records necessary to efficiently manage a business. The Company's stationery line, including letterhead, envelopes and business cards, is available in a variety of formats and ink colors designed to provide small businesses with a professional image. Checks and check writing systems are designed to facilitate payments, the recording of transactional information and the posting of related bookkeeping entries. The Company also offers a full line of printed products compatible with the software which the Company distributes and compatible with most third-party computer software packages commonly used by small businesses. The Company's computer business forms, including checks, billing forms, work orders, purchase orders and invoices are designed to provide automated small businesses with the records necessary to efficiently manage a business. 1 Promotional products, including labels, pricing tags, signage, presentation folders and seasonal greeting cards are designed to fulfill a variety of selling and marketing activities and to provide small businesses with a professional image. Additionally, the Company markets a line of filing systems, accountants' supplies and appointment products specifically for use in small professional offices. The majority of the Company's standard products are imprinted to provide small businesses with an affordable, professional image. Standard imprint options include consecutive numbering, logos, customer names, addresses, and phone numbers. The Company also offers a wide range of custom printing alternatives and a custom logo design service. The Company's packaging and shipping supplies, including bags and bag closures, bubble and polystyrene fill, wrapping materials, boxes, tapes and mailers are used principally by small wholesalers, manufacturers and distributors as containers to package, distribute and market their products. The Company's line of retail supplies, including signs, merchandising supplies, bags, ribbons, gift wrap and bows are used by small retailers to display, market and package their products. During fiscal year 1998, the Company developed and introduced the Company ColorsTM line of work clothing, including an array of jackets, shirts, hats, sweatshirts, and uniforms commonly worn in the conduct of small business. The Company Colors line may be embroidered with business names, logos, and employee names to provide a small business with a coordinated and professional image. The Company distributes Form Magic(R), a proprietary form-filling software package, third-party accounting software including Peachtree's One-Write Plus(R) and Intuit's Quickbooks(R), and a line of products designed by MySoftware Company. Software distributed by the Company is designed to perform a variety of the tasks required to manage and promote a small business, and is compatible with the business forms and other printed products offered by the Company. For a further discussion of the risks and uncertainties associated with customer preferences and the market for forms and related printed products, see "Forward Looking Information and Risk Factors to Future Performance" included in Part II, Item 7 to this Annual Report on Form 10-K. PRODUCT DEVELOPMENT AND RESEARCH The Company's products are designed principally by an in-house product development staff or are obtained from third-party sources. The Company relies upon direct field research with customers and prospects, focus groups, mail surveys, feedback from distributors, salespeople, representatives and unsolicited suggestions to generate new product ideas. Product design efforts are accomplished or directed by Company design personnel who employ manual and computer design methods to create products. Product design efforts range from minor revisions of existing manual business forms to the creation of a consistent and coordinated line of products such as the Company Colors line of work clothing. Throughout the design process, the Company solicits comments and feedback from customers and prospects, and tests market acceptance through a variety of direct mail and selling test methods. For a further discussion of the risks and uncertainties associated with the technological changes affecting future demand for the Company's standardized business forms and related products, see "Forward Looking Information and Risk Factors to Future Performance" included in Part II, Item 7 to this Annual Report on Form 10-K. SALES AND MARKETING The Company has established three distinct channels of distribution. The Company's primary channel is direct mail order in which approximately 90 million pieces of promotional advertising offering the Company's products are delivered by mail to 1,922,000 customers and 9,400,000 prospective customers each year under the 2 NEBS/TM/, RapidForms(R), Chiswick(R), Histacount(R), SYCOM(R), Russell & Miller(R), Bags & Bows, NCS(R), Main Street(R), ASH/TM/, NAPCO(R), Education Matters/TM/, Company Colors, Business Envelopes and SFL brand names. The Company's direct marketing efforts are also supplemented by the prospecting and account development efforts of an outbound telemarketing group. The Company's success to date has largely been the result of effective direct marketing and the strength of its customer relationships. Targeted mail order marketing in combination with focused telemarketing allows the Company to identify and penetrate numerically and geographically dispersed but, in the aggregate, significant markets. The Company targets small businesses with 100 or fewer employees within these markets with specialized promotions and products specifically designed to meet small business needs. In the direct mail channel, the Company's promotional materials contain one or more order forms to be completed by the customer and either mailed, faxed or telephoned to the Company's telesales and customer service group. The Company also maintains a World Wide Web site for promotion and order taking. The Company's promotional materials include several reference catalogs containing a comprehensive display of the Company's forms and checks, packaging supplies and retail merchandising supplies product offerings. In addition the Company utilizes smaller catalogs focused on specific products or targeted to a specific small business segment, promotional circulars with samples, flyers, inserts included with invoices, statements and product shipments. The Company relies to a lesser extent on advertising space in magazines and post card packages to generate sales leads from prospective customers. The Company utilizes the United States or the local country postal service for distribution of most of its advertising materials. The Company's second principal channel of distribution is through a 400 person in-house sales force dedicated to marketing McBee(R) brand checks and check writing systems, Chiswick brand packaging and shipping supplies, or Russell & Miller brand retail merchandising and display products. Initial order support, product reorders and routine service in the direct sales channel is provided by a network of customer service representatives located throughout the United States and Canada. The principal focus of the McBee sales force is to generate first-time buyers for Company check and check writing system products. Prospective customer leads are generated for the McBee sales force under referral arrangements with small business accountants and a network of commercial banks containing in excess of 16,000 geographically dispersed branch offices. The McBee sales effort typically generates small business customers with fewer than 10 employees. The principal focus of the Chiswick and Russell & Miller sales force has been to develop high-potential customer relationships initially established through the direct mail channel. The Chiswick and Russell & Miller sales effort typically supports businesses with more than 100 employees or retail chains with geographically dispersed store-front locations. The Company's third principal distribution channel is through a network of participating, independent dealers. The Company distributes a private label version of a full line of standard and custom printed products, including manual and computer forms, checks, greeting cards and labels through this dealer network. The Company's participating independent dealers typically include local printers, business forms dealers, stationers, computer stores and system houses and number in excess of 22,000. The Company believes that its sophisticated and extensive marketing database, customer/prospect lists and referral sources constitute a competitive advantage. The Company is able to select names and plan promotions based on a variety of attributes including status as a customer or prospect, line of business, product purchase history, purchase frequency or purchase dollar volume. With this data, the Company is able to create and deliver cost- effective marketing programs to small businesses through direct mail, direct sales, outbound telemarketing, the internet or the dealer channel. For a further discussion of the risks and uncertainties associated with the small business market and the Company's direct mail order channel, see "Forward Looking Information and Risk Factors to Future Performance" included in Part II, Item 7 to this Annual Report on Form 10-K. 3 RAW MATERIALS, PRODUCTION AND DISTRIBUTION The Company's production and distribution system is designed to process a high volume of small dollar orders on a cost-effective basis. The production and procurement of base printed product stock is based on forecasts of demand for the Company's products. The Company produces semi-finished base business forms, check stock and related products in long runs on high-speed, roll-fed presses from raw paper. The Company also purchases base printed stock from a number of industry sources at competitive prices. The raw paper and carbonless paper used by the Company to produce base printed stock is purchased from a limited number of vendors at competitive prices. In response to a customer order, the Company's base printed products are subsequently personalized with a variety of imprint options including customer names, addresses, phone numbers, consecutive numbering and logos. The Company operates equipment specifically designed to meet the demands of short-run personalized printing. Typesetting and imprinting of customer headings are accomplished with computerized typesetters, platemaking systems, letter presses, offset presses and digital presses. In addition, the Company utilizes manual and semi-automatic bindery equipment. A number of the Company's imprinting presses have been designed internally or substantially modified to meet the short-run demands of small businesses. These specialized presses allow the Company to produce small-order quantities with greater efficiency than possible with stock equipment available from typical printing press equipment suppliers. During the past two years, the Company has experienced an increase in the proportion of revenue generated by the sale of stock business products produced by third parties, including Chiswick brand industrial packaging and warehouse supplies, and Bags & Bows retail supplies. The Company principally utilizes a "pick and pack" operation to aggregate stock products from warehoused inventory into distinct order groups and to package these order groups for shipment to the customer. The Company's stock business products are obtained from a large number of suppliers at competitive prices. In addition, the Company relies on a limited number of suppliers to produce and drop-ship products directly to Company customers, including the Company Colors line of work clothing. The Company believes that alternative sources are generally available for products purchased from third-party vendors, and has not experienced any significant problems in obtaining necessary items. The Company has no significant backlog of orders. The Company's objective is to produce and ship product as expeditiously as possible following receipt of a customer's order. During fiscal year 1998, approximately 70% of printed products were produced and shipped within one day and approximately 90% within four days of order. The Company's stock business products are routinely shipped within 24 hours of receipt of a customer order. To facilitate expeditious production and shipment of product, the Company maintains significant inventories of raw paper ($1,622,000 at June 27, 1998), and partially printed business forms, packaging, shipping and retail supplies, and related business products ($19,348,000 at June 27, 1998). The Company ships in excess of 90% of its products to customers by United Parcel Service of America, Inc. The Company uses Parcel Post and overnight delivery services for distribution of the remainder of its products to customers. For a further discussion of the risks and uncertainties associated with the Company's reliance on certain individual third-party vendors to provide raw materials and services critical to the Company's operation, see "Forward Looking Information and Risk Factors to Future Performance" included in Part II, Item 7 to this Annual Report on Form 10-K. 4 COMPETITION The small business forms and business supplies industry is highly competitive. The Company believes that it is well positioned in the small business marketplace, with a reputation for reasonable prices and high quality, reliability and service. The Company's primary competitors for printed products are the local printers, business forms dealers, contract stationers and office products superstores located throughout the United States, Canada, the United Kingdom and France. Local printers have an advantage of physical proximity to customers, but generally do not have the capability of producing a broad array of products, particularly those having a complex construction. In addition, most local printers lack the economies of scale to produce a small order for a single customer on a cost effective basis. General purpose, preprinted business forms offered by stationers and office product superstores are typically price competitive with the Company's forms, but lack the design and functionality for specific lines of business and the custom printing options available with the Company's products. The Company's principal competitors for stock business products are the large number of local and regional business supplies jobbers, distributors and retailers throughout the United States and Canada. At present, the Company is aware of more than twenty major independent companies or divisions of larger companies marketing printed products and business supplies to small businesses through mail order, distributors, or a direct sales force in the United States and Canada, the United Kingdom and France. The primary competitive factors influencing a customer's purchase decision are product guarantees, breadth of product line, speed of delivery, price and customer service. The Company believes it is the leading direct marketer of business forms, checks and related printed products to the very small business market in the United States, Canada and the United Kingdom. The Company defines the very small business market as businesses with fewer than 20 employees. For a further discussion of the risks and uncertainties associated with the competitive landscape for the Company's products, see "Forward Looking Information and Risk Factors to Future Performance" included in Part II, Item 7 to this Annual Report on Form 10-K. EMPLOYEES The Company had 3,738 full and part-time employees at June 27, 1998. The Company believes its relationship with its employees to be satisfactory. ENVIRONMENT To the Company's knowledge, no material action or liability exists on the date hereof arising from the Company's compliance with federal, state and local statutes and regulations relating to protection of the environment. ITEM 2. PROPERTIES The Company's principal executive offices are located in Groton, Massachusetts. The Company's principal operating facilities consist of manufacturing, administrative and warehouse facilities and are located in the United States, Canada, the United Kingdom and France. Of its principal operating facilities, the Company owns 871,100 square feet in the aggregate in Arizona (Flagstaff), Massachusetts (Groton and Townsend), Missouri (Maryville), New Hampshire (Peterborough), New Jersey (Thorofare), Ontario (Midland and Toronto), the United Kingdom (Chester), and Utah (Ogden), and leases 582,851 square feet in the aggregate in California (Santa Fe Springs), France (Tours), Massachusetts (Sudbury), New Jersey (Parsippany), Ohio (Athens) and Virginia (Damascus). The Company also leases space in over 80 locations in the United States and Canada for sales purposes, leases and subleases manufacturing space in Arizona, holds a 37,000 square foot manufacturing building in Bridgeton, New Jersey for sale, and owns 16.9 acres of undeveloped land in Douglasville, Georgia. Plans are in progress to construct an additional 30,000 square feet of warehouse space in Midland, Ontario. 5 With reference given to the 30,000 square foot addition currently under construction in Midland, Ontario, the Company believes its existing production and office facilities are adequate for its present and foreseeable future needs. ITEM 3. LEGAL PROCEEDINGS From time to time the Company is involved in disputes and/or litigation encountered in the ordinary course of its business. The Company does not believe that the ultimate impact of the resolution of such outstanding matters will have a material effect on the Company's business, operating results or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of stockholders during the fourth quarter of fiscal 1998. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS COMMON STOCK The Company's Common Stock is listed and traded on the New York Stock Exchange under the symbol "NEB." For the fiscal periods indicated, the high and low sales prices for shares of the Company's Common Stock as reported on the New York Stock Exchange-Composite Transactions Reporting System were as follows:
FISCAL 1998 HIGH LOW - ----------- -------- ------ 1st Quarter............. 32 1/2 25 3/4 2nd Quarter............. 33 13/16 29 1/8 3rd Quarter............. 34 1/4 30 5/8 4th Quarter............. 34 1/2 30
FISCAL 1997 HIGH LOW - ----------- ------ ------ 1st Quarter............. 19 3/8 15 2nd Quarter............. 21 5/8 17 3/8 3rd Quarter............. 26 19 5/8 4th Quarter............. 29 7/8 25 1/8
As of August 28, 1998, there were 641 stockholders of record, and the Company believes that as of such date there were approximately 6,000 beneficial owners of the Company's Common Stock, based on information provided by the Company's transfer agent. Information with respect to dividends paid on the Company's Common Stock during the past two fiscal years is shown in Note 15 to the Consolidated Financial Statements included in this Annual Report on Form 10-K. 6 ITEM 6. SELECTED FINANCIAL DATA FIVE YEAR SUMMARY (IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS AND OTHER STATISTICS)
JUNE 27, JUNE 28, JUNE 29, JUNE 30, JUNE 24, FOR THE FISCAL YEAR ENDED 1998(A) 1997(B) 1996(C) 1995(D) 1994(E) - ------------------------- --------- --------- --------- --------- --------- INCOME STATISTICS Net Sales............... $ 355,767 $ 263,424 $ 254,954 $ 263,724 $ 251,253 Income before income taxes ................. 41,405 31,380 21,055 28,492 27,599 Percent of sales....... 11.6% 11.9% 8.3% 10.8% 11.0% Provision for income taxes.................. 16,471 12,731 8,306 11,818 12,036 Percent of sales....... 4.6% 4.8% 3.3% 4.5% 4.8% Net income before equity in losses of investment............. 24,934 18,649 12,749 16,674 15,563 Percent of sales....... 7.0% 7.1% 5.0% 6.3% 6.2% Percent of stockhold- ers' equity............ 21.8% 23.1% 16.8% 18.2% 15.6% Per diluted common share.................. 1.77 1.38 0.86 1.09 1.01 Net Income.............. 24,934 18,649 11,929 16,298 15,563 Percent of sales....... 7.0% 7.1% 4.7% 6.2% 6.2% Percent of stockhold- ers' equity............ 21.8% 23.1% 15.7% 17.8% 15.6% Per diluted common share.................. 1.77 1.38 0.81 1.07 1.01 Dividends per common share.................. 0.80 0.80 0.80 0.80 0.80 - --------------------------------------------------------------------------------- BALANCE SHEET STATISTICS Current assets.......... $ 101,060 $ 68,426 $ 71,334 $ 77,509 $ 85,288 Current liabilities..... 50,677 33,327 27,273 32,169 30,418 Working capital......... 50,383 35,099 44,061 45,340 54,870 Current ratio........... 2.0 2.1 2.6 2.4 2.8 Total assets............ 307,577 141,196 103,542 124,546 131,691 Long-term debt.......... 141,000 27,000 0 0 0 Stockholders' equity.... 114,505 80,581 75,916 91,523 99,479 Diluted weighted average shares outstanding..... 14,106 13,525 14,811 15,295 15,364 Book value per common share.................. 8.01 5.92 5.42 6.16 6.43 - --------------------------------------------------------------------------------- OTHER FINANCIAL STATIS- TICS Capital expenditures.... $ 13,275 $ 9,567 $ 9,388 $ 10,804 $ 6,054 Depreciation and amorti- zation................. 15,218 9,090 10,329 12,676 11,623 - --------------------------------------------------------------------------------- OTHER STATISTICS Number of employees..... 3,738 2,164 2,014 2,055 2,083 Number of stockholders.. 6,000 6,000 5,800 5,600 5,700 Number of active custom- ers.................... 1,922,000 1,297,000 1,238,000 1,292,000 1,285,000 Facilities (in square feet).................. 1,594,000 886,000 708,000 743,000 794,000
- -------- (A) Included in the 1998 results is a $.9 million pretax gain, or $.04 per diluted share, from the settlement of the Company's US defined-benefit pension plan and curtailment of the Company's Canadian defined-benefit pension plan. (B) Included in the 1997 results is a $3.8 million pretax charge, or $.17 per diluted share, related to the elimination of the Company's retail initiative with Kinko's and a $2.2 million pretax gain, or $.10 per diluted share, from the curtailment of the Company's defined-benefit pension plan. (C) Included in the 1996 results is a $3.04 million pretax charge, or $.12 per diluted share, related to the closure of the Company's Flagstaff, Arizona manufacturing facility. (D) Included in the 1995 results is a $1.96 million pretax charge, or $.07 per diluted share, related to integration of the Company's SYCOM subsidiary. (E) Included in the 1994 results is a $5.45 million pretax charge, or $.21 per diluted share, related to a restructuring program. See the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K. 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW New England Business Service, Inc. (the "Company"), a Delaware corporation founded in 1952, incorporated in Massachusetts in 1956 and reincorporated in Delaware in 1986, designs, produces and distributes business forms, checks, envelopes, labels, greeting cards, signs, stationery and related printed products and distributes packaging, shipping and warehouse supplies, software, work clothing and other business products through mail order, direct sales, telesales, dealers and the internet to small businesses throughout the United States, Canada, the United Kingdom and France. In December 1997, the Company acquired all of the outstanding common stock of Rapidforms, Inc. ("Rapidforms") for consideration of approximately $82,136,000 in cash (net of cash acquired). Rapidforms designs, produces and markets a line of business forms, business supplies, in-store retail merchandising supplies, holiday greeting cards and promotional products sold principally by direct mail to small businesses across the United States. In June 1998, the Company acquired all of the outstanding common stock of McBee Systems, Inc. and all of the assets of McBee Systems of Canada, Inc. (collectively "McBee") for consideration of approximately $48,529,000 in cash (net of cash acquired) and $12,600,000 in Company common stock. McBee manufactures and markets a line of checks and related products to small businesses in the United States and Canada through a dedicated field sales force. RESULTS OF OPERATIONS 1998 VERSUS 1997 Net sales increased $92.4 million or 35.1% to $355.8 million for fiscal year 1998 from $263.4 million in fiscal year 1997. $84.8 million or 91.8% of the net sales increase was attributable to acquisitions completed during fiscal years 1998 and 1997. The acquisitions of Rapidforms and McBee during fiscal year 1998 accounted for $38.0 million and $4.7 million of the increase, respectively. The acquisitions of Chiswick Trading, Inc. and Standard Forms, Ltd. during fiscal year 1997 contributed $38.3 million and $3.8 million, respectively, to the acquisition related net sales growth during fiscal year 1998. The balance of the net sales increase of $7.6 million was primarily attributable to price increases effected during the fiscal year and to moderate growth in certain product lines. The Company expects to achieve revenue growth in excess of 30% during fiscal year 1999 due primarily to the full year impact of the businesses acquired during fiscal year 1998.* Cost of sales as a percentage of net sales increased from 35.7% in fiscal year 1997 to 38.0% in fiscal year 1998. The increased percentage was primarily the result of an increase in revenue generated by lower margin products associated with the businesses acquired by the Company during fiscal years 1998 and 1997. The acquired businesses higher cost of sales is due to the nature of their products, markets and distribution methods. The Company has commenced implementation of certain cost savings initiatives in the acquired businesses designed to counter the unfavorable margin impact.* In addition, the Company is continuing to seek opportunities to leverage its enhanced purchasing power with vendors and service providers to reduce manufacturing costs.* Selling and advertising expense as a percentage of sales decreased slightly from 34.3% in fiscal year 1997 to 34.2% in fiscal year 1998. The impact of a higher ratio of selling and advertising expense to net sales in the acquired businesses and a significant increase in amortization expense associated with acquisition related - -------- * 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 the important factors 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." 8 intangibles was more than fully offset by improved selling and advertising efficiency in the Company's core businesses. Selling and advertising expense as a percentage of net sales is expected to grow by 3 to 4 percentage points during fiscal year 1999.* The projected increase is principally the result of planned marketing investment in support of new products during fiscal year 1999 and a proportionately higher weighting of revenues during the year generated by the new businesses acquired during fiscal year 1998.* General and administrative expense decreased as percentage of net sales from 17.4% in fiscal year 1997 to 15.2% in fiscal year 1998. The decline was principally the result of a lower ratio of general and administrative expense to net sales associated with the Company's newly acquired businesses and a reduction in corporate general and administrative expense during fiscal year 1998. These reductions in the ratio of general and administrative expense to net sales were partially offset by increased spending levels associated with the Company's program to reengineer its financial and operational information systems. General and administrative expense is expected to continue to decline as a percentage of net sales in fiscal year 1999.* During fiscal year 1998, payments related to accruals for previous year's exit costs were completed and there were no significant changes in estimates of such exit costs. During fiscal year 1997, the Company amended its defined benefit pension plan for U.S. based employees of New England Business Service, Inc. to freeze participation and to eliminate further benefit accruals. In fiscal year 1998, the Company terminated the defined benefit pension plan and settled all plan obligations. The Company recorded a plan curtailment gain of $2,187,000 and a plan settlement gain of $556,000 in fiscal years 1997 and 1998, respectively, associated with the amendment and termination of this plan. During fiscal year 1998, the Company amended its defined benefit pension plan for Canadian employees of NEBS Business Forms, Ltd. to freeze participation and to allow participants to rollover accrued benefits under the plan to a defined contribution retirement plan. The Company recorded a curtailment gain of $313,000 during fiscal year 1998 associated with the freeze and resultant benefit rollover. The Company plans to settle all obligations associated with the benefit rollover during fiscal year 1999.* Interest expense, net of interest income, increased from $64,000 in fiscal year 1997 to $4,334,000 or 1.2% of net sales in fiscal year 1998. The increase in net interest expense is the result of the issuance of debt to finance acquisitions completed during the two fiscal years. The Company expects interest expense to increase to approximately $9,000,000 during fiscal year 1999 to reflect the full year impact of the debt incurred to acquire Rapidforms and McBee in fiscal year 1998.* The provision for income taxes as a percentage of pretax income decreased from 40.6% in fiscal year 1997 to 39.8% in fiscal year 1998 principally due to a reduction in the Company's effective state tax rate. The Company will seek to take advantage of opportunities afforded by the acquisition related change in the Company's operational structure to further reduce its effective state tax rate during fiscal year 1999.* The Company will continue to seek opportunities to acquire companies, businesses and product lines to enhance the Company's competitive position in the marketplace or to gain access to new markets, products, competencies or technologies.* In addition, the Company is committed to capitalizing on the marketing and cost reduction opportunities presented by integration of the businesses acquired during fiscal years 1997 and 1998.* The Company will continue to seek opportunities to enhance the cost structure of the Company, to improve operating efficiencies, and to fund investments in support of the Company's strategies.* - -------- * 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 the important factors 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." 9 In fiscal 1998, the Company adopted SFAS No. 128, "Earnings Per Share." 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," in February 1998, SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits" and in June, 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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. * In March 1998, the AICPA issued Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The Company will be adopting this statement in fiscal year 1999 and does not expect the adoption of this statement will have a material impact on the consolidated financial statements.* The AICPA also issued Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities." The policies promulgated by this statement had previously been followed by the Company and thus its implementation will not impact the financial statements. 1997 VERSUS 1996 Net sales increased $8.4 million or 3.3% to $263.4 million for fiscal year 1997 from $255.0 million in fiscal year 1996. The net sales increase included a $15.7 million or 6.1% increase resulting from the acquisition of Standard Forms Ltd. and Chiswick Trading, Inc. during fiscal year 1997, offset by a $11.2 million or 4.4% decline attributable to the Company's decision to eliminate its retail initiative with Kinkos, to divest the One-Write Plus(R) software line and to reposition the Company's software line. The remainder of the sales increase consisted of price increases of 2.0% or $5.0 million, partially offset by a unit volume decrease of $1.1 million or 0.4%. Cost of sales remained constant from 1996 to 1997 at approximately 35.7% of net sales. Improved cost of sales performance in business forms and related products resulting from overhead cost reduction programs implemented in fiscal years 1996 and 1997 was offset by a higher cost of sales associated with the businesses acquired by the Company during fiscal year 1997. The acquired businesses' higher cost of sales is due to the nature of their products, markets and distribution methods. Paper prices remained relatively stable during fiscal years 1997 and 1996 and did not have a significant impact on cost of sales. Selling and advertising expenses decreased from 39.0% of net sales in fiscal year 1996 to 34.3% of net sales in fiscal year 1997. This decrease was principally the result of the Company's decision to eliminate the Kinko's retail channel initiative early in fiscal year 1997, which substantially reduced selling and advertising expenditures, as well as the sale of the One Write Plus(R) software line in late fiscal year 1996, which required a high level of selling and advertising support. These reductions were partially offset by increased direct mail advertising required to increase revenue growth rates in the direct mail forms business. General and administrative expenses increased from 16.5% of net sales in fiscal year 1996 to 17.4% of net sales in fiscal year 1997. The increase was primarily related to the Company's program to reengineer its financial and operational information systems, and an increase in performance-based bonus plan expenses from year to year. During fiscal year 1997, the Company recorded pretax exit costs of $3.8 million related to a decision to eliminate its retail channel initiative with Kinko's. The pre-tax exit charges consisted of estimated costs related to facility closures of $0.5 million, estimated equipment write-offs of $1.1 million and estimated termination benefits of $2.2 million. All liabilities have been substantially settled at June 27, 1998. - -------- * 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 the important factors 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." 10 During fiscal year 1997, the Company amended its defined-benefit pension plan for the majority of its domestic employees to freeze plan participation at December 31, 1996 and eliminate further benefit accruals after June 28, 1997. A non-recurring plan curtailment gain of $2.2 million was recorded by the Company as a result of the amendment. The plan was terminated and settled during the first quarter of fiscal 1998. During fiscal 1997, the Company terminated its existing profit-sharing plan and instituted a transition bonus plan for the remainder of the year. The net financial impact in fiscal 1997 was immaterial. The provision for income taxes as a percentage of pretax income increased from 1996 to 1997 due to a reduction in tax-free interest income. In fiscal year 1997, the Company's adoption of Statement 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 consolidated financial statements. As allowed by the Financial Accounting Standards Board, the Company chose during fiscal 1997 to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations ("APB Opinion No. 25") instead of adopting SFAS No. 123, "Accounting for Stock-Based Compensation." YEAR 2000 During fiscal year 1996, the Company established a five year plan to upgrade the majority of its critical operational information systems. This information systems reengineering plan was developed to enhance system performance and to address Year 2000 issues. The Company has experienced delays in certain facets of the reengineering effort, and as a result has modified its Year 2000 plan to focus on system remediation rather than system replacement. The majority of the Company's operational information systems have been inventoried and assessed for Year 2000 compliance, and approximately 40% of the Company's systems have been remediated as of June 27, 1998. The Company is currently on schedule to complete the remediation of all critical operating systems by June 1999, which is expected to leave an appropriate amount of time prior to the advent of the Year 2000 to perform detailed system testing and compliance verification.* In addition, the Company is communicating with key suppliers, vendors and business partners in order to assess their ability to maintain normal operations in the Year 2000. Such key suppliers include, but are not limited to, MCI Telecommunications Corporation, R.R. Donnelley and Sons, Appleton Papers, and United Parcel Service of America, Inc. To the extent that the Company is not satisfied with the status of a vendor's Year 2000 compliance or remediation plans, the Company expects to develop and implement appropriate contingency plans.* Such contingency plans will include the development of alternative sources for the product or service provided by the non-compliant vendor. In addition, the Company will monitor the Year 2000 activities of U.S., Canadian and U.K. postal services and pertinent local and regional utilities. However, due to the lack of alternative sources for such services, the Company can make no assurances that Year 2000 related disruptions in postal, electrical or similar services would not have a material adverse effect on the Company's financial performance or long-term prospects. The Company has also inventoried and assessed the majority of the systems associated with the functioning of its plant, property and equipment. The date-related issues associated with the proper functioning of such assets are insignificant and are not expected to represent a material risk to the Company.* Further, given that the Company has approximately 1.9 million active customers, the failure of any one customer due to a Year 2000 issue would not have a material adverse impact on the Company's financial performance or long- term prospects.* - -------- * 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 the important factors 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." 11 The Company's cash outlays for capital improvements and period expenses associated with the information systems reengineering project and for Year 2000 compliance are projected to total $21 million during fiscal years 1997 through 2000, of which over one-half has been spent as of June 27, 1998.* The capital improvements and expenses required to effect the information systems reengineering project and Year 2000 remediation effort have been included as part of the Company's annual budgets and reflected in the Company's strategic financial plans. The Company does not expect that the capital spending or period expense associated with the Year 2000 issue will have a material effect on its financial position or results of operations.* For a further discussion of the risks and uncertainties associated with the Year 2000 issue and the Company's reliance on individual third-party vendors to provide raw materials and services critical to the Company's operation, see "Forward Looking Information and Risk Factors to Future Performance" included in this Management's Discussion and Analysis of Financial Condition and Results of Operations. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities amounted to $42.5 million in fiscal year 1998, approximately $4.7 million or 12.6% higher than the $37.8 million provided in fiscal year 1997. This increase in cash provided by operating activities was composed of a $6.3 million increase in net income and a $6.1 million increase in non-cash depreciation and amortization expense, offset in part by a comparative reduction of $7.7 million in the amount of cash provided by working capital and other non-cash adjustments to reported net income. In fiscal year 1997, cash provided by operating activities increased $14.5 million or 62.2% from the $23.3 million dollars provided in fiscal year 1996 due principally to a 56% or $6.7 million increase in net income, in combination with an increase in accounts payable and income taxes payable balances. Working capital as of June 27, 1998 amounted to $52.2 million including $10.8 million of cash and short-term investments. This balance represents an increase of $17.1 million from the working capital balance of $35.1 million including cash and short-term investments of $7.8 million existing at the end of fiscal year 1997. This increase in working capital was principally the result of the increase in cash provided by operating activities and the addition of the working capital balances of companies acquired during fiscal year 1998. Investment in working capital declined by $9.0 million in fiscal year 1997, principally due to the repurchase of 1,046,000 shares of the Company's common stock for $17.7 million during the period. The Company does not expect to experience any significant change to the amount of working capital investment required to support its business during fiscal year 1999.* Capital expenditures of $13.3 million in fiscal year 1998 represented a $3.7 million increase from the $9.6 million expended in fiscal year 1997 and a $3.9 million increase from the $9.4 million expended in fiscal year 1996. Capital expenditures over the three year period have included significant investment in the purchase, development and implementation of information systems infrastructure and operating systems. In addition, capital expenditures in fiscal year 1998 included the construction of a $3.0 million telemarketing facility in Flagstaff, Arizona. Capital expenditures in fiscal year 1996 also included equipment to support the Company's retail initiative and stationery equipment to meet product demand for the retail channel. The Company expects capital expenditures to exceed $15.0 million dollars in fiscal year 1999 due to an existing $1.2 million commitment to expand the Company's Midland, Ontario manufacturing facility, additional planned improvements in information systems infrastructure and an increase in the annual maintenance level of capital expenditures required to support the Company's newly acquired businesses.* The Company repurchased 1,046,000 shares of the Company's common stock for $17.7 million in cash during fiscal year 1997 and 994,900 shares for $17.9 million in cash in fiscal 1996. The Company did not repurchase any shares of Company common stock in fiscal 1998. In addition, the Company declared and paid a cash dividend of $.80 per share during each of the last three fiscal years, amounting to a total of $11.0 million in fiscal 1998, $10.7 million in fiscal 1997 and $11.9 million in fiscal 1996. - -------- * 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 the important factors 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." 12 In addition to its present cash and short-term investment balances, the Company has consistently generated sufficient cash internally to fund its needs for working capital, dividends and capital expenditures. In anticipation of the Rapidforms acquisition, the Company amended the terms of its committed, unsecured, revolving line of credit agreement on December 27, 1997 to increase the total committed line to $135 million, to expand the number of participating banks to ten, and to extend the facility maturity date to December 27, 2002. In anticipation of the McBee acquisition, the Company further amended the credit agreement on May 29, 1998 to increase the total committed line to $165 million. At June 27, 1998, the Company had $141 million of outstanding debt under this credit facility. 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. In order to effectively fix the interest rate on a portion of the debt outstanding under the revolving line of credit, the Company has entered into interest rate swap agreements with several of the banks party to the credit agreement. These swap agreements contain notional principal amounts and other terms determined with respect to the Company's forecasts of future cash flows and borrowing requirements. At June 27, 1998, the notional principal amount outstanding of the interest rate swap agreements totaled $115 million. In order to minimize the Company's exposure to foreign currency fluctuations with respect to intercompany loans to foreign subsidiaries and affiliates, the Company has entered into short-term forward exchange rate contracts with a major commercial bank in currency amounts directly corresponding to the short- term intercompany loan amounts. At June 27, 1998, the Company had outstanding forward exchange rate contracts for $1.8 million worth of Pounds Sterling and $89,000 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 during fiscal year 1999.* However, the Company may pursue additional acquisitions from time to time which would likely be funded through the use of available cash, the issuance of stock, the obtaining of additional credit, or any combination thereof.* 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 this Annual Report on Form 10-K, 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 but not limited to 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, Year 2000 risks to computer systems and reliance on vendors, all of which are described in further detail below. - -------- * 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 the important factors 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." 13 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, checks, stationery and business supplies to small businesses. Over the course of the past decade, providers of business forms, checks, 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 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 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 adopters 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, over 30% 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 14 programs and selected product price increases. Due to increased competition in the small business forms, checks, 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, checks, 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 reengineering of many of the Company's basic business functions. In addition, the Company expects to continue to invest in its direct sales, 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 reengineering 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 15 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, of a material nature, 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. 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 or other means 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 failures. Any such operating system failures 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 16 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to a number of market risks, primarily the effects of changes in foreign currency exchange rates and interest rates. Investments in and loans and advances to foreign subsidiaries and branches, and their resultant operations, denominated in foreign currencies, create exposures to changes in exchange rates. The Company's utilization of its revolving line of credit creates an exposure to changes in interest rates. The effect of changes in exchange rates and interest rates on the Company's earnings generally has been small relative to other factors that also affect earnings, such as business unit sales and operating margins. For more information on these market risks and financial exposures, see Note 1 and Note 5 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. The Company does not hold or issue financial instruments for trading, profit or speculative purposes. In order to minimize the Company's exposure to foreign currency fluctuations with respect to the short-term intercompany loans created to fund the operating cash requirements of the Company's European operations (see Note 2 in the Notes to Consolidated Financial Statements on page F-8), the Company has entered into forward exchange rate contracts for the amount of the loans and associated interest. The currencies hedged are the British pound and the French franc. While there is no specified repayment date for the loans, the forward exchange rate contracts are of limited duration and are replaced periodically as they mature. In order to effectively convert the interest rate of a portion of the Company's debt from a Eurodollar based floating rate to a fixed rate, the company has entered into an interest rate swap agreements with major commercial banks. Although the Company is exposed to credit and market risk in the event of future nonperformance by any of the banks, management has no reason to believe that such an event will occur. Upon reviewing its derivatives and other foreign currency and interest rate instruments, based on historical foreign currency rate movements and the fair value of market-rate sensitive instruments at year-end, the Company does not believe that near term changes in foreign currency or interest rates will have a material impact on its future earnings, fair values or cash flows. 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The Company's financial statements, together with the independent auditors' report thereon, appear beginning on page F-1 of this Annual Report on Form 10- K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS OF THE COMPANY Robert J. Murray, age 57, was elected Chief Executive Officer and Chairman of the Board in December 1995. Mr. Murray has been a director of the Company since 1991. Mr. Murray retired from The Gillette Company in 1995 having been with that company for more than 34 years. From January 1, 1991 until his retirement in 1995, Mr. Murray was Executive Vice President, North Atlantic Group of Gillette. During 1990, he served as Vice President, Chairman's Office, of Gillette and from 1985 to 1989 as Chairman of the Board of Management of Braun AG, one of Gillette's German subsidiaries. Mr. Murray is a director of Fleet National Bank, LoJack Corporation, Hannaford Bros. Co. and Allmerica Financial Corporation. Peter A. Brooke, age 69, has been a director of the Company since 1989. He also served in that capacity from 1970 to 1983. His principal occupation for more than five years prior to December 31, 1995, was as Chairman and Chief Executive Officer of Advent International Corporation. In January 1996, Mr. Brooke retired as Chief Executive Officer of Advent International but remains as Chairman of its Board of Directors. Advent International Corporation is an international venture capital management firm. Robert L. Gable, age 67, has been a director of the Company since July 1996. Mr. Gable has been Chairman of Unitrode Corporation since 1990 and was Chief Executive Officer of Unitrode from 1990 to November 1997. From 1988 to 1990, Mr. Gable was a management consultant. From 1985 until 1988, Mr. Gable was President and Chief Executive Officer of Computervision Corporation. Mr. Gable is a director of Unitrode Corporation and Ibis Technology Corporation. Benjamin H. Lacy, age 72, has been a director of the Company since 1970. His principal occupation is as President of the Clipper Ship Foundation, Inc., a grant-making charitable foundation. Prior to his retirement in May 1995, Mr. Lacy was of counsel to the law firm of Hill & Barlow, a Professional Corporation, which served as general counsel to the Company from 1973 to 1998. Herbert W. Moller, age 56, has been a director of the Company since July 1996. Mr. Moller retired from The Gillette Company in January 1998 having been with that company for 32 years. From 1992 until his retirement in 1998, Mr. Moller was Vice President, Finance and Strategic Planning, Gillette North Atlantic Group. From 1989 through 1992, Mr. Moller was Vice President of Management Information Systems of Gillette. Jay R. Rhoads, Jr., age 73, has been a director of the Company since its incorporation in 1955. He served as President from 1965 to 1971, as Chief Executive Officer from 1965 to 1975 and as Chairman of the Board from 1971 to 1987. Mr. Rhoads is the brother of Richard H. Rhoads. Richard H. Rhoads, age 68, joined the Company in 1965 and has been a director since 1970. From 1975 to 1991, he was Chief Executive Officer. His principal occupation since 1988 was his position as Chairman of the Board, a position from which he retired in 1995. Since 1980, Mr. Rhoads has served as a member of the Executive Committee of the Board. Mr. Rhoads is the brother of Jay R. Rhoads, Jr. 18 Brian E. Stern, age 50, has been a director of the Company since April 1995. Mr. Stern has been President of the Office Document Products Group and Corporate Senior Vice President of Xerox Corporation since 1994. From 1993 to 1994, Mr. Stern was President of the Personal Document Products Division of Xerox. From 1992 to 1993, Mr. Stern was Vice President of Corporate Business Strategy of Xerox and from 1990 to 1992, Vice President, Finance, Development and Manufacturing of Xerox. Mr. Stern is a director of HON Industries, Inc. M. Anne Szostak, age 48, has been a director of the Company since January 1998. Ms. Szostak has been Executive Vice President and Corporate Director of Human Resources of Fleet Financial Group, Inc. since March 1998. From 1994 to March 1998, Ms. Szostak was Senior Vice President and Corporate Director of Human Resources for Fleet Financial Group, Inc. From 1991 to 1994, Ms. Szostak was Chairman, President and Chief Executive Officer of Fleet Bank of Maine. Ms. Szostak is a director of Providence Energy Corporation. EXECUTIVE OFFICERS OF THE COMPANY The Company's executive officers are elected to office by the Board of Directors at the first board meeting following the Annual Meeting of Stockholders or at other board meetings as appropriate. Robert J. Murray, George P. Allman, Edward M. Bolesky, Robert S. Brown, John F. Fairbanks, Theodore Pasquarello, Steven G. Schlerf and Robert D. Warren were re-elected to office on October 24, 1997. Richard T. Riley was elected to office on January 23, 1998. Each officer holds office until the first meeting of the Board following the next Annual Meeting and until a successor is chosen. Information regarding Robert J. Murray can be found in the above section titled "Directors of the Company." Information on the other executive officers is presented below. George P. Allman, age 56, joined the Company in February 1996 and was elected at that time Vice President--Retail Sales and Operations. In October 1996, Mr. Allman was elected Vice President--Diversified Operations. In 1984, Mr. Allman founded GPA Associates, Inc., and served as President from 1984 to 1994. During 1995, Mr. Allman was a private investor. Edward M. Bolesky, age 52, joined the Company in 1981 and has served in numerous capacities in operations and administration. In 1991, Mr. Bolesky was elected Vice President--Sales. In 1993, he was elected Vice President--General Manager, Administration and Customer Relations. In 1994, he was elected Vice President--General Manager, Operations. In 1995, he was elected Vice President--General Manager, Manufacturing and Information Systems. In 1996, Mr. Bolesky was elected to his current office of Vice President--Direct Marketing/Telesales and Service. Robert S. Brown, Jr., age 50, joined the Company in 1971 and has held various positions in operations and marketing in the United States and Canada. In 1992, Mr. Brown was elected Vice President--General Manager, Marketing. In 1994, he was elected Vice President--General Manager, Subsidiaries. In 1996, Mr. Brown was elected to the position of Vice President--Circulation and International. John F. Fairbanks, age 37, joined the Company in 1994 as Treasurer and Secretary. In January 1996, Mr. Fairbanks was elected Vice President-- Corporate Controller. In October 1996, Mr. Fairbanks was elected Vice President--Chief Financial Officer. In April, 1998, Mr. Fairbanks was elected Vice President--Chief Financial Officer and Treasurer. Prior to joining the Company, Mr. Fairbanks was Vice President & Treasurer of M/A-COM, Inc. from 1992 until 1994. Theodore Pasquarello, age 48, joined the Company in April 1997 as Executive Vice President and President of the Chiswick division. Prior to joining the Company, Mr. Pasquarello was the founder of Chiswick Trading, Inc., and had been President of such for over five years. Richard T. Riley, age 42, joined the Company in December 1998 in connection with the Company's acquisition of Rapidforms, Inc., where he has been President since 1992. In January 1998 he was elected to the additional office of Vice President of the Company. 19 Steven G. Schlerf, age 46, joined the Company in 1979 and has served in a variety of capacities in manufacturing and operations. Mr. Schlerf was elected Vice President--Image Manufacturing and Product Development in 1995, and Vice President--Manufacturing and Technical Operations in 1996. Robert D. Warren, age 47, joined the Company in April 1996 as Vice President, Business Management, Business Solutions. In October 1996, he was elected Vice President--Business Management and Development. Mr. Warren was previously Vice President, Marketing for Gillette Stationery Products, North America, and General Manager for Gillette Stationery Products of Canada from 1988 until 1992. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Information regarding compliance with Section 16(a) beneficial ownership reporting requirements is located in the Company's Proxy Statement for Annual Meeting of Stockholders to be held October 23, 1998 under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to "Election of Directors" and "Executive Compensation" in the Company's Proxy Statement for Annual Meeting of Stockholders to be held October 23, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to "Voting Securities" in the Company's Proxy Statement for Annual Meeting of Stockholders to be held October 23, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to "Certain Relationships and Related Transactions" in the Company's Proxy Statement for Annual Meeting of Stockholders to be held October 23, 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The following documents are filed as part of this report: (a)(1) CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- NEW ENGLAND BUSINESS SERVICE, INC. AND SUBSIDIARIES Consolidated Balance Sheets as of June 27, 1998 and June 28, 1997...... F-2 Statements of Consolidated Income for the fiscal years ended June 27, 1998, June 28, 1997 and June 29, 1996................................. F-3 Statements of Consolidated Stockholders' Equity for the fiscal years ended June 27, 1998, June 28, 1997 and June 29, 1996.................. F-4 Statements of Consolidated Cash Flows for the fiscal years ended June 27, 1998, June 28, 1997 and June 29, 1996..........................F-5 Notes to Consolidated Financial Statements............................. F-6 Independent Auditors' Report........................................... F-19
20 (a)(2) FINANCIAL STATEMENT SCHEDULE Schedule II Valuation and Qualifying Accounts........................... F-20
Schedules I, III, IV and V are omitted as they are not applicable or required under Regulation S-X. (a)(3) LIST OF EXHIBITS Exhibits required to be filed by Item 601 of Regulation S-K are listed in the exhibit index beginning on page X-1. (b) REPORTS ON FORM 8-K. The following report on Form 8-K was filed during the fourth quarter of fiscal 1998: On June 18, 1998, on Form 8-K, the Company filed financial statements and pro forma financial information relative to the acquisition of all of the outstanding common stock of McBee Systems, Inc. and all of the assets of McBee Systems of Canada, Inc. This same filing also announced the signing of and filed a copy of an amendment dated May 29, 1998 to the Company's Amended and Restated Revolving Credit Agreement. 21 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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) /s/ Robert J. Murray By: _________________________________ (ROBERT J. MURRAY, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER) Date: September 11, 1998 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each of the undersigned officers and directors of New England Business Service, Inc., a Delaware corporation (the "Company"), hereby constitutes and appoints Robert J. Murray and John F. Fairbanks, and each of them, with full power to act without the other, his or her true and lawful attorney-in-fact, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities (until revoked in writing) to sign the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1998, and any and all amendments thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED. NAME TITLE DATE /s/ Robert J. Murray Chairman, President, September 11, 1998 - ----------------------------- Chief Executive (ROBERT J. MURRAY) Officer and Director (Principal Executive Officer) /s/ Peter A. Brooke Director September 11, 1998 - ----------------------------- (PETER A. BROOKE) /s/ Robert L. Gable Director September 11, 1998 - ----------------------------- (ROBERT L. GABLE) /s/ Benjamin H. Lacy Director September 11, 1998 - ----------------------------- (BENJAMIN H. LACY) /s/ Herbert W. Moller Director September 11, 1998 - ----------------------------- (HERBERT W. MOLLER) /s/ Jay R. Rhoads, Jr. Director September 11, 1998 - ----------------------------- (JAY R. RHOADS, JR.) /s/ Richard H. Rhoads Director September 11, 1998 - ----------------------------- (RICHARD H. RHOADS) /s/ Brian E. Stern Director September 11, 1998 - ----------------------------- (BRIAN E. STERN) /s/ M. Anne Szostak Director September 11, 1998 - ----------------------------- (M. ANNE SZOSTAK) /s/ John F. Fairbanks Vice President-Chief September 11, 1998 - ----------------------------- Financial Officer (JOHN F. FAIRBANKS) and Treasurer (Principal Financial and Accounting Officer) 22 INDEX TO FINANCIAL STATEMENTS
PAGE ---- NEW ENGLAND BUSINESS SERVICE, INC. AND SUBSIDIARIES Consolidated Balance Sheets as of June 27, 1998 and June 28, 1997......... F-2 Statements of Consolidated Income for the fiscal years ended June 27, 1998, June 28, 1997 and June 29, 1996.................................... F-3 Statements of Consolidated Stockholders' Equity for the fiscal years ended June 27, 1998, June 28, 1997 and June 29, 1996........................... F-4 Statements of Consolidated Cash Flows for the fiscal years ended June 27, 1998, June 28, 1997 and June 29, 1996.................................... F-5 Notes to Consolidated Financial Statements................................ F-6 Independent Auditors' Report.............................................. F-19 Schedule II Valuation and Qualifying Accounts............................. F-20
F-1 NEW ENGLAND BUSINESS SERVICE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 27, 1998 AND JUNE 28, 1997 (IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
JUNE 27, 1998 JUNE 28, 1997 ------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents......................... $ 10,823 $ 7,365 Short-term investments............................ -- 469 Accounts receivable (less allowance for doubtful accounts of $4,257 in 1998 and $3,351 in 1997)... 50,985 34,147 Inventories....................................... 20,970 11,569 Direct mail advertising materials and prepaid expenses......................................... 12,289 6,976 Deferred income tax benefit....................... 5,993 7,900 -------- -------- TOTAL CURRENT ASSETS.......................... 101,060 68,426 PROPERTY AND EQUIPMENT: Land and buildings............................... 35,712 30,678 Equipment........................................ 96,250 74,662 -------- -------- Property and equipment........................... 131,962 105,340 Less accumulated depreciation.................... (80,032) (72,921) -------- -------- PROPERTY AND EQUIPMENT--NET..................... 51,930 32,419 PROPERTY HELD FOR SALE............................ 1,131 631 DEFERRED INCOME TAX BENEFIT....................... 2,652 -- GOODWILL, NET..................................... 75,586 30,078 TRADENAMES, NET................................... 30,332 1,391 CUSTOMER LISTS, NET............................... 43,878 7,566 OTHER ASSETS...................................... 1,008 685 -------- -------- TOTAL......................................... $307,577 $141,196 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.................................. $ 16,038 $ 13,872 Federal and state income taxes.................... 2,733 1,555 Accrued profit-sharing/bonus distribution......... 2,426 1,725 Accrued payroll expense........................... 8,794 4,983 Accrued employee benefit expense.................. 3,305 3,348 Accrued exit costs/restructuring charge........... 5,389 1,006 Deferred income taxes............................. 1,879 1,062 Other accrued expenses............................ 10,113 5,776 -------- -------- TOTAL CURRENT LIABILITIES..................... 50,677 33,327 REVOLVING LINE OF CREDIT.......................... 141,000 27,000 DEFERRED INCOME TAXES............................. 1,395 288 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock Common stock, par value, $1 per share--authorized, 40,000,000 shares; issued, 15,185,240 shares in 1998 and 14,615,359 shares in 1997; outstanding, 14,300,533 shares in 1998 and 13,611,770 shares in 1997.......................................... 15,185 14,616 Additional paid-in capital........................ 44,559 26,537 Cumulative foreign currency translation adjustment....................................... (2,337) (1,762) Retained earnings................................. 71,962 58,024 -------- -------- TOTAL......................................... 129,369 97,415 Less treasury stock, at cost--884,707 shares in 1998 and 1,003,589 shares in 1997................ (14,864) (16,834) -------- -------- TOTAL STOCKHOLDERS' EQUITY.................... 114,505 80,581 -------- -------- TOTAL......................................... $307,577 $141,196 ======== ========
See notes to consolidated financial statements. F-2 NEW ENGLAND BUSINESS SERVICE, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME FOR THE FISCAL YEARS ENDED JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996 (IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
1998 1997 1996 -------- -------- -------- NET SALES......................................... $355,767 $263,424 $254,954 OPERATING EXPENSES: Cost of sales including shipping costs.......... 135,225 94,048 90,974 Selling and advertising......................... 121,571 90,367 99,352 General and administrative...................... 54,101 45,949 42,164 Exit costs...................................... -- 3,803 3,044 -------- -------- -------- TOTAL OPERATING EXPENSES...................... 310,897 234,167 235,534 INCOME FROM OPERATIONS............................ 44,870 29,257 19,420 OTHER INCOME (EXPENSE): Interest income................................. 237 420 1,159 Interest expense................................ (4,571) (484) (19) Gain on pension curtailment/settlement.......... 869 2,187 -- Gain on sale of product line.................... -- -- 495 -------- -------- -------- TOTAL OTHER INCOME (EXPENSE).................. (3,465) 2,123 1,635 INCOME BEFORE INCOME TAXES........................ 41,405 31,380 21,055 PROVISION FOR INCOME TAXES........................ 16,471 12,731 8,306 -------- -------- -------- NET INCOME BEFORE EQUITY IN LOSSES OF INVESTMENT.. 24,934 18,649 12,749 EQUITY IN LOSSES OF INVESTMENT.................... -- -- (820) -------- -------- -------- NET INCOME........................................ $ 24,934 $ 18,649 $ 11,929 ======== ======== ======== PER SHARE AMOUNTS: BASIC EARNINGS PER SHARE........................ $ 1.81 $ 1.39 $ 0.81 ======== ======== ======== DILUTED EARNINGS PER SHARE...................... $ 1.77 $ 1.38 $ 0.81 ======== ======== ======== DIVIDENDS....................................... $ 0.80 $ 0.80 $ 0.80 ======== ======== ======== BASIC WEIGHTED AVERAGE SHARES OUTSTANDING......... 13,781 13,397 14,773 PLUS INCREMENTAL SHARES FROM ASSUMED CONVERSION OF STOCK OPTIONS............................... 325 128 38 -------- -------- -------- DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING...................................... 14,106 13,525 14,811 ======== ======== ========
See notes to consolidated financial statements. F-3 NEW ENGLAND BUSINESS SERVICE, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY FOR THE FISCAL YEARS ENDED JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996 (IN THOUSANDS)
COMMON STOCK ISSUED CUMULATIVE --------------------- FOREIGN NUMBER AT PAR ADDITIONAL CURRENCY OF VALUE PAID-IN TREASURY TRANSLATION RETAINED SHARES AMOUNT CAPITAL STOCK ADJUSTMENT EARNINGS TOTAL --------- ---------- ---------- -------- ----------- -------- -------- BALANCE, JUNE 30, 1995.. 15,770 $ 15,770 $12,450 $(17,426) $(1,683) $ 82,412 $ 91,523 Issuance of common stock to employees pursuant to stock plans including tax benefit.. 75 75 1,153 1,102 2,330 Dividends paid.......... (11,906) (11,906) Acquisition of treasury stock.................. (17,882) (17,882) Retirement of treasury stock.................. (1,840) (1,840) 34,206 (32,366) Foreign currency translation adjustment............. (78) (78) Net income.............. 11,929 11,929 --------- ---------- ------- -------- ------- -------- -------- BALANCE, JUNE 29, 1996.. 14,005 14,005 13,603 0 (1,761) 50,069 75,916 Issuance of common stock to employees pursuant to stock plans including tax benefit.. 246 246 4,899 877 6,022 Issuance of common stock to acquire a business.. 365 365 8,035 8,400 Dividends paid.......... (10,694) (10,694) Acquisition of treasury stock.................. (17,711) (17,711) Foreign currency translation adjustment............. (1) (1) Net income.............. 18,649 18,649 --------- ---------- ------- -------- ------- -------- -------- BALANCE, JUNE 28, 1997.. 14,616 14,616 26,537 (16,834) (1,762) 58,024 80,581 Issuance of common stock to employees pursuant to stock plans including tax benefit.. 187 187 5,804 1,970 7,961 Issuance of common stock to acquire a business.. 382 382 12,218 12,600 Dividends paid.......... (10,996) (10,996) Foreign currency translation adjustment............. (575) (575) Net income.............. 24,934 24,934 --------- ---------- ------- -------- ------- -------- -------- BALANCE, JUNE 27, 1998.. 15,185 $ 15,185 $44,559 $(14,864) $(2,337) $ 71,962 $114,505 ========= ========== ======= ======== ======= ======== ========
See notes to consolidated financial statements. F-4 NEW ENGLAND BUSINESS SERVICE, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE FISCAL YEARS ENDED JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996 (IN THOUSANDS OF DOLLARS)
1998 1997 1996 --------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income....................................... $ 24,934 $ 18,649 $ 11,929 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.................................... 9,296 8,280 9,268 Amortization.................................... 5,922 810 1,061 Gain on sale of product line.................... -- -- (495) Gain on pension settlement/curtailment.......... (869) (2,187) -- (Gain)/loss on disposal of equipment............ (94) 935 302 Loss on equity investment....................... -- -- 1,355 Deferred income taxes........................... 2,887 2,553 (290) Exit costs...................................... (1,119) (381) 633 Provision for losses on accounts receivable..... 3,293 2,612 3,033 Employee benefit charges........................ 3,980 (143) 2,244 Changes in assets and liabilities, net of acquisitions: Accounts receivable............................. (3,332) 61 (4,360) Inventories and advertising material............ (1,503) 2,566 61 Prepaid expenses................................ 2,054 (732) 1,225 Accounts payable................................ (3,908) 852 1,405 Income taxes payable............................ 1,193 2,214 (2,545) Other accrued expenses.......................... (205) 1,674 (1,573) --------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES..... 42,529 37,763 23,253 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment.............. (13,275) (9,567) (9,388) Acquisition of businesses--net of cash acquired.. (131,596) (40,174) -- Proceeds from sale of product line............... -- -- 4,500 Proceeds from sale of facilities and equipment... 262 406 4,985 Proceeds from sale of other assets............... -- -- 300 Investment in other assets, primarily bank fees in 1998 and software development costs in 1996.. (371) -- (812) Purchases of investments......................... (1,561) (3,800) (30,751) Proceeds from sale and maturities of investments..................................... 2,023 14,199 31,222 --------- -------- -------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES................................... (144,518) (38,936) 56 CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of debt................................ (25,650) (13,495) (8,000) Proceeds from credit line--net of issuance costs........................................... 138,900 39,342 8,000 Proceeds from issuing common stock............... 3,469 4,486 1,228 Acquisition of treasury stock.................... -- (17,711) (17,882) Dividends paid................................... (10,996) (10,694) (11,907) --------- -------- -------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES................................... 105,723 1,928 (28,561) EFFECT OF EXCHANGE RATE ON CASH.................. (276) 102 156 --------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... 3,458 857 (5,096) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR... 7,365 6,508 11,604 --------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR......... $ 10,823 $ 7,365 $ 6,508 ========= ======== ======== SUPPLEMENTAL CASH FLOW DISCLOSURE: INTEREST PAID.................................... $ 3,791 $ 365 $ 19 ========= ======== ======== INCOME TAXES PAID................................ $ 11,574 $ 7,553 $ 10,289 ========= ======== ========
See notes to consolidated financial statements. F-5 NEW ENGLAND BUSINESS SERVICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS AND BASIS OF CONSOLIDATION--The financial statements are consolidated to include the accounts of New England Business Service, Inc. and its wholly-owned subsidiaries (the "Company"). The Company operates primarily in a single industry segment consisting of the direct marketing of printed products and business supplies to small businesses throughout the United States, Canada, the United Kingdom and France. The accounts of the Company's foreign entities have been translated into U.S. dollars in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52. All significant intercompany accounts and transactions have been eliminated in consolidation. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS--The Company considers its holdings in short-term money market accounts and certificates of deposit with an original maturity to the Company of three months or less to be cash equivalents. Short-term investments are classified as available for sale securities and reported at amortized cost, which approximates fair market value (as required by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities"). Short-term investments have been primarily tax-exempt municipal debt instruments which have a fixed maturity beyond three months. INVENTORIES--Inventories are generally carried at the lower of first-in, first-out cost or market. At year end, inventories consisted of:
1998 1997 ----------- ----------- Raw paper........................................... $ 1,622,000 $ 586,000 Business forms and related office products.......... 19,348,000 10,983,000 ----------- ----------- Total............................................. $20,970,000 $11,569,000 =========== ===========
DIRECT MAIL ADVERTISING--The Company expenses the production costs of advertising at the time the advertising is initiated, except for direct- response advertising, which is capitalized and amortized over its expected period of future benefit; a period generally not in excess of three months. Direct-response advertising consists primarily of product catalogs and associated mailing costs. Advertising expense included in selling and advertising was approximately $46,271,000 in 1998, $36,411,000 in 1997 and $34,007,000 in 1996. PROPERTY AND EQUIPMENT--Property and equipment are carried at cost. Depreciation is computed over the estimated useful lives (three to twenty years) of the assets using the straight-line method. Property held for sale is stated at the lower of cost or estimated net realizable value. GOODWILL--Goodwill acquired is being amortized on a straight-line basis over periods of 20 to 40 years. Accumulated amortization amounted to $1,649,000 and $516,000 at June 27, 1998 and June 28, 1997, respectively. CUSTOMER LISTS, TRADENAMES AND OTHER ASSETS--Customer lists, tradenames and other assets are amortized using the straight-line method or the effective interest method over their estimated lives. The range of estimated lives and accumulated amortization balances for each category of assets are as follows:
1998 1997 ACCUMULATED ACCUMULATED DESCRIPTION LIVES AMORTIZATION AMORTIZATION ----------- ---------- ------------ ------------ Customer Lists.......................... 2-18 years 6,509,000 1,488,000 Tradenames.............................. 40 years 268,000 9,000 Covenant not to compete................. 5 years 150,000 41,000 Debt issue costs........................ 5 years 62,000 10,000
F-6 REVENUE RECOGNITION--Revenue is recognized from sales other than software support contracts when a product is shipped. Revenue on software support contracts is recognized ratably over the contract period, generally twelve months. CAPITALIZED SOFTWARE DEVELOPMENT COSTS AND PURCHASED SOFTWARE--The Company follows SFAS No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed." No such software development costs were capitalized in 1998 or 1997. Software development costs of $812,000 were capitalized in 1996. Purchased software costs acquired in connection with the acquisition of the One-Write Plus(R) ("OWP") product line were amortized in accordance with the provisions of SFAS No. 86. Amortization expense associated with the OWP acquisition of $1,199,000 was charged to operations in fiscal 1996. In connection with the sale of the OWP product line in 1996, the Company expensed the balance of the purchased software costs remaining at the time of the sale. There are no unamortized purchased software costs included in other assets at June 27, 1998, and June 28, 1997. INCOME TAXES--The provision for income taxes is determined based upon the Company's computed total income tax obligation for the year and the change in the Company's deferred tax balances from year to year. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. Such deferred tax assets and liabilities are also adjusted to reflect changes in the U.S. and applicable foreign tax laws when enacted. Future tax benefits are recognized to the extent realization of such benefit is more likely to occur than not. SIGNIFICANT ESTIMATES--In the process of preparing its consolidated financial statements, the Company estimates the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. The primary estimates underlying the Company's consolidated financial statements include allowances for doubtful accounts, inventory obsolescence, deferrals of mail advertising costs, accruals for profit sharing and bonuses, recoverability of deferred tax assets, goodwill and other intangible assets. Actual results may differ from these estimates. PER SHARE AMOUNTS--Effective December, 1997, the Company adopted SFAS No. 128, "Earnings Per Share." Earnings per share amounts presented for 1997 and 1996 have been restated to reflect this adoption. Basic earnings per share amounts are computed based upon the weighted average number of shares of common stock outstanding during each fiscal year. Diluted earnings per share amounts are computed by also giving consideration to potentially dilutive stock options outstanding. A reconciliation of outstanding shares is shown on the statements of consolidated income. CONCENTRATION OF CREDIT RISK--The Company extends credit to approximately 1.9 million geographically dispersed customers on an unsecured basis in the normal course of business. No individual industry or industry segment is significant to the Company's customer base. The Company has, in place, policies governing the extension of credit and collection of amounts due from customers. DERIVATIVES--The Company has entered into a variety of intercompany transactions between members of the consolidated group (which have different functional currencies) that present foreign currency risk. The Company has purchased foreign currency forward contracts to minimize the effect of fluctuating foreign currencies on its reported income; however, these contracts do not qualify under generally accepted accounting principles for hedge treatment. Accordingly, these contracts are carried in the financial statements at the current forward foreign exchange rates, with the changes in forward rates reflected directly in income. The offsetting exchange movements on the intercompany balances are also recognized directly to income. The Company has entered into interest rate swaps that qualify as matched swaps that are linked by designation with a balance sheet liability and have opposite interest rate characteristics of such balance sheet item. Matched interest rate swaps qualify for settlement accounting. Under settlement accounting, periodic net F-7 cash settlements under the swap agreements are recognized in income on an accrual basis. These settlements are offset against interest expense in the statements of consolidated income. INFORMATION ABOUT NONCASH INVESTING AND FINANCING ACTIVITIES--The Company issued 382,352 shares of Company common stock valued at approximately $12,600,000 during fiscal year 1998 in conjunction with the acquisition of all of the outstanding common stock of McBee Systems, Inc. and substantially all of the assets and assumption of certain liabilities of McBee Systems of Canada, Inc. The Company issued 365,217 shares of Company common stock valued at approximately $8,400,000 during fiscal year 1997 in conjunction with the acquisition of substantially all of the assets and assumption of certain liabilities of Chiswick Trading, Inc. See Note 2. IMPAIRMENT OF LONG-LIVED ASSETS--The Company evaluates the recoverability of long-lived assets in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." There were no adjustments to the carrying value of any long-lived assets in 1998, 1997 or 1996. ACCOUNTING FOR STOCK BASED COMPENSATION--SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations ("APB Opinion No. 25"). See Note 7 for the disclosures required by SFAS No. 123. NEW ACCOUNTING PRONOUNCEMENTS--In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure about Pensions and other Postretirement Benefits." In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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. In March 1998, the AICPA issued Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The Company will adopt this statement in fiscal year 1999 and does not expect the adoption of this statement will have a material impact on the consolidated financial statements. The AICPA also issued Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities." The policies promulgated by this statement had previously been followed by the Company and thus its implementation will not impact the financial statements. RECLASSIFICATIONS--Certain reclassifications have been made to the 1997 and 1996 financial statements to conform with the 1998 presentation. 2. ACQUISITIONS Fiscal 1997 Acquisitions On January 8, 1997, the Company acquired the outstanding stock of Standard Forms Limited ("SFL"), a U.K. based company, for approximately $4,300,000. The Company incurred acquisition fees of approximately $300,000 in connection with the acquisition. SFL 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 was accounted for under the purchase method of accounting. Accordingly, SFL's results of operations are included in the accompanying financial statements from the date of acquisition. The excess purchase price including acquisition costs over the fair value of the net tangible assets acquired was $4,952,000 of which $1,000,000 was allocated to SFL's customer list and the balance of $3,952,000 to goodwill. The goodwill is being amortized over a period of 25 years. F-8 On March 31, 1997, the Company acquired substantially all of the assets and assumed certain liabilities of Chiswick Trading, Inc. ("Chiswick") for consideration of approximately $34,600,000 in cash (net of cash acquired), and 365,217 shares of Company common stock valued at approximately $8,400,000, for an aggregate purchase price, of approximately $43,000,000. The Company incurred acquisition fees of approximately $400,000 in connection with the acquisition. Chiswick markets a line of retail and industrial packaging, shipping and warehouse supplies sold primarily to small wholesalers, manufacturers and retailers. The acquisition was accounted for under the purchase method of accounting. Accordingly, Chiswick'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 tangible 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 $34,724,000 of which $6,000,000 was allocated to customer lists, $1,000,000 to a non-compete agreement and the balance of $27,724,000 to goodwill. The goodwill is being amortized over a period of 40 years. Fiscal 1998 Acquisitions On December 23, 1997, the Company acquired all of the outstanding common stock of Rapidforms, Inc. ("Rapidforms") for consideration of approximately $82,136,000 in cash (net of cash acquired). The Company also incurred fees of approximately $368,000 in connection 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, Rapidforms' 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 tangible 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 $64,451,000 of which $21,000,000 was allocated to customer lists, $15,700,000 to tradenames and the balance of $27,751,000 to goodwill. The goodwill is being amortized on a straight line basis over a period of 40 years while customer lists and the tradenames arising from this transaction are being amortized over their respective useful lives. These allocations and useful lives are still subject to final valuations. The Company does not believe these initial allocations will change materially. As part of the purchase accounting for the Rapidforms acquisition and included in the allocation of the acquisition costs, a liability of $4,000,000 was recorded to cover the anticipated costs related to a plan to close redundant Rapidforms' 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. The liability associated with the Rapidforms integration plan remaining as of June 27, 1998 was $3,571,000. On June 3, 1998, the Company acquired all of the outstanding common stock of McBee Systems, Inc. and all of the assets of McBee Systems of Canada, Inc. (collectively "McBee") for consideration of approximately $48,529,000 in cash (net of cash acquired), and 382,352 shares of Company common stock valued at approximately $12,600,000, for an aggregate purchase price of $61,129,000. The Company also incurred fees of approximately $563,000 in connection with the acquisition. McBee manufactures and markets a line of checks and related products to small businesses throughout the United States and Canada through a dedicated field sales force. The acquisition was accounted for under the purchase method of accounting. Accordingly, McBee'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 tangible 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 $52,046,000 of which $19,600,000 was allocated to customer lists, $13,500,000 to tradename and the balance of $18,946,000 to goodwill. The goodwill is being amortized on a straight line basis over a period of 40 years while customer lists and the tradenames arising from this transaction are being amortized over their respective useful lives. These allocations and useful lives are still subject to final valuations. The Company does not believe these initial allocations will change materially. As part of the purchase accounting for the McBee acquisition and included in the allocation of the acquisition costs, a liability of $1,642,000 was recorded to cover the anticipated costs (primarily employee F-9 termination benefits) related to a plan to close redundant McBee manufacturing and warehouse facilities and to reduce manufacturing personnel. As of June 27, 1998, the McBee integration liability remained at $1,642,000. The following unaudited pro forma financial information reflects the consolidated results of operations of the Company for the years ended June 27, 1998 and June 28, 1997 as though the acquisitions described above had occurred on the first day of the respective fiscal year. 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 acquisitions been consummated on June 29, 1997 or June 30, 1996, or results which may occur in the future.
1998 1997 ------------ ------------ Net sales......................................... $457,581,000 $443,182,000 Net income........................................ $ 24,961,000 $ 18,932,000 Net income per diluted share...................... $ 1.73 $ 1.34
3. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY On July 8, 1994, the Company acquired a 19 percent equity interest in GST Software, plc ("GST") for $1,800,000 together with an option to acquire the balance of GST shares. In addition, the Company advanced GST approximately $250,000 in the form of a note. During the first quarter of fiscal year 1996, the Company revalued its 19 percent equity interest in GST. Accordingly, the Company's investment in GST was written down to $0 as of September 30, 1995. In January, 1996, the Company sold its 19 percent equity interest in GST for $300,000. The revaluation and subsequent sale resulted in a $820,000 loss, net of related income tax benefit of $535,000, and is included in the statements of consolidated income as Equity in Losses of Investment. 4. DEBT OBLIGATIONS AND LEASES During March 1997, the Company terminated two existing lines of credit in the total amount of $20,000,000 and entered into a five year, $60,000,000 committed, unsecured, revolving line of credit agreement with two major commercial banks. In December, 1997, the Company amended the terms of this agreement to increase the total committed line to $135,000,000, to expand the number of participating banks to ten, and to extend the facility maturity date to December 27, 2002. In May, 1998, the Company further amended the agreement to increase the total committed line to $165,000,000. 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 June 27, 1998 was 6.2%. 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 June 28, 1997, $141,000,000 was outstanding under this line. Debt issue costs incurred in connection with this facility are amortized over the term of the agreement in accordance with the effective interest method. The Company leases facilities and equipment under long-term operating leases with both related and non-related parties. An executive officer of the Company is a beneficiary of the related party leases which were entered into pursuant to the acquisition of Chiswick. The future minimum rental commitments for operating leases of certain facilities and equipment are as follows:
THIRD RELATED- FISCAL YEAR ENDED JUNE PARTIES PARTIES TOTAL ---------------------- ---------- ---------- ---------- 1999........................................ $4,183,000 $ 998,000 $5,181,000 2000........................................ 3,057,000 1,013,000 4,070,000 2001........................................ 1,767,000 1,058,000 2,825,000 2002........................................ 1,129,000 1,058,000 2,187,000 2003........................................ 1,121,000 1,074,000 2,195,000 Thereafter.................................. 4,788,000 4,207,000 8,995,000
F-10 Total rental expense was $2,988,000 ($998,000 to related parties), $1,053,000 ($184,000 to related parties), and $860,000 ($0 to related parties), in 1998, 1997, and 1996, respectively. 5. FINANCIAL INSTRUMENTS In order to minimize exposure to foreign currency fluctuations with respect to short-term, dollar-based intercompany loans to fund SFL's operations (see Note 2), the Company entered into forward exchange rate contracts for the amount of the loans and associated interest. At June 28, 1997, the Company had outstanding forward rate contracts for $1,800,000 worth of Pound Sterling and $89,000 worth of French Francs. The fair value of these contracts is nominal, and approximated the carrying value. Gains or losses on these contracts have been immaterial. The Company has entered into interest rate swap agreements with three major commercial banks in order to effectively convert the interest rate of a portion of the Company's outstanding revolving credit debt from a Eurodollar- based floating rate to fixed rates. The agreements expire on different dates, and the total notional principal amount decreases over time in conjunction with planned debt repayments. Although the Company is exposed to credit and market risk in the event of future non-performance by any of the banks, management has no reason to believe that such an event will occur. Information regarding the agreements as of June 27, 1998 follows:
FIXED FAIR AGREEMENT NOTIONAL PRINCIPAL AMOUNT INTEREST RATE VALUE EXPIRATION DATE ------------------------- ------------- ----- --------------- $ 5,000,000....................... 6.52% $(39,000) May 4, 1999 $45,000,000....................... 5.79% (48,000) June 8, 2001 $65,000,000....................... 5.62% (66,000) January 30, 2001
As of June 27, 1998 and June 28, 1997, the carrying value of all other financial instruments approximates fair value. 6. EQUITY TRANSACTIONS The Company has issued a stock purchase right to stockholders for each outstanding share of common stock of the Company. Each right becomes exercisable upon the occurrence of certain events, as provided in the Rights Agreement, and entitles the registered holder to purchase from the Company a "Unit" consisting of one one-hundredth of a share of preferred stock at a purchase price of $75.00 per Unit, subject to adjustment to prevent dilution. In addition, upon the occurrence of certain events, the registered holder will thereafter have the right to receive, upon payment of the purchase price, additional shares of common stock and/or cash and/or other securities, as provided in the Rights Agreement. The rights will expire on October 20, 2004. The Company may redeem the rights at a price of $.01 per right. The Company also has authorized but not issued 1,000,000 shares of $1.00 par value preferred stock. On April 29, 1996, the Company's Board of Directors authorized the repurchase of up to two million shares of the Company's stock over a two year period. As of June 29, 1996, 984,900 shares, at a cumulative cost of approximately $17,882,000, had been repurchased. The Company subsequently retired all shares held in treasury as of June 29, 1996. During fiscal 1997, the Company repurchased an additional 1,015,100 shares for approximately $16,679,000, which completed the April 1996 repurchase authorization. On October 25, 1996, the Company's Board of Directors authorized the repurchase of up to two million additional shares of the Company's common stock over a two year period. As of June 28, 1997, 41,000 shares had been purchased under the October 1996 repurchase plan at a cumulative cost of approximately $1,032,000, and no additional purchases were made during 1998. F-11 7. STOCK OPTIONS At the Company's October 1997 annual meeting, the stockholders approved the NEBS Key Employee and Eligible Director Stock Option and Stock Appreciation Rights Plan (the "1997 Plan"). The 1997 Plan amended and restated the Company's 1990 plan (described below) and 1994 plan (also described below) and incorporated the two plans into the 1997 Plan. Under the 1997 Plan, the Company was authorized to issue 1,300,000 shares of common stock pursuant to the granting of stock options or stock appreciation rights in addition to the shares remaining available for issuance under the 1990 and 1994 option plans. At the Company's 1994 annual meeting, the stockholders approved the NEBS 1994 Key Employee and Eligible Director Stock Option and Stock Appreciation Rights Plan (the "1994 Plan"). Under the 1994 Plan, the Company was authorized to issue up to 1,200,000 shares of common stock pursuant to the granting of stock options or stock appreciation rights. At the Company's 1990 annual meeting, the stockholders approved the NEBS 1990 Key Employee Stock Option and Stock Appreciation Rights Plan (the "1990 Plan"). Under the 1990 Plan, the Company was authorized to issue up to 1,000,000 shares of common stock pursuant to the granting of stock options or stock appreciation rights. At the Company's 1980 annual meeting, the stockholders approved the NEBS 1980 Stock Option Plan (the "1980 Plan"). Under the 1980 Plan, the Company was authorized to issue up to 900,000 shares of common stock pursuant to stock options or stock appreciation rights. The 1980 Plan expired in 1990, although shares of common stock may be issued pursuant to options still outstanding. Under the terms of the Company's stock option plans, options are granted to purchase stock at fair market value on the date of the option grant. Options granted have been exercisable in full in terms of up to nine years from the date of grant and the options expire no later than ten years from the date of grant. As of June 27, 1998, 2,948,982 shares of common stock are reserved for issuance under the Company's stock option plans, of which 1,891,870 are subject to outstanding options and 1,057,112 remain available for future option grants. Options for 854,907 shares and 624,538 shares were immediately exercisable under all option arrangements at June 27, 1998 and June 28, 1997, respectively. There were no outstanding stock appreciation rights under any of the plans during 1998, 1997 or 1996. A summary of stock option activity under the Company's stock option plans during 1998, 1997, and 1996 follows:
WEIGHTED- NUMBER OF PER SHARE AVERAGE SHARES OPTION PRICE EXERCISE PRICE --------- -------------- -------------- June 30, 1995....................... 1,224,512 $14.50 - 25.25 $17.49 Granted........................... 615,194 18.38 - 20.75 19.40 Exercised......................... (70,579) 14.50 - 20.75 15.91 Expired........................... (469,418) 14.75 - 25.25 17.52 --------- June 29, 1996....................... 1,299,709 14.75 - 25.25 18.47 Granted........................... 720,432 15.38 - 26.38 21.69 Exercised......................... (245,436) 14.75 - 22.25 17.31 Expired........................... (112,210) 15.38 - 25.25 21.45 --------- June 28, 1997....................... 1,662,495 14.75 - 26.38 19.89 Granted........................... 470,500 29.13 - 33.13 30.69 Exercised......................... (180,890) 14.75 - 25.75 18.59 Expired........................... (60,235) 15.38 - 30.00 20.66 --------- June 27, 1998....................... 1,891,870 14.75 - 33.13 22.66 =========
F-12 The following table presents information with regard to all stock options outstanding at June 27, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------- --------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE -------- ----------- ------------ --------- ----------- --------- $14.75 - 15.88..... 352,729 6.5 $15.27 229,147 $15.22 17.88 - 19.75..... 502,500 6.9 18.34 384,845 18.37 20.13 - 22.25..... 175,266 5.8 20.62 141,571 20.60 25.75 - 33.13..... 861,375 9.1 28.63 99,344 26.21 --------- --- ------ ------- ------ 14.75 - 33.13..... 1,891,870 7.7 $22.66 854,907 $18.81 ========= === ====== ======= ======
The Company applies APB Opinion No. 25 to account for its various stock plans. Accordingly, pursuant to the terms of the plans, no compensation cost has been recognized for the stock plans. However, if the Company had determined compensation cost for stock option grants issued during 1998 and 1997 under the provisions of SFAS No. 123, the Company's net income and net income per share would have been reduced to the pro forma amounts shown below:
1998 1997 ----------- ----------- Net income: As reported....................................... $24,934,000 $18,649,000 Pro forma......................................... 24,357,000 17,999,000 Net income per diluted share: As reported....................................... $ 1.77 $ 1.38 Pro forma......................................... 1.73 1.33
The pro forma net income reflects the compensation cost only for those options granted since 1996. Compensation cost is reflected over a stock option's vesting period and compensation cost for options granted prior to June 30, 1995 is not considered. Therefore, the full potential impact of compensation cost for the Company's stock plans under SFAS No. 123 is not reflected in the pro forma net income amounts presented above. The fair value of each stock option granted in 1998 and 1997 under the Company's stock option plans was estimated on the date of grant using the Black-Scholes option-pricing model. The following key assumptions were used to value grants issued for each year:
WEIGHTED- AVERAGE AVERAGE DIVIDEND RISK FREE RATE EXPECTED LIFE VOLATILITY YIELD -------------- ------------- ---------- -------- 1997........................ 6.28% 7.5 years 29.91% 3.7% 1998........................ 5.54% 5.4 years 28.53% 2.6%
The weighted-average fair values per share of stock options granted during 1998, 1997 and 1996 were $8.51, $6.40 and $4.71 respectively. It should be noted that the Black-Scholes option pricing model used in the calculation was designed to value readily tradable stock options with relatively short lives. The options granted to employees are not tradable and have contractual lives of up to ten years. However, management believes that the assumptions used and the model applied to value the awards yields a reasonable estimate of the fair value of the grants made under the circumstances. At the 1994 annual meeting, the stockholders approved the New England Business Service, Inc. Stock Compensation Plan (the "Stock Compensation Plan"). Under the Stock Compensation Plan, up to 300,000 shares of common stock may be issued to the Company's directors and employees in lieu of cash compensation F-13 otherwise payable. At June 27, 1998, 291,147 shares remain reserved for issuance under the Stock Compensation Plan. The number and value of shares issued under this plan have been nominal. 8. 401(K) AND PROFIT-SHARING PLANS The Company sponsors several 401(k) plans covering substantially all of the Company's domestic employees. Contributions to the plans are made by way of participant salary deferrals and Company contributions. Company contributions include combinations of matching, fixed and discretionary contributions subject to a maximum Company obligation ranging from 4% to 9% of an employees eligible pay. The Company's aggregate contributions to the plans, which were charged to general and administrative expense, were $4,795,000 in fiscal 1998, $1,123,000 in fiscal 1997 and $1,103,000 in fiscal 1996. The Company issued 120,648 shares of treasury stock with a fair market value of $3,836,000 in fiscal 1998, 52,511 shares with a fair market value of $1,123,000 in fiscal 1997 and 57,966 shares with a fair market value of $1,103,000 in fiscal 1996 as payment in full, or in part, of the 401(k) plan contribution obligations. At June 27, 1998, 345,816 shares remain reserved for issuance under the Company's 401(k) plans. The Company and its subsidiaries maintained a profit-sharing plan for substantially all employees who completed one year of service. Distributions were based on net income and payments were made five times a year. For 1997 and 1996 distributions under the plans (which were charged to general and administrative expense) aggregated $1,138,000 and $3,489,000, respectively. The Company terminated this plan during 1997. In conjunction with the termination of this plan, the Company instituted a transition plan, under which substantially all employees received a predetermined portion of their salary during the third and fourth quarters of fiscal 1997. Payments under the transition plan amounted to $1,908,000 and were also charged to general and administrative expense. 9. PENSION PLANS The Company sponsored a defined-benefit, trusteed pension plan (the "DB Plan") which provided retirement benefits for the majority of its domestic employees. During the second quarter of 1997, the Company amended its DB Plan. The amendment specifically froze plan participation at December 31, 1996 and eliminated further benefit accruals after June 28, 1997. The Company recorded a plan curtailment gain of $2,187,000 as a component of other income during 1997 associated with the plan amendment. In 1998 the Company terminated the plan and settled all obligations. The Company recorded a plan settlement gain of $556,000 associated with the DB plan termination. The Company also maintains two similar plans for its Canadian employees. During fiscal 1998, the Company amended its Canadian DB Plan to freeze participation at December 31, 1997 and recorded a plan curtailment gain of $313,000 associated with this action. The components of net pension expense/(income) for 1997 and 1996 are as follows:
1997 1996 ----------- ----------- Service cost-benefits earned during the period... $ 635,000 $ 1,564,000 Interest cost on projected benefit obligation.... 1,879,000 2,169,000 Actual return on plan assets..................... (1,746,000) (4,557,000) Net amortization and deferral.................... (1,903,000) 1,834,000 ----------- ----------- Net pension expense/(income)................... $(1,135,000) $ 1,010,000 =========== ===========
The assumptions used for the computation of net pension expense/(income) for 1997 and 1996 were as follows:
1997 1996 ---- ---- Discount rate...................................................... 8.0% 7.8% Rate of increase in compensation levels............................ 5.0% 5.0% Expected long-term rate of return on assets........................ 9.0% 9.0%
F-14 In addition, the Company has a supplemental executive retirement plan which is currently unfunded. Executive employees are eligible to become members of the plan upon designation by the Board of Directors. Benefits under the plan are based on the employees' annual earnings and years of service. Provision for this benefit is charged to operations over the employees' term of employment. The amounts are not significant. 10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, ("SFAS No. 106"), requires the accrual of postretirement benefits other than pensions (such as health care benefits) during the years an employee provides service to the Company. The Company sponsors a defined benefit postretirement plan that provides health and dental care benefits for retired Company officers. The plan is contributory and retirees' contributions are adjusted annually. The following table sets forth the plan's funded status and obligations as of June 27, 1998 and June 28, 1997:
1998 1997 ---------- ---------- Accumulated postretirement benefit obligation ("APBO"): Retirees.......................................... $ 638,000 $ 538,000 Eligible active plan participants................. -- -- Other active plan participants.................... 589,000 448,000 ---------- ---------- Total........................................... 1,227,000 986,000 Plan assets at fair value........................... -- -- Accumulated postretirement benefit obligation in excess of plan assets............................ 1,227,000 986,000 Unrecognized net gain (loss)...................... (73,000) 91,000 ---------- ---------- Net postretirement liability (included in accrued employee benefit expense).............. $1,154,000 $1,077,000 ========== ==========
The components of net periodic postretirement benefits cost for 1998, 1997 and 1996 are as follows:
1998 1997 1996 -------- -------- ------- Service cost.................................. $ 47,000 $ 43,000 $40,000 Interest on accumulated postretirement benefit obligation................................... 78,000 75,000 64,000 Amortization of gain.......................... (5,000) (3,000) (9,000) -------- -------- ------- Net periodic postretirement cost............ $120,000 $115,000 $95,000 ======== ======== =======
For measurement purposes, a 9% annual rate of increase in the cost of providing medical benefits was assumed in 1998 with a reduction of 1% per year to a trend rate of 6% for fiscal 2002. The weighted average discount rate used in determining the APBO was 7.0% in 1998 and 7.8% in 1997. The health care cost trend has a significant effect on the amounts reported. An increase of 1% in the rate of increase would have had an effect of increasing the APBO by $196,000 and the net periodic postretirement benefits cost by $19,000. 11. EXIT COSTS During the first quarter of fiscal year 1996, the Company implemented a plan to restructure operations, including the closure of the company's Flagstaff, Arizona manufacturing facility. The accompanying statements F-15 of consolidated income include a pretax charge of approximately $3,044,000 for exit costs associated with this plan. The charge consists of costs related to the closure of the Flagstaff facility of $1,224,000 and termination benefits of $1,820,000. Approximately 110 employees were terminated as a result of the facility closing. As of June 27, 1998, the payment of termination benefits and the closure of the manufacturing operations was complete. During the first quarter of fiscal year 1997, the Company reached a decision to eliminate the Company's print desks in Kinko's stores, its administrative offices in Phoenix and its stationery plant in Scottsdale, Arizona. The accompanying statements of consolidated income include a $3,803,000 pretax charge for exit costs associated with this plan recognized during the year ended June 28, 1997. The $3,803,000 pretax charge for exit costs 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. As of June 27, 1998, the payment of termination benefits, write-off of equipment and closure of facilities was complete. There was not a material change from the liability originally reported. There were no significant changes in estimates of exit costs during fiscal year 1998. 12. SALE OF PRODUCT LINE During the third quarter of fiscal 1996, the Company completed the sale of selected assets of its Software and Services Division for $4,500,000 resulting in a gain of approximately $495,000. The asset sale included the rights to the Company's One-Write Plus accounting package and the Company's software development and technical support organizations. 13. INCOME TAXES The components of income before income taxes were as follows:
1998 1997 1996 ----------- ----------- ----------- United States............................ $39,817,000 $30,149,000 $19,735,000 Foreign.................................. 1,588,000 1,231,000 1,320,000 ----------- ----------- ----------- Total.................................. $41,405,000 $31,380,000 $21,055,000 =========== =========== ===========
Provisions for income taxes under SFAS No. 109 in 1998, 1997 and 1996 consist of:
1998 1997 1996 ----------- ----------- ---------- Currently payable: Federal................................ $10,369,000 $ 7,350,000 $5,217,000 State.................................. 3,517,000 2,376,000 2,353,000 Foreign................................ 733,000 436,000 1,019,000 ----------- ----------- ---------- Total................................ 14,619,000 10,162,000 8,589,000 Deferred................................. 1,852,000 2,569,000 (283,000) ----------- ----------- ---------- Total................................ $16,471,000 $12,731,000 $8,306,000 =========== =========== ==========
F-16 The tax effects of significant items comprising the Company's net deferred tax asset (liability) as of June 27, 1998 and June 28, 1997 are as follows:
1998 1997 ---------------------- ---------------------- CURRENT NONCURRENT CURRENT NONCURRENT ---------- ---------- ---------- ---------- Deferred tax assets: Pension plans............. $ 119,000 $ 345,000 Accrued vacation.......... 1,108,000 956,000 Allowance for doubtful accounts................. 612,000 1,212,000 Accrued expenses.......... 2,719,000 1,508,000 Accrued exit costs........ -- 15,000 Sales returns and allowances............... 400,000 405,000 Inventory................. 579,000 910,000 Employee benefit reserves................. 456,000 434,000 Amortization of intangible assets................... -- $1,960,000 1,456,000 Depreciation.............. -- 157,000 124,000 Other..................... -- 535,000 535,000 Deferred tax liabilities: Amortization.............. -- (299,000) -- Depreciation.............. -- (768,000) -- Deferred mail advertising.............. (1,672,000) -- (983,000) Other..................... (207,000) (328,000) (79,000) $(288,000) ---------- ---------- ---------- --------- Net deferred tax asset (liability)................ $4,114,000 $1,257,000 $6,838,000 $(288,000) ========== ========== ========== =========
A reconciliation of the provisions for income taxes to the U.S. Federal income tax statutory rates follows:
1998 1997 1996 ---- ---- ---- Statutory tax rate....................................... 35.0% 35.0% 35.0% State income taxes (less federal tax benefits)........... 6.3 6.2 6.3 Other--net............................................... (1.5) (0.6) (1.9) ---- ---- ---- Effective tax rate....................................... 39.8% 40.6% 39.4% ==== ==== ====
14. FINANCIAL INFORMATION BY GEOGRAPHIC AREA The Company markets its products directly to small businesses and professional offices in the United States, Canada, France and the United Kingdom. Income from operations represents net sales less all identifiable operating expenses. Investment income, interest expense and income taxes are excluded from geographic area operating data. Sales or transfers between geographic areas are not material. General corporate expenses are included under the Company's domestic operations.
DOMESTIC INTERNATIONAL CONSOLIDATED (IN THOUSANDS) -------- ------------- ------------ 1998 Net sales............................. $325,791 $29,976 $355,767 Income from operations................ 44,437 433 44,870 Identifiable assets................... 277,242 30,335 307,577 1997 Net sales............................. 237,130 26,294 263,424 Income from operations................ 28,718 539 29,257 Identifiable assets................... 115,125 26,071 141,196 1996 Net sales............................. 233,462 21,492 254,954 Income from operations................ 18,754 666 19,420 Identifiable assets................... 82,921 20,621 103,542
F-17 15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following financial information is in thousands of dollars except per share amounts.
FIRST SECOND THIRD FOURTH TOTAL QUARTER QUARTER QUARTER QUARTER YEAR ------- ------- ------- -------- -------- 1998 Net sales....................... $75,615 $81,651 $98,002 $100,499 $355,767 Gross profit.................... 46,604 51,194 60,564 62,180 220,542 Income before income taxes...... 9,732 10,541 10,727 10,405 41,405 Net income...................... 5,961 6,483 6,382 6,108 24,934 Diluted earnings per share...... .43 .46 .45 .43 1.77 ======= ======= ======= ======== ======== Dividends per share............. $ .20 $ .20 $ .20 $ .20 $ .80 ======= ======= ======= ======== ======== 1997 Net sales....................... $60,702 $63,203 $64,127 $ 75,392 $263,424 Gross profit.................... 38,741 42,557 41,441 46,637 169,376 Income before income taxes...... 1,147 9,435 10,003 10,795 31,380 Net income...................... 678 5,700 6,004 6,267 18,649 Diluted earnings per share...... .05 .43 .45 .46 1.38 ======= ======= ======= ======== ======== Dividends per share............. $ .20 $ .20 $ .20 $ .20 $ .80 ======= ======= ======= ======== ========
F-18 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of New England Business Service, Inc.: We have audited the accompanying consolidated balance sheets of New England Business Service, Inc. and subsidiaries as of June 27, 1998 and June 28, 1997 and the related statements of consolidated income, consolidated stockholders' equity, and consolidated cash flows for each of the three years in the period ended June 27, 1998. Our audits also included the financial statement schedule listed in the Index on page F-1. These financial statements and financial statement schedule are the responsibility of the Corporation's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of New England Business Service, Inc. and subsidiaries as of June 27, 1998 and June 28, 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 27, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Boston, Massachusetts July 24, 1998 F-19 SCHEDULE II NEW ENGLAND BUSINESS SERVICE, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (000'S OMITTED)
ADDITIONS ---------------- BALANCE AT CHARGED CHARGED DEDUCTIONS BALANCE BEGINNING TO TO OTHER FROM AT END OF PERIOD INCOME ACCOUNTS RESERVES(2) PERIOD ---------- ------- -------- ----------- --------- Reserves deducted from assets to which they apply: For doubtful accounts receivable: Year ended June 29, 1996.... 3,304 3,033 0 2,994 3,343 Year ended June 28, 1997.... 3,343 2,612 0 2,604 3,351 Year ended June 27, 1998.... 3,351 3,293 1,053(1) 3,440 4,257 Reserves included in liabilities: For sales returns and allowances: Year ended June 29, 1996.... 990 1,072 0 990 1,072 Year ended June 28, 1997.... 1,072 993 0 1,072 993 Year ended June 27, 1998.... 993 866 300(1) 993 1,166
- -------- (1) Acquired in acquisitions. (2) Accounts written off. F-20 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION -------------- ----------- 3.1.1 Certificate of Incorporation of the Registrant. (Incorporated by reference to Exhibit 7(a) to the Company's Current Report on Form 8-K dated October 31, 1986.) 3.1.2 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 Exhibit 7(a) to the Company's Current Report on Form 8-K dated October 31, 1986.) 3.1.3 Certificate of Designations, Preferences and Rights of Series A Participating Preferred Stock of the Company, dated October 27, 1989. (Incorporated by reference to Exhibit (3)(c) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995.) 3.2 By-Laws of the Registrant, as amended. (Incorporated by reference to Exhibit (3)(d) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1995.) 4.1 Specimen stock certificate for shares of Common Stock, par value $1.00 per share. (Incorporated by reference to Exhibit (4)(a) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995.) 4.2 Amended and Restated Rights Agreement, dated as of 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 (now BankBoston), 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.) 10.1.1 Amended and Restated 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 Exhibit 10.1 to the Company's Current Report on Form 8-K dated January 7, 1998.) 10.1.2 First Amendment to Amended and Restated Revolving Credit Agreement dated as of May 29, 1998, 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 Exhibit 10.1 to the Company's Current Report on Form 8-K dated June 18, 1998.) 10.2 Asset Purchase Agreement by and among New England Business Service, Inc., Chiswick Trading, Inc. and Theodore Pasquarello dated as of March 31, 1997. (Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated April 15, 1997.) 10.3.1 Lease between Theodore Pasquarello, as Trustee of the E.B. Realty Trust (Landlord) and New England Business Service, Inc. (Tenant) for the land and improvements located at 33 Union Avenue, Sudbury, MA 01776. (Incorporated by reference to Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 29, 1997.) 10.3.2 Lease between Theodore Pasquarello and Eileen Pasquarello, as Trustees of The Paris Trust (Landlord) and New England Business Service, Inc. (Tenant) for the land and improvements located at 31 Union Avenue, Sudbury, MA 01776. (Incorporated by reference to Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 29, 1997.)
X-1
EXHIBIT NUMBER DESCRIPTION -------------- ----------- 10.3.3 Lease between Theodore Pasquarello and Eileen Pasquarello, as Trustees of The Paris Trust (Landlord) and New England Business Service, Inc. (Tenant) for the land and improvements located at 25 Union Avenue, Sudbury, MA 01776. (Incorporated by reference to Exhibit (10)(w) to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1997.) 10.4 Stock Purchase Agreement by and between New England Business Service, Inc. and CSS Industries, Inc. dated as of December 5, 1997 (Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated January 7, 1998.) 10.5.1 Stock Purchase Agreement by and between New England Business Service, Inc. and ROMO Corp. dated as of May 1, 1998. (Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated June 18, 1998.) 10.5.2 Asset Purchase Agreement by and among New England Business Service, Inc., NEBS Business Forms Ltd., McBee Systems of Canada, Inc. and ROMO Corp. dated as of May 1, 1998. (Incorporated by reference to Exhibit 2.3 to the Company's Current Report on Form 8-K dated June 18, 1998.) 10.6* NEBS Key Employee Stock Option and Stock Appreciation Rights Plan, as amended March 31, 1987. (Incorporated by reference to Exhibit (10)(a) to the Company's Annual Report on Form 10-K for the fiscal year ended June 24, 1998.) 10.7* NEBS 1997 Key Employee and Eligible Director Stock Option and Stock Appreciation Rights Plan dated July 25, 1997 (including amendment and restatement of the NEBS 1990 Key Employee Stock Option and Stock Appreciation Rights Plan and the NEBS 1994 Key Employee and Eligible Director Stock Option and Stock Appreciation Rights Plan). (Incorporated by reference to Exhibit (10)(x) to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1997.) 10.8* Stock Option Agreement dated February 2, 1996 between the Company and Robert J. Murray; filed herewith. 10.9* NEBS Deferred Compensation Plan for Outside Directors. (Incorporated by reference to Exhibit (10)(d) to the Company's Annual Report on Form 10-K for the fiscal year ended June 25, 1982.) 10.10* New England Business Service, Inc. Stock Compensation Plan dated July 25, 1994. (Incorporated by reference to Exhibit (10)(g) to the Company's Annual Report on Form 10-K for the fiscal year ended June 24, 1994.) 10.11.1* New England Business Service, Inc. Deferred Compensation Plan dated June 25, 1994. (Incorporated by reference to Exhibit (10)(g) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995.) 10.11.2* First Restated Trust Agreement for the New England Business Service, Inc. Deferred Compensation Plan (Restated Effective April 1, 1998); filed herewith. 10.12* Supplemental Retirement Plan for Executive Employees of New England Business Service, Inc. dated July 1, 1991, as amended June 24, 1994. (Incorporated by reference to Exhibit (10)(h) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995.) 10.13* Executive Bonus Plan for 1999; filed herewith. 10.14* Employment Agreement dated March 31, 1997 between the Company and Theodore Pasquarello. (Incorporated by reference to Exhibit (10)(n) to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1997.) 10.15* Change in Control agreement dated November 27, 1996 between the Company and Robert J. Murray. (Incorporated by reference to Exhibit (10)(o) to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1997.)
X-2
EXHIBIT NUMBER DESCRIPTION -------------- ----------- 10.16* Change in Control agreement dated November 27, 1996 between the Company and John F. Fairbanks. (Incorporated by reference to Exhibit (10)(p) to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1997.) 10.17* Change in Control agreement dated November 27, 1996 between the Company and George P. Allman. (Incorporated by reference to Exhibit (10)(q) to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1997.) 10.18* Change in Control agreement dated November 27, 1996 between the Company and Robert D. Warren. (Incorporated by reference to Exhibit (10)(r) to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1997.) 10.19* Change in Control agreement dated November 27, 1996 between the Company and Robert S. Brown. (Incorporated by reference to Exhibit (10)(s) to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1997.) 10.20* Change in Control agreement dated November 27, 1996 between the Company and Edward M. Bolesky. (Incorporated by reference to Exhibit (10)(t) to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1997.) 10.21* Change in Control agreement dated November 27, 1996 between the Company and Steven G. Schlerf. (Incorporated by reference to Exhibit (10)(u) to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1997.) 10.22* Change in Control agreement dated April 2, 1997 between the Company and Theodore Pasquarello. (Incorporated by reference to Exhibit (10)(v) to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1997.) 10.23* Change in Control agreement dated January 23, 1998 between the Company and Richard T. Riley; filed herewith. 10.24+ Agreement dated as of September 19, 1995 between New England Business Service, Inc. and Appleton Papers, Inc. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997.) 11 Statement re Computation of Per Share Earnings. 21 List of Subsidiaries. 23 Consent of Deloitte & Touche LLP. 24 Power of Attorney (included in the signature page of this Annual Report on Form 10-K). 27 Article 5 Financial Data Schedule.
- -------- * Identifies a management contract or compensatory plan or arrangement in which an executive officer or director of the Company participates. + Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. X-3 EX-10.8 2 STOCK OPTION AGREEMENT EXHIBIT 10.8 STOCK OPTION AGREEMENT THIS STOCK OPTION AGREEMENT dated as of February 2, 1996, is made between New England Business Service, Inc., a Delaware corporation (the "Company"), and Robert J. Murray of Cohasset, Massachusetts (the "Grantee"), an employee of the Company. WHEREAS, the Grantee is the Chairman, President and Chief Executive Officer of the Company; and WHEREAS, in order to provide a performance incentive to the Grantee and to encourage stock ownership in the Company by the Grantee, the Board of Directors of the Company (the "Board") desires to grant to the Grantee an option to purchase 250,000 shares of the Company's Common Stock, par value $1.00 per share (the "Stock"), subject to the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties agree as follows: 1. Grant of Option. The Company hereby grants to the Grantee an option --------------- (the "Option") to purchase 250,000 shares of Stock (the "Optioned Shares") at a price of $18.25 per share in accordance with and subject to all the terms and conditions hereinafter set forth. 2. Term and Exercise of Option. Except as otherwise provided in this --------------------------- Agreement, the Option shall terminate at the close of business on February 2, 2006, and may be exercised only by the Grantee or, to the extent provided in Section 3(c) hereof, by his legal representative. While the Option is effective and the Grantee continues to be employed, the Optioned Shares shall become available for purchase by the Grantee in minimum installments of ten (10) shares unless the issue of a lesser number is enough to exhaust the Option. The Grantee's right to purchase shares pursuant to the Option shall vest according to the following schedule:
Price if Date Number of Shares Exercised In Full - ----------------- ---------------- ----------------- February 2, 1996 62,500 $1,140,625 February 2, 1997 62,500 1,140,625 February 2, 1998 62,500 1,140,625 February 2, 1999 62,500 1,140,625
Provided that, subject to the provisions of Section 6 hereof, the right to purchase all of the remaining shares purchasable hereunder shall vest and become exercisable immediately upon the occurrence of the Change in Control (as defined in Section 6 hereof). Unpurchased portions of available installments may be accumulated and subsequently purchased by the Grantee prior to the expiration of the Option. 3. Terms and Conditions of Exercise of Option. Each exercise and purchase ------------------------------------------ of Optioned Shares shall be subject to the following terms and conditions: (a) The Grantee shall have remained in the continuous employ of the Company from the date of the Option grant until the date of exercise (or in the circumstances specified in Section 3(b) hereof, until a date not more than three months prior to the date of exercise). (b) If the Grantee retires prior to the expiration of the Option, then he shall be entitled, within three months after the date of his retirement or prior to the expiration date of the Option, whichever is earlier, to exercise the Option to the extent that the Grantee would have been entitled to exercise the Option immediately prior to his retirement. (c) If the Grantee dies, then his legal representative or the person or persons to whom his rights under this Agreement shall pass by will or by the applicable law of descent and distribution shall be entitled, within twelve months after the date of his death or prior to the expiration date of the Option, whichever is earlier, to exercise the Option to the extent that the Grantee would have been entitled to exercise the Option on the date of his death. (d) The Grantee shall exercise the Option by giving written notice of such exercise to the Chief Financial Officer of the Company at the Company's principal place of business, accompanied by the full purchase price of the Optioned Shares so being purchased, together with any tax or excise, if any, due in respect of the issue thereof, in cash, by certified or bank check, or by the surrendering of shares of the Company's Stock (which shall be valued at its Fair Market Value (as defined below) on the date of surrender). Such notice shall be effective when received by the Chief Financial Officer. For purposes of this subsection (d), the term "Fair Market Value" shall mean the last sales price per share of the Stock as reported on the New York Stock Exchange-Composite Transactions Reporting System on or prior to the date as to which such valuation is to made. (e) The stated price and number of Optioned Shares purchasable hereunder are subject to adjustment as provided in Section 7 hereof. (f) The Option is not intended to qualify as an "incentive stock option," within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. No Optioned Shares shall be delivered pursuant to this Agreement unless arrangements satisfactory to the Chief Financial Officer have been made for any required federal or state tax or other withholdings. 4. Option Non-Transferable. The Option may not be transferred or assigned ----------------------- by the Grantee or by operation of law other than by will or by the laws of descent and distribution. It may be exercised during the lifetime of the Grantee only by him. 2 5. Right to Terminate. Nothing contained in this Agreement shall restrict ------------------ the right of the Company to terminate the employment of the Grantee at any time. 6. Change in Control. For purposes of this Agreement, a "Change in ----------------- Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of either (i) the then outstanding shares of the Stock or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of the directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege); (B) any acquisition by the Company or by any corporation controlled by the Company; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (D) any acquisition by any corporation pursuant to a consolidation or merger, if, following such consolidation or merger, the conditions described in clauses (i), (ii) and (iii) of subsection (c) of this Section 6 are satisfied; or (b) Individuals who, as of date hereof, constitute the Board (the "Incumbent Board") ceasing for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote or resolution of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Adoption by the Board of a resolution approving an agreement of consolidation of the Company with or merger of the Company into another corporation or business entity in each case, unless, following such consolidation or merger, (i) more than 60% of, respectively, the then outstanding shares of common stock of the corporation resulting from such consolidation or merger and/or the combined voting power of the then outstanding voting securities of such corporation or business entity entitled to vote generally in the election of directors (or other persons having the general power to direct the affairs of such entity) is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Stock and the Outstanding Company Voting Securities immediately prior to such consolidation or merger in substantially the same proportions as their ownership, immediately prior to such consolidation or merger, of the Stock and/or 3 Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation or other business entity resulting from such consolidation or merger and any Person beneficially owning, immediately prior to such consolidation or merger, directly or indirectly, 35% or more of the Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 35% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such consolidation or merger or the combined voting power of the then outstanding voting securities of such corporation or business entity entitled to vote generally in the election of its directors (or other persons having the general power to direct the affairs of such entity) and (iii) at least a majority of the members of the board of directors (or other group or persons having the general power to direct the affairs of the corporation or other business entity) resulting from such consolidation or merger were members of the Incumbent Board at the time of the execution of the initial agreement providing for such consolidation or merger; provided that any right to purchase shares of Stock which shall vest by reason of the action of the Board pursuant to this subsection (c) shall be divested, with respect to any shares not already purchased by the Grantee or his personal representative, upon (A) the rejection of such agreement of consolidation or merger by the stockholders of the Company or (B) its abandonment by either party thereto in accordance with its terms; or (d) Adoption by the requisite majority of the whole Board, or by the holders of such majority of stock of the Company as is required by law or by the Certificate of Incorporation or By-Laws of the Company as then in effect, of a resolution or consent authorizing (i) the dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation or other business entity with respect to which, following such sale or other disposition, (A) more than 60% of, respectively, the then outstanding shares of common stock of such corporation and/or the combined voting power of the outstanding voting securities of such corporation or other entity entitled to vote generally in the election of its directors (or other persons having the general power to direct its affairs) is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportions as their ownership, immediately prior to such sale or other disposition, of the Stock and/or Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation or other business entity and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 35% or more of the Stock and/or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 35% or more of, respectively, the then outstanding shares of common stock of such corporation and/or the combined voting power of the then outstanding voting securities of such corporation or other business entity entitled to vote generally in the election of directors (or other persons having the general power to direct its affairs) and (C) at least a majority of the members of the board of directors (or other group of persons having the general power to direct the affairs of such corporation or other entity) were members of the Incumbent Board at the time of the execution of the initial agreement or 4 action of the Board providing for such sale or other disposition of assets of the Company; provided that any right to purchase shares of Stock which shall vest by reason of the action of the Board or the stockholders pursuant to this subsection (d) shall be divested, with respect to any shares not already purchased by the Grantee or his personal representative, upon the abandonment by the Company of such dissolution, or such sale or other disposition of assets, as the case may be. 7. Adjustment of Optioned Shares; Reorganization. --------------------------------------------- (a) If the Company shall combine or split the Stock or shall declare thereon any dividend payable in shares of the Stock, or shall reclassify or take any other action of a similar nature affecting the Stock, then the number and class of shares which may thereafter be purchased upon exercise of the Option and the option price per share shall be adjusted to such extent as may be determined by the Board, upon recommendation of the Stock Option Committee, to be necessary to maintain unimpaired and unenlarged the rights of the Grantee, and any such determination shall be conclusive and binding upon the Grantee. After any such adjustment, the term "Stock" shall mean the Stock as so adjusted. (b) In case of any one or more reclassifications, changes, or exchanges of outstanding shares of the Company's Stock (other than as provided in subsection (a) above), or consolidations of the Company with, or mergers of the Company into, other corporations, or other recapitalizations or reorganizations (other than consolidations with another corporation, a majority of the voting stock of which is owned by the Company, in which the Company is the continuing corporation and which do not result in any reclassification, change or exchange of outstanding shares of the Company's Stock), or in case of any one or more sales or conveyances to another corporation of the property of the Company as an entirety, or substantially as an entirety (any and all of which are hereinafter in this Section called "Reorganizations"), the Grantee shall have the right, upon any subsequent exercise of the Option, to acquire the same kind and amount of securities and property which he would then hold if he had exercised the Option immediately before the first of such Reorganizations and continued to hold all securities and property which came to him as a result of that and subsequent Reorganizations, less all securities and property surrendered or cancelled pursuant to any of same (the rights provided by Section 7(a) and (b) being continuing and cumulative) except that, notwithstanding any provision of Section 3(b) or (c) hereof to the contrary, the Board may decide to terminate the Option at the time of such Reorganization. If the Board so decides, it shall give not less than thirty (30) days' notice to the Grantee that the period in which the Option may be exercised will terminate at the time of such Reorganization. Such notice shall be effective when mailed to the Grantee by certified or registered mail addressed to him at his address of record or when delivered in hand to the Grantee. Following such notice, where neither of the events referred to in Section 3(b) or (c) hereof has occurred, the Option may be exercised, in whole in or part, and where one of the events referred to in Section 3(b) or (c) hereof has occurred, the Option may be exercised, but only to the extent therein permitted, and only at any time prior to such Reorganization. A liquidation shall be deemed a Reorganization for the foregoing purposes. 5 8. Restrictions on Transfer. The shares of Stock issued on exercise of ------------------------ the Option shall be subject to any restrictions on transfer then in effect pursuant to the Certificate of Incorporation or By-Laws of the Company and to any other restrictions or provisions set forth herein or in any other contract or agreement binding on the Grantee. The Grantee will not sell or otherwise dispose of any of the shares of Stock issued on exercise of the Option except in compliance with all applicable state and federal securities laws and regulations. 9. Stockholder Rights. No person shall have any rights as a stockholder ------------------ with respect to any shares of Stock subject to the Option until he shall been issued a stock certificate for such shares. 10. General. This Agreement constitutes the entire agreement between the ------- parties with respect to the subject matter hereof and supersedes any prior or contemporaneous agreements or understandings, written or oral, concerning the subject matter hereof. This Agreement may be amended, modified or revoked only by written instrument executed by both parties hereto. Failure to enforce any provision of this Agreement shall not constitute a waiver of any term hereof, and no waiver of a provision of this Agreement shall constitute a waiver of any other provision(s) or of the same provision on another occasion. This Agreement is personal to and shall not be assignable by the Grantee, but shall inure to the benefit of the respective parties hereto and their respective heirs, legal representatives, successors and assigns. This Agreement shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts applicable to agreements under seal made and to be performed within the Commonwealth. If any provision of this Agreement shall be held by a court of competent jurisdiction to be illegal, invalid or unenforceable, the remaining provisions shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first written above. NEW ENGLAND BUSINESS SERVICE, INC. By: /s/ John F. Fairbanks ------------------------------- Name: John F. Fairbanks Title: Treasurer /s/ Robert J. Murray ------------------------------- Robert J. Murray 6 EX-10.11.2 3 FIRST RESTATED TRUST AGREEMENT EXHIBIT 10.11.2 FIRST RESTATED TRUST AGREEMENT FOR THE NEW ENGLAND BUSINESS SERVICE, INC DEFERRED COMPENSATION PLAN (Restated Effective April 1, 1998) This Trust Agreement made as of the 25th day of June, 1994, and restated effective the 1st day of April, 1998, by and between New England Business Service, Inc. (hereinafter called the "Company"), a corporation duly organized in Delaware whose principal office is located in Massachusetts, and Norwest Bank Minnesota, N.A. (hereinafter called the "Trustee"), a corporation with trust powers whose principal office is located in Minnesota, as successor Trustee to the First National Bank of Boston. WITNESSETH: WHEREAS, certain designated employees (hereinafter called "Participants" or "Trust Beneficiaries") of the Company and other "Participating Employers" (as defined in the Plan described herein) and the respective beneficiaries (hereinafter called "Trust Beneficiaries") of such Participants are entitled to deferred compensation benefits (hereinafter called "Deferred Compensation") arising under the New England Business Service, Inc. Deferred Compensation Plan, as the same has been or may hereafter be amended or restated, or any successor thereto (hereinafter called the "Deferred Compensation Plan" or the "Plan"), attached hereto as Exhibit A and by this reference made a part hereof; and WHEREAS, the amount and timing of Deferred Compensation to which each Trust Beneficiary is entitled is specified in the Deferred Compensation Plan; and WHEREAS, the Company wishes to establish a trust fund (hereinafter called the "Trust Fund" or the "Fund") and to transfer to the Trust Fund assets which shall be held therein, subject to the claims of the Participating Employers' creditors in the event of any Participating Employer's Insolvency (as defined herein), until paid to the Trust Beneficiaries as Deferred -1- Compensation Benefits in such manner and at such times as specified in the Deferred Compensation Plan; and WHEREAS, it is the obligation of the Company, or other Participating Employer to make contributions to the Trust Fund of amounts deferred by Participants pursuant to the Deferred Compensation Plan as soon as is administratively feasible after such deferral amounts are withheld by the Company or other Participating Employer; WHEREAS, it is the intention of the Company and the Trustee hereby to restate the Trust pursuant to this restated Trust Agreement; NOW, THEREFORE, the parties do hereby establish the Trust Fund and agree that the Trust Fund be comprised, held and disposed of as follows: Section 1. Trust Fund. ---------- 1.1 Establishment of Trust Fund. Subject to the claims of creditors as --------------------------- set forth in Section 3, the Company hereby deposits with the Trustee in trust One Dollar ($1.00) which shall become the principal of the Trust Fund to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. 1.2 Irrevocable Trust. The Trust hereby established shall be irrevocable. ----------------- 1.3 Grantor Trust. The Trust is intended to be a grantor trust, within ------------- the meaning of Section 671 of the Internal Revenue Code of 1986, as amended (the "Code"), and shall be construed accordingly. 1.4 Use of Trust Assets. The principal of the Trust, and any earnings ------------------- thereon which are not paid to the Participating Employers as provided in Section 5, shall be held separate and apart from other funds of the Participating Employers and shall be used exclusively for the uses and purposes herein set forth. Neither any Trust Beneficiary nor the Deferred Compensation Plan shall have any preferred claim on, or any beneficial ownership interest in, any assets of the Trust Fund prior to the time such assets are paid to such Trust Beneficiary as Deferred Compensation as provided in Section 2, and all rights created under the Deferred Compensation -2- Plan and this Trust Agreement shall be mere unsecured contractual rights of a Trust Beneficiary against the relevant Participating Employer. 1.5 Contributions to Trust Fund. To the extent required under the Deferred --------------------------- Compensation Plan, the relevant Participating Employer shall from time to time make additional deposits of cash or other property (including but not limited to shares of the Company's common stock) in Trust with the Trustee, to augment the principal to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. When each such deposit is made, the Participating Employer shall inform the Trustee what portion of the total deposit (if any) is for the benefit of each Participant. 1.6 Separate Accounts. ----------------- (a) Establishment By Plan Administrator Prior to Change of Control. -------------------------------------------------------------- On behalf of the Company and each Participating Employer, the Retirement Committee appointed pursuant to the Deferred Compensation Plan shall establish and maintain in an equitable manner a separate account (an "Account") for each Participant in which it shall keep a separate record of the assets available in the Trust Fund to pay the Participant's Deferred Compensation. As agent for the Company, the Retirement Committee may select and retain a third party administrator to maintain such Accounts. The Company or other relevant Participating Employer shall certify to the Trustee at the time of each contribution to the Trust Fund the amount of such contribution being made in respect of each Participant under the Plan. The Fund shall be revalued periodically by the Trustee at current market values, as determined by the Trustee in accordance with Section 6.5. The Trustee shall certify to the Company the results of each such valuation, whereupon each Participant's Account shall be equitably adjusted by the Company to reflect its share of income, expense, appreciation and depreciation since the preceding valuation date. The Company shall provide the Trustee with a compilation of all such adjusted Account balances as of each such valuation date. Each Participant (or Trust Beneficiary of a deceased Participant) shall receive a statement of the value of the Participant's separate Account at least annually. -3- Such statement shall be provided by the Company prior to a Change of Control and by the Trustee after a Change of Control. (b) Maintenance By Trustee After Change of Control. Notwithstanding ---------------------------------------------- the foregoing, upon a "Change of Control" (as defined in Section 1.8), the Trustee shall become responsible for the maintenance of a separate Account for each Participant under the Deferred Compensation Plan and for the periodic adjustment of such Accounts in accordance with the procedures described herein. The Trustee may select and retain a third party administrator to maintain such Accounts. The full expense incurred by the Trustee in maintaining such separate Accounts shall be paid by the Company, and until so paid shall constitute a charge upon the Trust Fund. 1.7 Definition of "Plan Administrator". The "Plan Administrator" shall be ---------------------------------- the Retirement Committee appointed pursuant to the Deferred Compensation Plan. 1.8 Definition and Determination of "Change of Control". --------------------------------------------------- (a) Definition and Presumption. "Change of Control" means the -------------------------- occurrence of a "Business Combination" (as such term is defined in Article 14 of the Company's Certificate of Incorporation as in effect on the Effective Date of the Supplemental Plan) in circumstances requiring the affirmative vote of the holders of at least eighty percent (80%) of the Company's issued and outstanding common stock pursuant to the provisions of Article 14 of the Company's Certificate of Incorporation as in effect on the Effective Date of the Supplemental Plan. The Trustee shall have no duty to inquire whether a Change of Control has occurred, but shall presume for all purposes under this Trust Agreement that a Change of Control has occurred if it either has actual knowledge of a Change of Control or receives written notice to that effect from any source (including any Trust Beneficiary) until the Company demonstrates the contrary to the Trustee's reasonable satisfaction. (b) Procedure After Notice. If the Trustee receives notice of a ---------------------- Change of Control from any source other than the Company (through its board of directors or a senior executive officer) or the Plan Administrator, the Trustee shall promptly so notify the Company. -4- If the Company disputes the occurrence of any Change of Control presumed by the Trustee pursuant to this Section, the Company shall furnish such evidence as the Trustee reasonably requests for the purpose of determining whether a Change of Control has occurred. The Trustee may rely on such evidence concerning the matter as may be furnished to the Trustee which will give the Trustee a reasonable basis for determining whether the Company has demonstrated that no Change of Control occurred. (c) Conclusive Determination. In performing any of its obligations ------------------------ or taking any discretionary action under this Trust Agreement which is dependent upon a Change of Control having occurred, The Trustee may rely on its determination, including an opinion of counsel (who may be counsel to the Trustee), that a Change of Control has occurred. Unless such a determination arises out of the Trustee's gross negligence or willful misconduct, the Trustee's determination as to whether a Change of Control has occurred shall be binding and conclusive on all persons to the extent of determining their respective interests, rights and duties under this Trust Agreement. 1.9 Definition and Determination of "Insolvent". A Participating Employer ------------------------------------------- shall be considered "Insolvent" for purposes of this Trust Agreement if (a) the Participating Employer is unable to pay its debts as they come due or (b) the Participating Employer is subject to a pending proceeding as a debtor under the federal Bankruptcy Code or under the insolvency laws of any state. The procedures set forth in Section 3.1 shall be followed in determining whether a Participating Employer is Insolvent. Section 2. Payments to Trust Beneficiaries. ------------------------------- 2.1 Benefit Payments from Trust Fund. The Trustee shall make payments of -------------------------------- Deferred Compensation to an eligible Trust Beneficiary from the assets of the Trust Beneficiary's separate Account in the Trust Fund, but only (a) if and to the extent such assets are available for distribution, (b) upon the direction of the Plan Administrator (except if there has been a Change of Control), (c) subject to the tax withholding requirements of Section 6.4, and (d) so long as no Participating Employer is Insolvent. Notwithstanding the foregoing, if a -5- Change of Control occurs, so long as no Participating Employer is Insolvent the Trustee shall determine the benefits payable from time to time under the Deferred Compensation Plan as in effect on the day before such Change of Control occurred and, subject to the tax withholding requirements of Section 6.4, shall pay from the assets in a Trust Beneficiary's separate Account in the Trust Fund all such benefits of the Trust Beneficiary as they become due and without regard to any lack of direction or inconsistent direction from the Plan Administrator or any other person. 2.2 Benefit Payments from Participating Employers. If the Trustee --------------------------------------------- cannot or does not make full payment of Deferred Compensation to a Trust Beneficiary from his or her separate Account in accordance with Section 2.1 as such payments are due, then the relevant Participating Employer shall make the balance of each such payment as it falls due; provided, however, that all Participating Employers shall be jointly and severally liable to make such payments to the extent that they are not made by the relevant Participating Employer. To the full extent that Deferred Compensation Benefits are paid from the Trust Fund, the Participating Employers' obligation to pay such Deferred Compensation shall be deemed to have been satisfied. Section 3. Trustee's Responsibility Regarding Payments to Trust Beneficiaries When any Participating Employer Is Insolvent ---------------------------------------------------------- 3.1 Procedure if a Participating Employer Is Insolvent. --------------------------------------------------- (a) Benefits Unsecured. At all times during the continuance of this ------------------ Trust, the principal and income of the Trust Fund shall be subject to claims of general creditors of each Participating Employer as hereinafter set forth. All Trust Beneficiaries shall have the rights under this Trust Agreement of unsecured general creditors of the Participating Employers and shall not have any preferred claim on, or any beneficial interest in, the Trust Fund other than in amounts as they become due and payable as Deferred Compensation under Section 2.1. Nothing in this Trust Agreement shall in any way diminish any rights of any Trust Beneficiary to pursue -6- his or her rights as an unsecured general creditor of the Participating Employers with respect to the Deferred Compensation or otherwise. (b) Procedure if Notice Is Given. At any time that the Trustee has ---------------------------- received notice that a Participating Employer is Insolvent, the Trustee shall immediately discontinue payment of all Deferred Compensation and shall thereafter deliver any undistributed principal and income of the Trust Fund to satisfy all claims of general creditors (including the Trust Beneficiaries) as a court of competent jurisdiction may direct; provided, however, that the Trustee may deduct or continue to deduct its fees and other expenses of the Trust Fund (as provided for in Section 6.11), including taxes, pending receipt of such court direction. (c) Duty to Give Notice; Reliance by Trustee. The Company (by its ---------------------------------------- board of directors and chief executive officer) and the Plan Administrator shall have the duty to inform the Trustee immediately in writing if any Participating Employer becomes Insolvent, and the Trustee may rely on such notice (except as provided in the following paragraph) without making an independent determination. Unless the Trustee has actual knowledge of a Participating Employer's insolvency, the Trustee shall have no duty to inquire whether any Participating Employer is Insolvent. (d) Duty to Make an Independent Determination. Notwithstanding the ----------------------------------------- foregoing, if the Trustee receives such notice that a Participating Employer is Insolvent at any time after a Change of Control has occurred or receives a written allegation of an event of insolvency from a third party considered by the Trustee to be reliable and responsible, the Trustee shall independently determine, as soon as practicable after receipt of such notice or allegation, whether such Participating Employer is Insolvent, and the Company shall furnish such evidence as the Trustee reasonably requests for the purpose of making such determination. The Trustee may in all events rely on such evidence concerning any Participating Employer's solvency as may be furnished to the Trustee which will give the Trustee a reasonable basis for making a determination concerning the Participating Employer's solvency. For purposes of this Trust Agreement, the Trustee (if it is a bank) shall be considered to possess any knowledge and -7- information concerning the Participating Employers in the possession of the Trustee's Banking Department or other department that can reasonably be imputed to the Trustee under normal bank procedures. (e) Procedure While a Determination Is Being Made. Pending such --------------------------------------------- determination by the Trustee if one is required pursuant to paragraph (d) above, the Trustee shall suspend payment of Deferred Compensation to every Trust Beneficiary who is then in pay status, shall hold the Trust assets for the benefit of each Insolvent Participating Employer's general creditors and the payment of fees and expenses (as provided for in Section 6.11), and shall resume payments of Deferred Compensation to Trust Beneficiaries in accordance with Section 2 of this Trust Agreement only after the Trustee has determined that no Participating Employer is Insolvent (or remains Insolvent, if the Trustee initially determined any Participating Employer to be Insolvent). (f) Conclusive Determination or Notice. In performing any of its ---------------------------------- obligations or taking any discretionary action under this Trust Agreement which is dependent on a Participating Employer being Insolvent, the Trustee may rely on its determination (if such was required under paragraph (d) above), including an opinion of counsel (who may be counsel to the Trustee), that a Participating Employer is Insolvent or on a written notice of insolvency from any Participating Employer or the Plan Administrator. Unless such a determination arises out of the Trustee's gross negligence or willful misconduct, the Trustee's determination as to whether a Participating Employer is Insolvent shall be binding and conclusive on all persons to the extent of determining their respective interests, rights and duties under this Trust Agreement. 3.2 Procedure Following Insolvency. ------------------------------ (a) Resumption of Trustee's Duties. If the Trustee suspends or ------------------------------ discontinues payments of Deferred Compensation from the Trust Fund pursuant to Section 3.1 and each Insolvent Participating Employer later becomes solvent again without the entry of a court order concerning the disposition of the Trust Fund, the Company shall so inform the Trustee -8- immediately in writing and the Trustee shall thereupon resume all of its duties and responsibilities under this Trust Agreement. (b) Resumption of Benefit Payments. The first payment of Deferred ------------------------------ Compensation following any suspension or discontinuance of payments pursuant to Section 3.1 shall include the aggregate amount of all payments which would have been made to each Trust Beneficiary in accordance with the Deferred Compensation Plan during the period of such suspension or discontinuance, plus interest on the delayed payments (at a rate which the Trustee determines to be reasonable under the circumstances at its sole discretion) and less the aggregate amount of payments made to the Trust Beneficiary by the Participating Employers in lieu of the payments provided for hereunder during any such period of suspension or discontinuance. Section 4. Payments to Participating Employers. ----------------------------------- The Participating Employers shall have no right or power to direct the Trustee to return to them or to divert to others any of the Trust Fund assets in a separate Account established pursuant to Section 1 before all payments of Deferred Compensation have been made to all eligible Trust Beneficiaries of such separate Account pursuant to the Deferred Compensation Plan. If it is determined by the Trustee that assets remaining in any separate Account will clearly never be required to pay Deferred Compensation to any Trust Beneficiary of such separate Account (because, for example, no such Trust Beneficiary can be found after reasonable efforts have been made), then such excess assets shall be returned to the relevant Participating Employer. Section 5. Disposition of Income. --------------------- During the term of this Trust, except as provided in Section 3.1 all income received by the Trust Fund, net of fees, expenses and taxes not paid by the Participating Employers, shall be accumulated and reinvested unless the Trustee determines that future income allocable to any separate Account will clearly never be required to pay Deferred Compensation to any Trust Beneficiary of such separate Account, in which event future net income allocable to such separate Account shall be paid to the relevant Participating Employer. -9- Section 6. Investment and Administration of Trust Fund. ------------------------------------------- 6.1 Standard of Trustee's Care; Indemnification. ------------------------------------------- (a) Standard of Care. Except after a Change of Control, the Trustee ---------------- shall faithfully comply with all lawful written directions from the Plan Administrator or the Company concerning investment of the Trust Fund or any particular assets in the Trust Fund. To the extent the Trustee is not so directed, then consistent with the powers set forth in Section 6.2, the Trustee shall receive, invest, reinvest and hold the Trust Fund in any form of property without distinction between principal and income using the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. To the extent that the Trustee is not directed, as provided above, as to investment of the Trust Fund, the Trustee shall diversify investments so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so, and shall provide for sufficient liquidity of the Trust Fund assets. (b) Indemnification. The Company hereby agrees to indemnify and hold --------------- harmless the Trustee from and against any losses, costs, damages, claims or expenses, including without limitation reasonable attorneys' fees, which the Trustee may incur or pay out in connection with, or which otherwise arise out of, the performance by the Trustee of its duties hereunder, except that to the extent such losses, costs, damages, claims, expenses or attorneys' fees are incurred or paid out in connection with, or otherwise arise out of, the Trustee's negligence or willful misconduct, the Trustee shall be solely responsible therefor and shall not be indemnified by the Company or any other Participating Employer. All indemnified amounts shall be paid by the Company promptly after notice from the Trustee; provided that the Company may delay payment for up to ninety (90) days to establish whether the Trustee is entitled to indemnification and to verify the nature and amount of each claim for indemnification. Any dispute between the Company and the Trustee as to the Trustee's entitlement to indemnification or as to the proper amount to be indemnified shall be determined -10- exclusively by binding arbitration pursuant to Section 12. Notwithstanding the foregoing, except after a Change of Control the Company may elect in its sole discretion to have any or all indemnified amounts that arise under this Trust Agreement prior to such Change of Control be paid from the Trust Fund. If indemnified amounts are not paid by the Company, the Trustee may charge the Trust Fund for such amounts as provided for in paragraph (b) of Section 6.3, and if the Trustee subsequently receives such amounts from the Company, the Trustee shall promptly credit the Trust Fund for such amounts. 6.2 Specific Trustee Powers. In addition to the powers granted by law, ----------------------- but subject to the lawful written directions of the Plan Administrator or the Company, the Trustee may: (a) Hold cash uninvested in a checking account, deposit cash in savings accounts, or purchase certificates of time deposits in any banking or savings institution; (b) Exercise any options appurtenant to any investment in which the Trustee has invested for conversion thereof into another investment; and exercise any rights to subscribe for additional investments and make all necessary payments therefor; (c) Write, sell, purchase, acquire, hold and otherwise deal in any manner in options of any nature whatsoever and futures contracts of any nature whatsoever; (d) Join in or oppose the reorganization, recapitalization, sale or merger of corporations or properties, including those in which the Trustee holds an ownership interest as trustee; (e) Hold investments in nominee or bearer form; (f) Exercise the right to vote or give general or limited proxies appurtenant to shares of stock in which the Trustee has invested; (g) Purchase or sell, grant or obtain options to purchase, any property, either at public or private sale, and lease, partition, subdivide or exchange any property which may constitute a portion of the Trust for such prices and upon such terms as the Trustee may deem best, free and discharged of all trusts and without liability on the part of any person to see to the proper application of the purchase price; and to make, execute and deliver to the purchasers or -11- lessees proper leases or good and sufficient deeds of conveyance therefor, and all assignments, transfers and other legal instruments either necessary or convenient for passing the title, ownership, or possession thereof; (h) Repair, improve, erect, alter or demolish structures on any real estate or interest therein; (i) Create, renew, extend or participate in the creation, renewal or extension of any mortgage, and agree to a reduction in the rate of interest on any mortgage or of any guarantee pertaining thereto, in any manner and to any extent for the protection of the Trust or the preservation of the value of the investment; waive any default, whether in the performance of any covenant or condition of any mortgage or in the performance of any guarantee; enforce any such default in such manner and to such extent as the Trustee may deem necessary or appropriate, including instigation of foreclosure proceedings; bid in property on foreclosure; taking a deed in lieu of foreclosure with or without paying a consideration therefor, and in connection therewith release the obligation on the bond secured by such mortgage; and exercise and enforce in any action, suit or proceeding at law or in equity any rights or remedies in respect to any mortgage or guarantee; (j) Borrow money and, if necessary or desirable, pledge all or part of the Trust as security for such borrowing. No person lending to the Trustee need see to the application of the money lent or the propriety of the borrowing; (k) Form corporations, partnerships, joint ventures, or trusts to hold title to or to operate any assets of the Trust, or for any other purpose; (l) Insure Trust assets against any contingency; (m) Subject to Section 6.6, employ independent investment and other advisory services; and (n) Appoint a corporate custodian of all or any part of the Trust. -12- 6.3 Payments from Trust Fund. ------------------------ (a) Payment of Benefits. The Trustee shall make or cause to be made ------------------- payments of benefits from the Trust Fund, in cash or in kind, only in accordance with Section 2.1. The Trustee shall have no authority or responsibility to review any direction from the Plan Administrator made pursuant to Section 2.1 except to the extent provided therein in the event of a Change of Control. (b) Payment of Fees, Expenses, Taxes and Indemnified Amounts. Any -------------------------------------------------------- amount payable under paragraph (b) of Section 6.1 or under Section 6.11 and not paid by a Participating Employer within the times respectively permitted in those sections shall be paid from the Trust Fund. In the event that payment is made hereunder from the Trust Fund, the Trustee shall promptly notify the Company in writing of the amount of such payment. The failure of the Company to make any payments due the Trustee or the Company's election to have such amounts paid from the Trust Fund shall not in any way impair the Trustee's right to indemnification pursuant to Section 6.1 or to reimbursement and payment pursuant to Section 6.11. 6.4 Returns, Reports and Withholding. -------------------------------- (a) Preparation, Execution and Filing of Returns. The Company shall be -------------------------------------------- responsible for preparing any required fiduciary income tax returns for the Trustee's signature and for filing all such executed returns. The Trustee shall be responsible for executing all such fiduciary income tax returns. The Company shall be responsible for all other filings, reporting or disclosure required by applicable law for the Deferred Compensation Plan or the Trust Fund unless such requirements are specifically imposed on the Trustee. (b) Company's Representation as to Nature of Deferred Compensation -------------------------------------------------------------- Plan. The Company represents that the Deferred Compensation Plan is an unfunded - ---- deferred compensation plan exempt from the application of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), except for any limited disclosure requirements which may be applicable to such plans and for which the Company bears full responsibility as to -13- compliance. The Company further represents that the Deferred Compensation Plan is not qualified under Section 401 of the Code and, therefore, is not subject to any of the Code requirements applicable to tax qualified plans. (c) Company's Responsibility for Tax Withholding and Reporting. The ---------------------------------------------------------- Trustee shall not be responsible for determining the amount of any income tax or F.I.C.A. tax required to be withheld under federal, state, and local wage withholding requirements from any payment to a Trust Beneficiary from the Trust Fund. The Trustee shall withhold amounts from benefit payments as instructed by the Plan Administrator or the relevant Participating Employer, and shall be fully protected under Section 6.1 in relying on such instructions. For purposes of the preceding sentence, a failure by everyone to provide any instructions as to required withholding may be deemed by the Trustee to be an instruction that no withholding is required. Any amounts withheld shall be transferred to the relevant Participating Employer, and it shall be the responsibility of the Participating Employer to pay over to the appropriate government authority the amount so transferred. The relevant Participating Employer shall be responsible for any required information reporting of wages paid and tax withheld from payments to a Trust Beneficiary on U.S. Form W-2, or other similar federal, state, and local tax information reporting forms. (d) Trustee's Responsibility to Furnish Information. The Trustee ----------------------------------------------- shall promptly provide each Participating Employer with any information that the Participating Employer reasonably requests for the purpose of fulfilling its filing, withholding, reporting and disclosure obligations. 6.5 Valuation of Trust Fund. At such intervals and as of such dates ----------------------- (each of which is herein referred to as a "Valuation Date") as the Plan Administrator may designate from time to time, but not less frequently than once during each period of twelve months, the Trustee shall determine the value of the assets held in each separate account in the Trust Fund. In so doing, the Trustee shall allocate each item of net income, gain or loss among all such accounts as the Trustee deems appropriate in its sole discretion; provided that to the extent that particular -14- accounts in the Trust Fund are invested at the direction of the Plan Administrator or the Company, net income, gain, loss, expenses and taxes attributable to such investments shall be allocated exclusively to such accounts. Each valuation shall be made, to the extent reasonably practicable, within thirty business days after the Valuation Date as of which it is made. Except as otherwise provided in this Trust Agreement, assets shall be valued at their market values at the close of business on the Valuation Date, or, in the absence of readily ascertainable market values, at such values as the Trustee shall determine in good faith, in accordance with methods consistently followed and uniformly applied. At the discretion of the Trustee, certain securities and investments may be valued on the basis of valuations provided by an independent pricing service when such prices are believed to reflect fair market value. Prices provided by a pricing service may be determined without exclusive reliance on quoted prices, and may take into account appropriate factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Except as otherwise provided in this Trust Agreement, values of assets for which such a pricing service is not utilized will be determined as follows: (a) Stocks, bonds and other securities and investments listed on security or other exchanges shall be valued at their closing sale prices on the Valuation Date, or if no sale was made on the Valuation Date, at their recorded bid prices. Prices for securities or investments whose principal trading markets are within the United States shall be obtained from the Composite Transaction Tape where applicable, or from the records of the exchanges, newspapers of general circulation published domestically, or standard financial periodicals. Prices for securities or investments whose principal trading markets are not within the United States shall be determined from the published records of the exchanges where such principal trading markets are located or from such other sources as the Trustee shall determine to be the best qualified available sources. (b) Securities and other investments which are not listed on any exchange shall, if possible, be valued at the last sale price on the Valuation Date, or if there has been no -15- such sale, at the bid price on such Valuation Date, each as reported in newspapers of general circulation published domestically or abroad or by recognized investment and security dealers or quotation services. (c) Marketable obligations of the United States Government for which no valuation prices are available from recognized pricing services shall be valued at the dealer bid prices appearing on the Valuation Date reported in Federal Reserve publications. (d) Investments in real property shall be valued on the basis of estimated values on the Valuation Date determined by (i) an appraisal valuation obtained from a recognized appraiser of real property; or (ii) an estimated market valuation obtained from recognized qualified available sources, including, but not limited to, affiliates or employees of the Trustee; or (iii) an index valuation obtained from a recognized Real Estate Index; or (iv) the projection of the expected stream of future cash payments from each investment (including, but not limited to, interest and principal payments on loans, participation in income from the property and participation in refinancing) and the discounting of those payments back to their present values, using appropriate discount rates. (e) For purposes of establishing the value of foreign investments, foreign currencies will be valued at the prevailing market rate quoted by the Trustee (if a bank) or a custodian bank on the morning of the date of valuation. In those instances when there is no readily ascertainable market value obtainable or when the Trustee deems the application of the foregoing rules to be inappropriate, investments shall be valued on the basis of estimated values on the Valuation Date obtained from recognized qualified available sources, including bankers, brokers or dealers, or any affiliates or employees of the Trustee who deal in or are familiar with the type of investment involved or other qualified appraisers, or by reference to the market value of similar investments for which an appropriate market value is readily ascertainable. The reasonable and equitable decision of the Trustee regarding the value of the assets of the Trust Fund and the methods employed in determining those values shall be conclusive. -16- The Trustee shall keep such records as the Trustee may deem necessary or appropriate in the Trustee's sole discretion to record the assets transferred to the Trust Fund. 6.6 Appointment of Investment Managers. The Plan Administrator may from ---------------------------------- time to time appoint, terminate or replace one or more investment managers to hold and manage all or any portion of the assets of the Trust Fund. If an investment manager is appointed for all or any portion of the Trust Fund, the investment manager shall be delegated all responsibility for the selection of the investments in the Trust Fund or portion thereof. The Trustee shall have no responsibility for the selection, retention or disposal of any investment by any investment manager nor be liable for any loss of Fund assets caused by such selection, retention or disposal. 6.7 Investment of Trust Fund. Except after a Change of Control, the ------------------------ Trustee shall faithfully comply with all lawful written directions from the Plan Administrator or the Company concerning investment of the Trust Fund or any particular asset in the Trust Fund. To the extent the Trustee is not so directed, then except as otherwise expressly provided, the Trustee shall have the power to invest and reinvest the principal and income of the Trust Fund and to keep the Trust Fund invested, without distinction between principal and income, in such securities or in such other property, real or personal, tangible or intangible, or part interest therein, wherever situate, whether or not productive of income, or consisting of wasting assets, as the Trustee shall deem advisable, including but not limited to stocks, common or preferred, options of every type, trust and participation certificates, interests in investment companies, whether so-called 'open-end mutual funds' or 'closed-end mutual funds', bonds or notes and mortgages, and other evidences of indebtedness or ownership, insurance contracts (including without limitation guaranteed investment contracts and group and individual annuities), and interests in any pooled trust fund or funds which serve as media for investments for trusts not exempt from tax pursuant to Section 501(a) of the Code, or any successor provision of law, irrespective of whether such securities or such property shall be of the character authorized by the law of any State from time to time for trust investments. The Trustee shall not be liable for any loss sustained by the Trust Fund by reason of the purchase, retention, sale or exchange of any investment in good faith and in accordance with the provisions of this Trust Agreement and of any applicable federal or state law. -17- Notwithstanding the foregoing, (a) the Company and the Plan Administrator in their sole discretion may solicit the views of any one or more Participants on any matter, provided that the Trustee shall retain the sole power to exercise all rights conferred on the Trustee pursuant to this Trust Agreement except to the extent that the Trustee is subject to the lawful written directions of the Plan Administrator and the Company and except to the extent provided in clauses (b) and (c) hereof, and (b) voting rights with respect to Trust Fund assets shall be exercised by the Company prior to the date of any Change of Control (and by the Trustee on and after such date), and (c) each Participating Employer shall have the right at any time and from time to time, in its sole discretion, to substitute assets of equal fair market value for any asset held in the Trust Fund that is attributable to Deferred Compensation amounts transferred by the Participating Employer. (Such right is exercisable by a Participating Employer in a non-fiduciary capacity without the approval or consent of any person in a fiduciary capacity.) Notwithstanding anything to the contrary in this Trust Agreement, from and after the date a Change of Control occurs, the Trustee shall have sole and exclusive power over the investment of Trust Fund assets. 6.8 Funding Policy. The Company shall establish and carry out a -------------- funding policy consistent with the purposes of the Deferred Compensation Plan and the requirements of applicable law, as may be appropriate from time to time. As part of such funding policy, the Company shall from time to time direct the Trustee or any investment manager to exercise its investment discretion so as to provide sufficient cash assets in an amount determined by the Company, under the funding policy then in effect, to be necessary to meet the liquidity requirements for the administration of the Deferred Compensation Plan. 6.9 Insurance Contracts. The Company may at any time and from time to ------------------- time direct the Trustee in writing to become a party to one or more contracts or policies for the benefit of any one or more of the Trust Beneficiaries under the Deferred Compensation Plan with any legal -18- reserve life insurance company upon such terms and conditions as the Company shall determine and to make specified payments from the Trust Fund to any such insurance company under any such contract or policy. Any such contract or policy shall be an asset of the Trust Fund, subject to the provisions of this Trust Agreement. The Trustee shall not be liable for any loss or lack of income in respect of such payments made under any such contract or policy pursuant to any such written direction and specifically, but not by way of limitation, shall have no responsibility to review, comment on or suggest changes in any such contract or policy or in the investment of such amounts held by any such insurance company under any such contract or policy. The Trustee shall be entitled to rely on all statements and accounts rendered to it by any such insurance company relating to such assets. No insurance company shall for any purpose be deemed to be a party to this Trust Agreement and the obligations of any insurance company shall be determined solely by the terms and conditions of the contracts or policies issued by it. 6.10 Records and Reports; Discharge of Trustee's Liability. ----------------------------------------------------- (a) Records and Reports. All transactions hereunder shall be ------------------- recorded by the Trustee in records open to inspection as designated by the Plan Administrator. Within 90 days following the close of the Plan Year and within 90 days after the date of the removal or resignation of any Trustee or the termination of the Trust, the Trustee shall file with the Company a written account of the Trustee's administration of the Trust from the date of the last preceding accounting. (b) Settlement of Accounts. To the extent permitted by applicable ---------------------- law, upon the expiration of 90 days from the date of filing of its accounting, the Trustee shall be forever released and discharged from any liability or accountability to anyone with respect to the acts or transactions shown in such report, except with respect to any such acts or transactions as to which the Company or the Plan Administrator shall within such 90-day period file with the Trustee a written statement setting forth its exceptions or objections. If the Trustee and the Company cannot amicably settle the questions raised by such exceptions or objections, the Trustee or the Company shall have the right to have such questions settled by judicial -19- proceedings. Nothing herein contained shall be construed as depriving the Trustee of the right to have a judicial settlement of its accounts to the extent permitted by applicable law. In any proceeding for a judicial settlement of such accounts, or for instructions, the only necessary parties shall be the Trustee and the Company. (c) Other Reports and Information. The Trustee shall from time to ----------------------------- time make such other reports and furnish such other information concerning the Trust Fund as the Company may reasonably request or as may be required by the Deferred Compensation Plan. 6.11 Costs and Taxes. The Trustee's and any investment manager's fees --------------- for performing its duties hereunder shall be such as may be mutually agreed upon by the Company and the Trustee or investment manager. All such fees and any expenses incurred by the Trustee or any investment manager in the performance of its duties, including the fees for legal and auditing services rendered to the Trustee, the Trustee's fees and expenses to make any determinations required pursuant to this Trust Agreement (including determinations required under Sections 1.8, 2.1, 3.1, 4 or 5), and all other proper charges and disbursements of the Trustee and any investment manager, including commissions and other transaction expenses, shall be paid: (a) prior to a Change of Control, from the Trust Fund except to the extent that the Company, in its sole discretion, elects to pay such amounts or have them paid by one or more other Participating Employers and (b) after a Change of Control, by the Company. Until paid, all such amounts shall constitute a charge upon the Trust Fund. All taxes of any and all kinds whatsoever that may be levied or assessed under existing or future laws upon or in respect of the Trust Fund or the income thereof, shall be paid: (a) prior to a Change of Control, from the Trust Fund except to the extent that the Company, in its sole discretion, elects to pay such amounts or have them paid by one or more Participating Employers and (b) after a Change of Control, by the Company. Until paid, all such taxes shall constitute a charge upon the Trust Fund. If any such fees, expenses or taxes are not paid within 60 days of the billing date, the Trustee may charge the Trust Fund for the amount of such fees, expenses or taxes as provided for in paragraph (b) of Section 6.3, and if the Trustee subsequently receives such amount (or any portion thereof) from a Participating Employer, the Trustee shall promptly credit the Trust Fund for the amount received. -20- 6.12 Legal and Other Advice for Trustee. The Trustee may consult with ---------------------------------- legal counsel, who may be counsel for the Company if no Change of Control has occurred, and shall be fully protected in acting upon such counsel's legal advice. The Trustee may also hire agents, accountants, actuaries and financial consultants. The Trustee's expenses therefor shall constitute a proper charge against the Trust Fund, except litigation expenses primarily occasioned by and involving a charge of the Trustee's negligence or willful misconduct, in which case the expenses shall be a charge against the Trust Fund if it shall be determined finally by such litigation that no loss occurred by reason of the Trustee's negligence or willful misconduct. 6.13 Resignation or Removal. The Trustee may resign by written notice ---------------------- to the Company, which shall be effective upon receipt unless a different effective date is agreed to by the board of directors of the Company, provided that no such resignation of the Trustee shall be effective until the board of directors has appointed a successor Trustee (which it shall do as soon as practical) and the successor Trustee has taken office, if the resignation would leave no Trustee in office. The Trustee may be removed by action of the board of directors by written notice, which shall be effective upon receipt unless a different effective date is specified in the notice; provided that on or after the date a Change of Control occurs the Trustee in office on the day before such date may be removed only upon a showing that the Trustee has committed a material breach of its fiduciary duty with respect to the Trust or has materially violated the terms of this Trust Agreement. In the event of the death, incapacity, removal or resignation of a Trustee, the board of directors of the Company may appoint a successor Trustee. Such successor Trustee, upon accepting such appointment by an instrument in writing delivered to the Company, shall, without further act, become invested with all the estate, rights, powers, discretion and duties of the predecessor Trustee, with similar effect as if originally named as the Trustee in this Trust Agreement. Upon resignation or removal of a Trustee and upon written notice to such former Trustee of the appointment of a successor Trustee if any, the predecessor -21- Trustee shall execute all documents necessary to transfer the Trust to the successor Trustee, provided that this action shall not waive any lien such former Trustee may have upon the Trust Fund for compensation or expenses. Section 7. Amendment and Termination. ------------------------- 7.1 Amendment. Except to alter Sections 1.4, 4, 5, 7.1 or 7.2, this --------- restated Trust Agreement may be amended at any time and to any extent by a written instrument executed by the Trustee and the Company; provided, however, that on and after the date a Change of Control occurs, this restated Trust Agreement may not be amended in any manner or terminated until all benefits under the Deferred Compensation Plan are paid to all Trust Beneficiaries who were such at any time on or prior to the date such Change of Control occurred without the express written consent of the Trustee and of each such person who would be affected by such termination or change; and provided further that the duties and responsibilities of the Trustee shall not be increased without the Trustee's written consent. 7.2 Restriction on Termination. The Trust shall not terminate until the -------------------------- date on which there is no Trust Beneficiary who is entitled to any more Deferred Compensation Benefits pursuant to the Deferred Compensation Plan. 7.3 Reversion of Excess Assets Upon Termination. Upon termination of ------------------------------------------- the Trust as provided in Section 7.2, any assets remaining in the Trust Fund shall be returned to the relevant Participating Employers. Section 8. Severability. ------------ Any provision of this Trust Agreement that is prohibited by law shall be ineffective to the extent of any such prohibition without invalidating the remaining provisions hereof. Section 9. Spendthrift. ----------- To the extent permitted by law, no benefits to any Trust Beneficiary under this Trust Agreement may be anticipated, assigned (either at law or in equity), alienated, sold, transferred or pledged, and shall not be subject to attachment, garnishment, levy, execution, encumbrance of any kind, or other legal or equitable process and no benefit (nor this Trust Fund) shall be -22- subject in any manner to the debts or liabilities of any Trust Beneficiary. No benefit actually paid to a Trust Beneficiary by the Trustee upon the Plan Administrator's direction (or in any case after a Change of Control has occurred) shall be subject to any claim for repayment by any Participating Employer or the Trustee, unless it is established that the Trust Beneficiary was not entitled to such payment under the Deferred Compensation Plan. Section 10. Governing Law. ------------- The Trust Fund maintained pursuant to this Trust Agreement is held by the Trustee in the Trustee's state of domicile (Minnesota, as of the effective date of this restated Trust Agreement) and the trust laws of such state shall govern the rights and duties of the Trustee hereunder. On all other matters, this Trust Agreement shall be governed by and construed in accordance with the internal substantive laws of the Commonwealth of Massachusetts, without application of its conflicts-of-laws rules. Section 11. Successors and Assigns. ---------------------- This Trust Agreement shall be binding upon and inure to the benefit of any successor to the Company as the result of merger, consolidation, reorganization, or otherwise. In the event of any such merger, consolidation, reorganization, or other similar transaction, the successor to the Company shall promptly notify the Trustee in writing of its successorship and furnish the Trustee with any information required of the Company under this Trust Agreement or otherwise reasonably requested by the Trustee. Section 12. Arbitration. ----------- Except as provided by Section 6.10, any dispute between any Trust Beneficiary and any Participating Employer or the Trustee as to the interpretation or application of the provisions of this Trust Agreement and amounts payable hereunder or between the Company and the Trustee as to any amounts payable to the Trustee hereunder shall be determined exclusively by binding arbitration in the Commonwealth of Massachusetts in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court of competent jurisdiction. All fees and expenses of such arbitration shall be paid as -23- determined by the arbitrator, except that in the case of a dispute with a Trust Beneficiary the Trustee's expenses shall be considered an expense of the Trust under Section 6.11. Section 13. Trust Beneficiaries. ------------------- Each Trust Beneficiary is an intended beneficiary under this Trust Agreement, and shall be entitled to enforce all terms and provisions hereof with the same force and effect as if such person had been a party hereto. IN WITNESS WHEREOF, the Company and the Trustee have executed this restated Trust Agreement under seal as of the date first above written. NEW ENGLAND BUSINESS SERVICE, INC. By /s/ Robert H. Glaudel ----------------------------------------- Its: Vice President-Human Resources NORWEST BANK MINNESOTA, N.A., Trustee By /s/ Lucinda J. Frenz ----------------------------------------- Its: Assistant Vice President -24- 6877-146 2/6/98 FIRST RESTATED TRUST AGREEMENT FOR THE NEW ENGLAND BUSINESS SERVICE, INC. DEFERRED COMPENSATION PLAN (RESTATED EFFECTIVE APRIL 1, 1998) FIRST RESTATED TRUST AGREEMENT FOR THE NEW ENGLAND BUSINESS SERVICE, INC DEFERRED COMPENSATION PLAN TABLE OF CONTENTS ----------------- SECTION 1. TRUST FUND .......................................................... 2 1.1 ESTABLISHMENT OF TRUST FUND ............................................... 2 1.2 IRREVOCABLE TRUST ......................................................... 2 1.3 GRANTOR TRUST ............................................................. 2 1.4 USE OF TRUST ASSETS ....................................................... 2 1.5 CONTRIBUTIONS TO TRUST FUND ............................................... 3 1.6 SEPARATE ACCOUNTS ......................................................... 3 (a) Establishment By Plan Administrator Prior to Change of Control ........... 3 (b) Maintenance By Trustee After Change of Control ........................... 4 1.7 DEFINITION OF PLAN ADMINISTRATOR .......................................... 4 1.8 DEFINITION AND DETERMINATION OF CHANGE OF CONTROL ......................... 4 (a) Definition and Presumption ............................................... 4 (b) Procedure After Notice ................................................... 4 (c) Conclusive Determination ................................................. 5 1.9 DEFINITION AND DETERMINATION OF INSOLVENT ................................. 5 SECTION 2. PAYMENTS TO TRUST BENEFICIARIES ..................................... 5 2.1 BENEFIT PAYMENTS FROM TRUST FUND .......................................... 5 2.2 BENEFIT PAYMENTS FROM PARTICIPATING EMPLOYERS ............................. 6 SECTION 3. TRUSTEE'S RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARIES WHEN ANY PARTICIPATING EMPLOYER IS INSOLVENT ................................... 6 3.1 PROCEDURE IF A PARTICIPATING EMPLOYER IS INSOLVENT ........................ 6 (a) Benefits Unsecured ....................................................... 6
-i- (b) Procedure if Notice Is Given ............................................. 7 (c) Duty to Give Notice; Reliance by Trustee ................................. 7 (d) Duty to Make an Independent Determination ................................ 7 (e) Procedure While a Determination Is Being Made ............................ 8 (f) Conclusive Determination or Notice ....................................... 8 3.2 PROCEDURE FOLLOWING INSOLVENCY ............................................ 9 (a) Resumption of Trustee's Duties ........................................... 9 (b) Resumption of Benefit Payments ........................................... 9 SECTION 4. PAYMENTS TO PARTICIPATING EMPLOYERS ................................. 10 SECTION 5. DISPOSITION OF INCOME ............................................... 10 SECTION 6. INVESTMENT AND ADMINISTRATION OF TRUST FUND ......................... 10 6.1 STANDARD OF TRUSTEE'S CARE; INDEMNIFICATION ............................... 10 (a) Standard of Care ......................................................... 10 (b) Indemnification .......................................................... 11 6.2 SPECIFIC TRUSTEE POWERS .................................................. 12 6.3 PAYMENTS FROM TRUST FUND .................................................. 14 (a) Payment of Benefits ...................................................... 14 (b) Payment of Fees, Expenses, Taxes and Indemnified Amounts ................. 14 6.4 RETURNS, REPORTS AND WITHHOLDING ......................................... 14 (a) Preparation, Execution and Filing of Returns ............................ 14 (b) Company's Representation as to Nature of Deferred Compensation Plan ...... 14 (c) Company's Responsibility for Tax Withholding and Reporting ............... 15 (d) Trustee's Responsibility to Furnish Information .......................... 15 6.5 VALUATION OF TRUST FUND ................................................... 15 6.6 APPOINTMENT OF INVESTMENT MANAGERS ........................................ 18 6.7 INVESTMENT OF TRUST FUND ................................................. 18 6.8 FUNDING POLICY ........................................................... 19 6.9 INSURANCE CONTRACTS ...................................................... 20 6.10 RECORDS AND REPORTS; DISCHARGE OF TRUSTEE'S LIABILITY .................... 20 (a) Records and Reports ...................................................... 20 (b) Settlement of Accounts ................................................... 21 (c) Other Reports and Information ............................................ 21
-ii- 6.11 COSTS AND TAXES .......................................................... 21 6.12 LEGAL AND OTHER ADVICE FOR TRUSTEE ....................................... 22 6.13 RESIGNATION OR REMOVAL ................................................... 22 SECTION 7. AMENDMENT AND TERMINATION ........................................... 23 7.1 AMENDMENT ................................................................. 23 7.2 RESTRICTION ON TERMINATION ................................................ 23 7.3 REVERSION OF EXCESS ASSETS UPON TERMINATION ............................... 24 SECTION 8. SEVERABILITY ........................................................ 24 SECTION 9. SPENDTHRIFT ......................................................... 24 SECTION 10. GOVERNING LAW ...................................................... 24 SECTION 11. SUCCESSORS AND ASSIGNS ............................................ 24 SECTION 12. ARBITRATION ........................................................ 25 SECTION 13. TRUST BENEFICIARIES ................................................ 25
-iii- EX-10.13 4 EXECUTIVE BONUS PLAN FOR 1999 EXHIBIT 10.13 1999 NEBS EXECUTIVE BONUS PLAN (EFFECTIVE AS OF JUNE 29, 1998) This Executive Bonus Plan was adopted by the Board of Directors of New England Business Service, Inc. (the "Company") on July 24, 1998 upon the recommendation of its Organization and Compensation Committee for the purpose of providing incentive compensation for the senior executives and managers of the Company and its subsidiaries. This Plan shall be governed by the following definitions and calculations. I. Participants. The Participants in the Plan for the 1999 fiscal year ------------- of the Company (the "Year") and their respective target bonus percentages shall be as follows: A. Officers of the Company. ------------------------ Chairman, President & Chief Executive Officer 70% Vice President, Diversified Operations 60% Vice President, Information Systems 60% Vice President, Direct Marketing, 60% Telesales & Service Vice President, Chief Financial Officer 60% Vice President, Human Resources 60% Vice President, General Manager 60% Chiswick Division Vice President, General Manager 60% RapidForms Division Vice President, Manufacturing and 60% Technical Operations Vice President, Business Management & 60% Business Solutions Vice President, Investor Relations 50% Vice President, Controller 50%
B. CEOs of Subsidiaries -------------------- Managing Director, NEBS Business Stationery 40% President and Chief Executive, NEBS Business Forms, Ltd. 40%
II. Target Bonus. The Target Bonus payable to a Participant with respect to ------------ the Year shall be an amount arrived at by multiplying his base salary at the end of the Year by his target bonus percentage. III. Actual Bonus. The Actual Bonus of each Participant shall be calculated ------------ based on actual results vs. targeted objectives. A. Chairman, President & Chief Executive Officer --------------------------------------------- 1. The actual bonus of this participant shall be the sum of the following: (a) Each 1% by which consolidated net sales are more than 95% up to 105% of the targeted consolidated net sales for the Year equals 5.6% of his base salary, plus each 1% by which consolidated net sales are more than 105% of the targeted consolidated net sales for the Year equals 2.8% of his base salary; and (b) Each 1% by which consolidated net income is more than 95% up to 105% of the targeted consolidated net income for the Year equals 5.6% of his base salary, plus each 1% by which consolidated net income is more than 105% of the targeted consolidated net income for the Year equals 2.8% of his base salary; and (c) 14% of his base salary based on his qualitative measurements (MBOs) as determined by the Board of Directors on the recommendation of the Organization and Compensation Committee. The qualitative measures described in item c above are capped at 14% of base salary or 100% attainment of the target. 2. No bonuses shall be paid if the Company's consolidated net income for the Year is less than 90% of the targeted net income objective. B. Vice President, Business Management & Development; Vice President, Chief Financial Officer; Vice President, Human Resources; Vice President, Information Systems; Vice President, Manufacturing and Technical Operations. 1. The actual bonus of each of these Participants shall be the sum of the following: (a) Each 1% by which consolidated net sales are more than 95% up to 105% of the targeted consolidated net sales for the Year equals 4.8% of his base salary, plus each 1% by which consolidated net sales are more than 105% of the targeted consolidated net sales for the Year equals 2.4% of his base salary; and (b) Each 1% by which consolidated net income is more than 95% up to 105% of the targeted consolidated net income for the Year equals 4.8% of his base salary, plus each 1% by which consolidated net income is more than 105% of the targeted consolidated net income for the Year equals 2.4% of his base salary; and (c)12% of his base salary based on his quantitative and/or qualitative measurements (MBOs) as determined by the Chairman, President & Chief Executive Officer. The objectives described in item (c) above are capped at 100% attainment of the target. 2. No bonus shall be paid if the Company's consolidated net earnings for the Year is less than 90% of the targeted net income objective. C. Vice President, Chiswick Division; Vice President, Diversified Operations. 1. The actual bonus of this Participant shall be the sum of the following: (a) Each 1% by which channel net sales are more than 95% up to 105% of the targeted channel net sales for the Year equals 4.8% of his base salary, plus each 1% by which channel net sales are more than 105% of the targeted channel net sales for the Year equals 2.4% of his base salary; and (b) Each 1% by which consolidated net income is more than 95% up to 105% of the targeted consolidated net income for the Year equals 3.0% of his base salary, plus each 1% by which consolidated net income is more than 105% of the targeted consolidated net income for the Year equals 1.5% of his base salary; and (c) Each 1% by which channel profit from operations is more than 95% up to 105% of the targeted channel profit from operations for the Year equals 1.8% of his salary. Payment for the attainment of channel profit from operations will be capped at 200% of target payment (105% achievement); and (d) 12% of his or her base salary based on his quantitative and/or qualitative measurements (MBOs) as determined by the Chairman, President & Chief Executive Officer. Objectives described in item (d) above are capped at 100% attainment of the target. 2. No bonus shall be paid if the Company's consolidated net earnings for the Year is less than 90% of the targeted net income objective. D. Vice President, Direct Marketing, Telesales & Service; President; RapidForms. 1. The actual bonus of both these participants shall be the sum of the following: (a) Each 1% by which channel net sales are more than 95% up to 105% of the targeted channel net sales for the Year equals 3.0% of his base salary, plus each 1.0% by which channel net sales are more than 105% of the targeted channel net sales for the Year equals 1.5% of his base salary; and (b) Each 1% by which combined channel net sales is more than 95% up to 105% of the targeted combined channel net sales for the Year equals 1.8% of his base salary, plus each 1% by which combined channel net sales are more than 105% of the targeted combined channel sales for the Year equals 0.9% of his base salary; and (c) Each 1% by which consolidated net income is more than 95% up to 105% of the targeted consolidated net income for the Year equals 3.0% of his base salary, plus each 1% by which consolidated net income is more than 105% of the targeted consolidated net income for the Year equals 1.5% of his base salary; and (d) Each 1% by which channel profit from operations is more than 95% up to 105% of the targeted channel profit from operations for the Year equals 1.8% of his base salary. Payment for the attainment of channel profit from operations will be capped at 200% of target payment (105% achievement); and (e) 12% of his base salary based on his quantitative and/or qualitative measurements (MBOs) as determined by Chairman, President & Chief Executive Officer. 2. No bonus shall be paid if the Company's consolidated net income for the Year is less than 90% of the targeted net income objective. E. Vice President, Investor Relations; Vice President, Controller. 1. The actual bonus of these Participants shall be the sum of the following: (a) Each 1% by which consolidated net sales are more than 95% up to 105% of the targeted consolidated net sales for the Year equals 4% of his base salary, plus each 1% by which consolidated net sales are more than 105% of the targeted consolidated net sales for the Year equals 2% of his base salary; and (b) Each 1% by which consolidated net income is more than 95% up to 105% of the targeted consolidated net income for the Year equals 4% of his base salary, plus each 1% by which consolidated net income is more than 105% of the targeted consolidated net income for the Year equals 2% of his base salary; and (c) 10% of his base salary based on his quantitative and/or qualitative measurements (MBOs) as determined by the Chairman, President & Chief Executive Officer. Objectives described in item (C) above are capped at 100% attainment of the target. 2. No bonus shall be paid if the Company's consolidated net earnings for the Year is less than 90% of the targeted net income objective. F. Subsidiary Business Units: President, Chief Executive; Managing Director. 1. The actual bonus of these Participants shall be the sum of the following: (a) Each 1% by which subsidiary net sales are more than 95% up to 105% of the targeted subsidiary net sales for the Year equals 3.2% of his base salary, plus each 1% by which subsidiary net sales are more than 105% of the targeted subsidiary net sales for the Year equals 1.6% of his base salary; and (b) Each 1% by which consolidated net income is more than 95% up to 105% of the targeted consolidated net sales for the Year equals 2.0% of his base salary, plus each 1% by which consolidated net income is more than 105% of the targeted consolidated net income for the Year equals 1.0% of his base salary; and (c) Each 1% by which subsidiary profit from operations is more than 95% up to 105% of the targeted subsidiary profit from operations for the Year equals 1.2% of his base salary. Payment for the attainment of channel profit from operations will be capped at 200% of target payment (105% achievement); and (d) 8% of his base salary based on his quantitative and/or qualitative measurements (MBOs) as determined by the Chairman, President & Chief Executive Officer. Objectives described in item d above are capped at 100% attainment of the target. 2. No bonus shall be paid if the Company's consolidated net income for the Year is less than 90% of the targeted net income objective. IV. Bonus Payments -------------- A. For Participants with 60% or 70% bonus targets: 75% of the gross payment will be in the form of cash; 25% of the gross payment will be in the form of NEBS Stock with a share price which is established at the close of trading on the New York Stock Exchange on the third business day following the issuance of the press release disclosing the Company's financial results for the fourth quarter of the Year. Cash payments will be made within 60 days after the close of the Year. Stock awarded under the plan will be in the form of Restricted Stock with terms and conditions detailed in the Participant commitment letter. B. For Participants with 40% or 50% bonus targets: 75% of the net payment will be in the form of cash; 25% of the net payment will be in the form of NEBS Stock with a share price which is established at the close of trading on the New York Stock Exchange on the third business day following the issuance of the press release disclosing the Company's financial results for the fourth quarter of the Year. All bonus payments will be made within 60 days after the close of the Year. V. Certain Definitions and Other Provisions. ----------------------------------------- A. All references to "net" sales shall refer to consolidated net sales of the Company or net sales of a distribution channel or a business unit, as the case may be, as reported or used in calculating the Company's audited consolidated earnings. B. For purposes of calculating the actual bonuses, consolidated net income for the Year shall mean such consolidated income, after taxes and after provision for executive bonuses under this Plan, determined in accordance with all of the accounting policies employed in the preparation of the Company's audited financial statements for the Year. C. Actual or targeted consolidated net income; actual or targeted consolidated sales; actual or targeted profit from operations of any business unit or distribution channel; or actual or targeted net sales of any business unit or distribution channel may, at the discretion of the Organization and Compensation Committee, be adjusted to eliminate the effect of (a) either the acquisition or the divestiture by the Company of any subsidiary or division during the Year, and/or (b) the imposition during the Year by Massachusetts or any other state or states of sales taxes on services, materials or supplies purchased by the Company or any subsidiary of the Company the effect of which is not allowed for in the Company's annual budget for the 1999 fiscal year or (C) any abatement of taxes or material increase or decrease in Federal or State corporate tax rates. It is the intention of the Organization and Compensation Committee that any such discretionary adjustment shall be made by it, and shall be announced to the affected Participants, promptly after the occurrence of the motivation event, but failure to act promptly shall not deprive the Committee of its power to make such an adjustment at a later date. D. Should a Participant die, retire, or become totally disabled during the Year, he or his estate shall be entitled to receive a bonus pro-rated in accordance with the percentage of his annual salary earned from the beginning of the Year up to the date of death, retirement or disability. Should a Participant's employment by the Company or a subsidiary business unit be terminated for any other reason, payment of any bonus hereunder for the year in which such termination occurs is at the sole discretion of the Organization and Compensation Committee. E. If a Participant assumes a new position during the Year, the Organization and Compensation Committee may make an appropriate adjustment in his target bonus and/or the means of calculating his actual bonus, effective from and after that event. F. If a Change of Control event (as defined in Section 11 of the Company's 1994 Key Employee and Eligible Director Stock Option and Stock Appreciation Rights Plan) occurs, the Company will within sixty (60) days following such event pay to each Participant a pro- rated bonus through the date thereof as hereinafter provided, whereupon this Plan will terminate. The portion of the bonus based on factors other than Qualitative Measurements shall be calculated based on a comparison of (I) actual results of the Company through the end of the calendar quarter next preceding the Change in Control event to (ii) the targeted quarterly performance criteria set forth on the schedules attached hereto. The portion of the bonus based on Qualitative Measurements will be calculated through the end of the calendar quarter next preceding the Change of Control event to the extent equitable and reasonably practicable in the judgment of the Organization and Compensation Committee. Qualitative Measurements for which such calculation is not equitable or reasonably practicable will be disregarded and the percentage of the bonus otherwise allocated thereto under the terms hereof will be reallocated in even percentages to the Sales and Earnings components of the bonus calculation. After determining the full year bonus based on the extent to which the aforesaid quarterly targets have been achieved, the amount of the full year bonus will be pro-rated by multiplying the same by a fraction the numerator of which is the number of days between the beginning of the fiscal year and the date of the Change of Control event and the denominator of which would be 365. The determination of the amount of any bonus payable under this paragraph shall be made by the Organization and Compensation Committee and its determination shall be final and binding on the Company and all Participants. G. In the event of any material, unusual and non-recurring charge to income purchase or sale of any material business unit by the Company, or other material event affecting the ability of the Participants to achieve the performance targets established under this Plan, the Organization and Compensation Committee shall review such performance targets and make such adjustments with respect thereto as it deems reasonable and equitable in light of the purposes of this Plan. Any and all adjustments made by the Organization and Compensation Committee under this paragraph shall be final and binding on the Company and all Participants. H. The Organization and Compensation Committee may in its discretion terminate the Plan as of the end of any fiscal quarter. If the Plan is so terminated, the Company shall pay out bonuses to the Participants in such amounts as are appropriate and equitable in light of the Company's and Participants' performance through the end of such quarter and the targets established hereunder. The determination of the amount of any bonuses payable under this paragraph shall be made by the Organization and Compensation Committee in line with the objectives set for each Participant, and its determination shall be final and binding on the Company and all Participants. I. The Qualitative Measures referred to herein and the application of certain of the provisions hereof are described in the FY99 MBO Scorecards prepared by the Compensation Manager. J. This Plan shall be effective commencing June 29, 1998. Attachments: Set of Schedules - FY99 MBO Scorecards (TBD) EX-10.23 5 CHANGE IN CONTROL AGREEMENT EXHIBIT 10.23 January 23, 1998 Mr. Richard T. Riley 14 Memel Drive Thornton, PA 19373 Dear Rich: New England Business Service, Inc., a Delaware corporation (the "Company"), considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its shareholders. In this connection, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may arise and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders. Accordingly, the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in circumstances arising from the possibility of a change in control of the Company. In particular, the Board believes it important, should the Company or its shareholders receive a proposal for transfer of control of the Company, that you be able to assess and advise the Board whether such proposal would be in the best interests of the Company and its shareholders and to take such other action regarding such proposal as the Board might determine to be appropriate, without being influenced by the uncertainties of your own situation. In order to induce you to remain in the employ of the Company, this letter agreement, which has been approved by the Board, sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a "change in control" of the Company under the circumstances described below. 1. Agreement to Provide Services; Right to Terminate. ------------------------------------------------- (i) Except as otherwise provided in paragraph (ii) below, the Company or you may terminate your employment at any time, subject to the Company's providing the benefits hereinafter specified in accordance with the terms hereof. 1 (ii) In the event a tender offer or exchange offer is made by a Person (as hereinafter defined) for more than 25% of the combined voting power of the Company's outstanding securities ordinarily having the right to vote at elections of directors ("Outstanding Company Voting Securities"), including shares of common stock ($1.00 par value) of the Company (the "Stock"), you agree that you will not leave the employ of the Company (other than as a result of Disability or upon Retirement, as such terms are hereinafter defined) and will render the services contemplated in the recitals to this Agreement until such tender offer or exchange offer has been abandoned or terminated or a change in control of the Company, as defined in Section 3 hereof, has occurred. For purposes of this Agreement, the term "Person" shall mean and include any individual, corporation, partnership, group, association or other "person", as such term is defined in Section 3(a)(9) and as used in Section 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), other than the Company, a wholly owned subsidiary of the Company or any employee benefit plan(s) sponsored by the Company or a subsidiary of the Company. 2. Term of Agreement. This Agreement shall commence on the date hereof and ----------------- shall continue in effect until JULY 1, 2001; provided, however, that this Agreement shall continue in effect for a period of twenty-four (24) months after a change in control of the Company, as defined in Section 3 hereof, if such change in control shall have occurred during the term of this Agreement. Notwithstanding anything in this Section 2 to the contrary, this Agreement shall terminate if you or the Company terminate your employment prior to a change in control of the Company as provided in Section 1 (i) above. 3. Change in Control. For the purpose of this Agreement a "Change in Control" ----------------- shall mean: (a) THE ACQUISITION BY ANY PERSON OF BENEFICIAL OWNERSHIP (WITHIN THE MEANING OF RULE 13d-3 PROMULGATED UNDER THE EXCHANGE ACT) OF 35% OR MORE OF EITHER (i) THE THEN OUTSTANDING SHARES OF THE STOCK OR (ii) THE COMBINED VOTING POWER OF THE OUTSTANDING Company Voting Securities; provided, however, that the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege); (B) any acquisition by the Company or by any corporation controlled by the Company; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (D) any acquisition by any corporation pursuant to a consolidation or merger, if, following such consolidation or merger, the conditions describe in clauses (i), (ii) and (iii) of subsection (c) of this paragraph are satisfied; or 2 (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") ceasing for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director (other than a director designated by a Person who has entered into an agreement within the Company to effect a transaction described in clauses (a) or (c) of this Section) subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote or resolution of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Adoption by the Board of a resolution approving an agreement of consolidation of the Company with or merger of the Company into another corporation or business entity in each case, unless, following such consolidation or merger, (i) more than 60% of, respectively, the then outstanding shares of common stock of the corporation resulting from such consolidation or merger and/or the combined voting power of the then outstanding voting securities of such corporation or business entity entitled to vote generally in the election of directors (or other persons having the general power to direct the affairs of such entity) is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Stock and Outstanding Company Voting Securities immediately prior to such consolidation or merger in substantially the same proportions as their ownership, immediately prior to such consolidation or merger, of the Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation or other business entity resulting from such consolidation or merger and any Person beneficially owning, immediately prior to such consolidation or merger, directly or indirectly, 35% or more of the Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 35% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such consolidation or merger and/or the combined voting power of the then outstanding voting securities of such corporation or business entity entitled to vote generally in the election of its directors (or other persons having the general power to direct the affairs of such entity) and (iii) at least a majority of the members of the board of directors (or other group of persons having the general power to direct the affairs of the corporation or other business entity) resulting from such consolidation or merger were members of the Incumbent Board at the time of the execution of the initial agreement providing for such consolidation or merger; provided, that any right to receive compensation pursuant to Section 5 below which shall vest by reason of the action of the Board pursuant to this subsection (c) shall be divested upon (A) the rejection of such agreement of consolidation or merger by the stockholders of the Company or (B) its abandonment by either party thereto in accordance with its terms; or 3 (d) Adoption by the requisite majority of the whole Board, or by the holders of such majority of stock of the Company as is required by law or by the Certificate of Incorporation or By-Laws of the Company as then in effect, of a resolution or consent authorizing (i) the dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation or other business entity with respect to which, following the such sale or other disposition, (A) more than 60% of, respectively, the then outstanding shares of common stock of such corporation and/or the combined voting power of the outstanding voting securities of such corporation or other entity to vote generally in the election of its directors (or other persons having the general power to direct its affairs) is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Stock and/or Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation or other business entity and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 35% or more of the Stock and/or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 35% or more of, respectively, the then outstanding shares of common stock of such corporation and/or the combined voting power of the then outstanding voting securities of such corporation or other business entity entitled to vote generally in the election of directors (or other persons having the general power to direct its affairs), and (C) at least a majority of the members of the board of directors or group of persons having the general power to direct the affairs of such corporation or other entity were members of the Incumbent Board at the time of the execution of the initial agreement of action of the Board providing for such sale or other disposition of assets of the Company; provided, that any right to receive compensation pursuant to Section 5 below which shall vest by reason of the action of the Board or the stockholders pursuant to this subsection shall be divested upon the abandonment by the Company of such dissolution, or such sale of or other disposition of assets, as the case may be. NOTWITHSTANDING ANYTHING IN THE FOREGOING TO THE CONTRARY, NO CHANGE IN CONTROL SHALL BE DEEMED TO HAVE OCCURRED FOR PURPOSES OF THIS AGREEMENT BY VIRTUE OF ANY TRANSACTION WHICH RESULTS IN YOU, OR A GROUP OF PERSONS WHICH INCLUDES YOU, ACQUIRING, DIRECTLY OR INDIRECTLY, 35% OR MORE OF THE COMBINED VOTING POWER OF THE COMPANY'S OUTSTANDING VOTING SECURITIES. 4. Termination Following Change in Control. If any of the events described in --------------------------------------- Section 3 hereof constituting a change in control of the Company shall have occurred, you shall be entitled to the benefits provided in section 5 hereof upon the termination of your employment with the Company within twenty-four (24) months after such event, unless such termination is (a) because of your death, (b) by the Company for Cause, Disability or Retirement or (c) by you other than for Good Reason (as all such capitalized terms are hereinafter defined). 4 (i) Disability. Termination by the company of your employment based ---------- on "Disability" shall mean termination because of your absence from your duties with the Company on a full time basis for one hundred twenty (120) consecutive days as a result of your incapacity due to physical or mental illness, unless within thirty (30) days after Notice of Termination (as hereinafter defined) is given to you following such absence you shall have returned to the full time performance of your duties. (ii) Retirement. Termination by you or by the Company of your ---------- employment based on "Retirement" shall mean termination on or after your normal retirement date as defined in the Company's Pension Plan (or any successor or substitute plan or plans of the Company put into effect prior to a change in control) (the "Pension Plan"). (iii) Cause. Termination by the Company of your employment for "Cause" ----- shall mean termination upon (a) the willful and continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness) after a demand for substantial performance is delivered to you by the Chairman of the Board or President of the Company which specifically identifies the manner in which such executive believes that you have not substantially performed your duties, or (b) the willful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company. For purposes of this paragraph (iii), no act, or failure to act, on your part shall be considered "willful" unless done, or omitted to be done, by you without reasonable belief that your action or omission was in, or not opposed to, the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the Company. It is also expressly understood that your attention to matters not directly related to the business of the Company shall not provide a basis for termination for Cause so long as the Board has approved your engagement in such activities. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of the conduct set forth above in (a) or (b) of this paragraph (iii) and specifying the particulars thereof in detail. (iv) Good Reason. Termination by you of your employment for "Good ----------- Reason" shall mean termination based on: 5 (A) a determination by you, in your reasonable judgment, that there has been an adverse change in your status or position(s) as an officer of the Company as in effect immediately prior to the change in control, including, without limitation, any adverse change in your status or position as a result of a diminution in your duties or responsibilities (other than, if applicable, any such change directly attributable to the fact that the Company is no longer publicly owned) or the assignment to you of any duties or responsibilities which are inconsistent with such status or position(s), or any removal of you from or any failure to reappoint or reelect you to such position(s) (except in connection with the termination of your employment for Cause, Disability or Retirement or as a result of your death or by you other than for Good Reason); (B) a reduction by the Company in your base salary as in effect immediately prior to the change in control; (C) the failure by the Company to continue in effect any Plan (as hereinafter defined, excluding any stock option plan) in which you are participating at the time of the change in control of the Company (or Plans providing you with at least substantially similar benefits) other than as a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the change in control, or the taking of any action, or the failure to act, by the Company which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as is the case on the date of the change in control or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the change in control; (D) the failure by the Company to provide and credit you with the number of paid vacation days to which you are then entitled in accordance with the Company's normal vacation policy as in effect immediately prior to the change in control; (E) the Company's requiring you to be based at an office that is greater than 50 miles from where your office is located immediately prior to the change in control except for required travel on the Company's business to an extent substantially consistent with the business travel obligations which you undertook on behalf of the Company prior to the change in control; (F) the failure by the Company to obtain from any Successor (as hereinafter defined) the assent to this Agreement contemplated by Section 6 hereof; (G) any purported termination by the Company of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (v) below (and, if applicable, paragraph (iii) above); and for purposes of this Agreement, no such purported termination shall be effective; or 6 (H) any refusal by the Company to continue to allow you to attend to matters or engage in activities not directly related to the business of the Company which, prior to the change in control, you were permitted by the Board to attend to or engage in. For purposes of this Agreement, "Plan" shall mean any compensation plan such as an incentive, stock option or restricted stock plan or any employee benefit plan such as a thrift, pension, profit sharing, medical, disability, accident, life insurance plan or a relocation plan or policy or any other plan, program or policy of the Company intended to benefit employees. (v) Notice of Termination. Any purported termination by the Company --------------------- or by you following a change in control shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon. (vi) Date of Termination. "Date of Termination" following a change in ------------------- control shall mean (a) if your employment is to be terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such thirty (30) day period), (b) if your employment is to be terminated by the Company for Cause or by you pursuant to Sections 4 (iv) (F) and 6 hereof or for any other Good Reason, the date specified in the Notice of Termination, or (c) if your employment is to be terminated by the Company for any reason other than Cause, the date specified in the Notice of Termination, which in no event shall be a date earlier than ninety (90) days after the date on which a Notice of Termination is given, unless an earlier date has been expressly agreed to by you in writing either in advance of, or after, receiving such Notice of Termination. In the case of termination by the Company of your employment for Cause, if you have not previously expressly agreed in writing to the termination, then within thirty (30) days after receipt by you of the Notice of Termination with respect thereto, you may notify the Company that a dispute exists concerning the termination, in which event the Date of Termination shall be the date set either by mutual written agreement of the parties or by the arbitrators in a proceeding as provided in Section 13 hereof. During the pendency of any such dispute, the Company will continue to pay you your full compensation in effect just prior to the time the Notice of Termination is given (or, if higher, as in effect immediately prior to the change in control) and until the dispute is resolved in accordance with Section 13. 7 5. Compensation Upon Termination or During Disability; other Agreements. -------------------------------------------------------------------- (i) During any period following a change in control of the Company that you fail to perform your duties as a result of incapacity due to physical or mental illness, you shall continue to receive your salary at the rate then in effect and any benefits or awards under any Plans shall continue to accrue during such period, to the extent not inconsistent with such Plans, until your employment is terminated pursuant to and in accordance with paragraphs 4(i) and 4 (vi) hereof. Thereafter, your benefits shall be determined in accordance with the Plans then in effect. (ii) If your employment shall be terminated for Cause following a change in control of the Company, the Company shall pay you your salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including both the cash and stock components) which pursuant to the terms of any Plans have been earned or become payable, but which have not yet been paid to you. Thereupon the Company shall have no further obligations to you under this Agreement. (iii) Subject to Section 8 hereof, if, within twenty-four (24) months after a change in control of the Company, as defined in Section 3 above, shall have occurred, your employment by the Company shall be terminated (a) by the Company other than for Cause, ' Disability or Retirement or (b) by you for Good Reason, then the Company shall pay to you, no later than the fifth day following the Date of Termination, without regard to any contrary provisions of any Plan, the following: (A) (x) your salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given (or, if higher, as in effect immediately prior to the change in control) and (y) any benefits or awards (including both the cash and stock components) which pursuant to the terms of any Plans have been earned or become payable, but which have not yet been paid to you; and (B) you shall receive an amount equal to 1.5 times the average of your calendar year earnings from the Company, consisting for the purposes of this Agreement of base salary and any bonus paid pursuant to the Executive Bonus Plan, the Management Incentive Plan, Profit Sharing Plan or similar bonus plan, during the period consisting of the 5 most recent consecutive calendar years (or fewer than 5, if applicable) ending on or before the date of the change of control. For purposes of computing payment under this Agreement, compensation for any partial calendar year, including the year during which a change of control occurs, shall be annualized. 8 (iv) If, within twenty-four (24) months after a change in control of the Company, as defined in Section 3 above, shall have occurred, your employment by the Company shall be terminated (a) by the Company other than for Cause, Disability or Retirement or (b) by you for Good Reason, then the Company shall maintain in full force and effect, for the continued benefit of you and your dependents for a period terminating on the earliest of (a) thirty months after the Date of Termination, (b) the commencement date of equivalent benefits from a new employer or (c) your normal retirement date under the terms of the Retirement Plan, all insured and self-insured employee welfare benefit Plans in which you were entitled to participate immediately prior to the Date of Termination, provided that your continued participation is possible under the general terms and provisions of such Plans (and any applicable funding media) and you continue to pay an amount equal to your regular contribution under such plans for such participation. In the event that your participation in any such Plan is barred, the Company, at its sole cost and expense, shall arrange to have issued for the benefit of you and your dependents individual policies of insurance providing benefits substantially similar (on an after-tax basis) to those which you otherwise would have been entitled to receive under such Plans pursuant to this paragraph (iv) or, if such insurance is not available at a reasonable cost to the Company, the Company shall otherwise provide you and your dependents with equivalent benefits (on an after-tax basis). You shall not be required to pay any premiums or other charges in an amount greater than that which you would have paid in order to participate in such Plans. If, at the end of three years after the Termination Date, you have not reached your normal retirement date, you are participating in any of such Plans and you have not previously received or are not then receiving equivalent benefits from a new employer, the Company shall arrange, at its sole cost and expense, to enable you to convert your and your dependents' coverage under such Plans to individual policies or programs upon the same terms as employees of the Company may apply for such conversions. (v) Except as specifically provided in paragraph (iv) above, the amount of any payment provided for in this Section 5 shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination, or otherwise. 9 6. Successors; Binding Agreement. ----------------------------- (i) The Company will seek, by written request at least five business days prior to the time a Person becomes a Successor (as hereinafter defined), to have such Person assent to the fulfillment of the Company's obligations under this Agreement. Failure of such Person to furnish such assent by the later of (A) three business days prior to the time such Person becomes a Successor or (B) two business days after such Person receives a written request to so assent shall constitute Good Reason for termination by you of your employment if a change in control of the Company occurs or has occurred. For purposes of this Agreement, "Successor" shall mean any Person that succeeds to, or has the practical ability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase of the Company's voting securities or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate. (iii) For purposes of this Agreement, the "Company" shall include any corporation or other entity which is the surviving or continuing entity in respect of any merger, consolidation or form of business combination in which the Company ceases to exist. 7. Fees and Expenses; Mitigation. ----------------------------- (i) The Company shall reimburse you, on a current basis, for all reasonable legal fees and related expenses incurred by you in connection with the Agreement following a change in control of the Company, including, without limitation, (a) all such fees and expenses, if any, incurred in contesting or disputing any termination of your employment or incurred by you in seeking advice with respect to the matters set forth in Section 8 hereof or (b) your seeking to obtain or enforce any right or benefit provided by this Agreement, in each case, regardless of whether or not your claim is upheld by a court of competent jurisdiction; provided, however, you shall be required to repay any such amounts to the Company to the extent that a court issues a final and non- appealable order setting forth the determination that the position taken by you was frivolous or advanced by you in bad faith. 10 (ii) You shall not be required to mitigate the amount of any payment the Company becomes obligated to make to you in connection with this Agreement, by seeking other employment or otherwise. 8. Taxes. ----- (i) All payments to be made to you under this Agreement will be subject to required withholding of federal, state and local income and employment taxes. (ii) Notwithstanding anything in the foregoing to the contrary, if any of the payments provided for in this Agreement, together with any other payments which you have the right to receive from the Company or any corporation which is a member of an "affiliated group" (as defined in Section 1504 (a) of the Internal Revenue Code of 1986 (the "Code") without regard to Section 1504(b) of the Code) of which the Company is a member, would constitute a "parachute payment" (as defined in Section 28OG (b) (2) of the Code) , the payments pursuant to this Agreement shall be reduced (reducing first the payments under Section 5 (iii) (B) ) to the largest amount as will result in no portion of such payments being subject to the excise tax imposed by Section 4999 of the Code; provided, however, that the determination as to whether any reduction in the payments under this Agreement pursuant to this proviso is necessary shall be made by you in good faith, and such determination shall be conclusive and binding on the Company with respect to its treatment of the payment for tax reporting purposes. 9. Survival. The respective obligations of, and benefits afforded to, the -------- Company and you as provided in Sections 5, 6 (ii), 7, 8, 13 and 14 of this Agreement shall survive termination of this Agreement. 10. Notice. For the purposes of this Agreement, notices and all other ------ communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid and addressed, in the case of the Company, to the address set forth on the first page of this Agreement or, in the case of the undersigned employee, to the address set forth below his signature, provided that all notices to the Company shall be directed to the attention of the Chairman of the Board of the Company, with a copy to Terrence W. Mahoney, Hill & Barlow, One International Place, Boston, MA 02110, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 11 11. Miscellaneous. No provision of this Agreement may be modified, waived or ------------- discharged unless such modification, waiver or discharge is agreed to in a writing signed by you and the Chairman of the Board or President of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Massachusetts. 12. Validity. The invalidity or unenforceability of any provision of this -------- Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Arbitration. Any dispute or controversy arising under or in connection ----------- with this Agreement shall be settled exclusively by arbitration in Boston, Massachusetts by three arbitrators in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrators' award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. The Company shall bear all costs and expenses arising in connection with any arbitration proceeding pursuant to this Section 13. 14. Employee's Commitment. You agree that subsequent to your period of --------------------- employment with the Company, you will not at any time communicate or disclose to any unauthorized person, without the written consent of the Company, any proprietary processes of the Company or any subsidiary or other confidential information concerning their business, affairs, products, suppliers or customers which, if disclosed, would have a material adverse effect upon the business or operations of the Company and its subsidiaries, taken as a whole; it being understood, however, that the obligations of this Section 14 shall not apply to the extent that the aforesaid matters (a) are disclosed in circumstances where you are legally required to do so or (b) become generally known to and available for use by the public otherwise than by your wrongful act or omission. 15. Counterparts. This Agreement may be executed in several counterparts, each ------------ of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 12 If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, NEW ENGLAND BUSINESS SERVICE, INC. By /s/ Robert J. Murray --------------------- Robert J. Murray For NEBS, Inc. Board of Directors Agreed to this 23rd day Of January, 1998 /s/ Richard T. Riley - --------------------------------------- Mr. Richard T. Riley 14 Memel Drive Thornton, PA 19373 13 EX-11 6 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 NEW ENGLAND BUSINESS SERVICE, INC. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS EXCEPT PER SHARE DATA) FOR THE FISCAL YEARS ENDED JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996
1998 1997 1996 -------- -------- -------- Shares - ------ Basic Weighted Average Shares Outstanding (a) 13,781 13,397 14,773 Plus incremental shares from assumed conversion of stock options 325 128 38 ------- ------- ------- Diluted Weighted Average Number of Shares Outstanding (b) 14,106 13,525 14,811 ======= ======= ======= Earnings per Statement of Consolidated Income (c) $24,934 $18,649 $11,929 - --------------------------------------------- Per Share Amounts - ----------------- Basic Earnings Per Share (c)/(a) $ 1.81 $ 1.39 $ 0.81 Diluted Earnings Per Share (c)/(b) 1.77 1.38 0.81
EX-21 7 LIST OF SUBSIDIARIES EXHIBIT 21 LIST OF SUBSIDIARIES Name of Subsidiary Jurisdiction of Incorporation - --------------------------- ----------------------------- NEBS Business Forms Limited (Canada) Shirlite, Ltd. (United Kingdom) Standard Forms, Ltd. (United Kingdom) McBee Systems, Inc. (Colorado) Rapidforms, Inc. (New Jersey) Russell & Miller, Inc. (Delaware) EX-23 8 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT New England Business Service, Inc.: We consent to the incorporation by reference in Registration Statement Nos. 2-72662, 33-38925, 33-56227, 333-32719, 333-44825 and 333-44819 of New England Business Service, Inc. on Form S-8 and Registration Statement Nos. 333-26499 and 333-57657 of New England Business Service, Inc. on Form S-3 of our report dated July 24, 1998, appearing in this Annual Report on Form 10-K of New England Business Service, Inc. for the year ended June 27, 1998. /s/ Deloitte & Touche LLP Boston, Massachusetts September 11, 1998 EX-27 9 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET OF NEW ENGLAND BUSINESS SERVICE, INC. AND ITS SUBSIDIARIES AS OF JUNE 27, 1998 AND THE RELATED STATEMENTS OF CONSOLIDATED INCOME AND CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JUN-27-1998 JUN-29-1997 JUN-27-1998 10,823 0 55,242 (4,257) 20,970 101,060 131,962 80,032 307,577 50,677 0 0 0 15,185 99,320 307,577 355,767 355,767 135,225 135,225 0 3,293 4,571 41,405 16,471 24,934 0 0 0 24,934 1.81 1.77
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