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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended September 28, 2002.
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 number 1-11427
NEW ENGLAND BUSINESS SERVICE, INC.
----------------------------------
(Exact name of the registrant as specified in its charter)
Delaware 04-2942374
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Main Street
Groton, Massachusetts, 01471
----------------------------
(Address of principal executive offices)
(Zip Code)
(978) 448-6111
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 and 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
--- ---
The number of common shares of the Registrant outstanding on November 12, 2002
was 13,095,058.
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
- ----------------------------
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
Sept. 28, June 29,
2002 2002
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 6,784 $ 6,112
Accounts receivable, net 55,247 55,738
Inventories, net 35,432 34,095
Direct mail advertising materials, net
and prepaid expenses 19,406 13,374
Deferred income tax benefit 11,863 13,240
-------- --------
Total current assets 128,732 122,559
Property and Equipment, net 72,541 73,602
Property Held for Sale 328 328
Deferred Income Tax Benefit 19,356 18,934
Goodwill and Other Intangible Assets, net 117,913 119,848
Long-Term Investment - 30,521
Other Assets 2,997 3,130
-------- --------
TOTAL ASSETS $341,867 $368,922
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 16,836 $ 16,858
Accrued expenses 45,075 48,126
Obligations under capital lease-current portion 901 1,102
-------- --------
Total current liabilities 62,812 66,086
Long-Term Debt 118,325 148,358
Deferred Income Taxes 17,981 17,758
STOCKHOLDERS' EQUITY
Common stock 15,882 15,829
Additional paid-in capital 58,995 57,885
Unamortized value of restricted stock awards (1,011) (62)
Accumulated other comprehensive loss (5,942) (7,411)
Retained earnings 130,270 125,905
-------- --------
Total 198,194 192,146
Less Treasury stock, at cost (55,445) (55,426)
-------- --------
Stockholders' Equity 142,749 136,720
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $341,867 $368,922
======== ========
See Notes to Condensed Consolidated Financial Statements
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three Months Ended
Sept. 28, Sept. 29,
2002 2001
-------- --------
NET SALES $128,851 $133,515
COST OF SALES 54,279 58,137
-------- --------
GROSS PROFIT 74,572 75,378
OPERATING EXPENSES:
Selling and advertising 43,999 46,497
General and administrative 19,317 18,042
-------- --------
Total operating expenses 63,316 64,539
INCOME FROM OPERATIONS 11,256 10,839
OTHER INCOME/(EXPENSE):
Interest income 32 50
Interest expense (3,077) (3,347)
Loss on settlement of interest rate swaps (3,211) -
Gain on sale of long-term investment 6,322 -
-------- --------
INCOME BEFORE INCOME TAXES 11,322 7,542
PROVISION FOR INCOME TAXES 4,348 2,896
-------- --------
INCOME BEFORE THE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE 6,974 4,646
-------- --------
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE - (2,792)
-------- --------
NET INCOME $ 6,974 $ 1,854
======== ========
PER SHARE AMOUNTS:
Basic Earnings Per Share Before the Effect
of a Change in Accounting Principle $ .54 $ .37
======== ========
Effect of a Change in Accounting Principle $ .00 $ (.22)
-------- --------
Basic Earnings Per Share $ .54 $ .15
======== ========
Diluted Earnings Per Share Before the Effect
of a Change in Accounting Principle $ .52 $ .37
======== ========
Effect of a Change in Accounting Principle $ .00 $ (.22)
-------- --------
Diluted Earnings Per Share $ .52 $ .15
======== ========
Dividends $ .20 $ .20
======== ========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 13,025 12,541
Plus incremental shares from assumed
conversion of stock options and
contingently returnable shares 360 167
-------- --------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 13,385 12,708
======== ========
See Notes to Condensed Consolidated Financial Statements
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months Ended
Sept. 28, Sept. 29,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 6,974 $ 1,854
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,017 4,633
Amortization 1,784 2,247
(Gain)/Loss on disposal of asset (2) 4
Gain on sale of long-term investment (6,322) -
Change in accounting principle - 2,792
Provision for losses on accounts receivable 1,507 1,175
Deferred Grants (2) -
Employee benefit charges 214 1,318
Changes in assets and liabilities:
Accounts receivable (1,186) (1,891)
Inventories and prepaid expenses (6,982) (5,016)
Accounts payable (11) 456
Income taxes payable 2,100 1,489
Accrued expenses (2,039) (968)
-------- --------
Net cash provided by operating activities 1,052 8,093
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (4,124) (3,835)
Purchase of long-term investment (5,421) (17,652)
Proceeds from sale of long-term investment 42,264 -
Proceeds from sale of equipment 11 -
-------- --------
Net cash provided by/(used in)
investing activities 32,730 (21,487)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (52,734) (6,359)
Proceeds from borrowings, net of issuance costs 22,498 20,261
Proceeds from issuance of common stock 6 762
Dividends paid (2,609) (2,506)
-------- --------
Net cash provided by/(used in)
financing activities (32,839) 12,158
EFFECT OF EXCHANGE RATE CHANGES ON CASH (271) (98)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 672 (1,334)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,112 7,154
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,784 $ 5,820
======== ========
See Notes to Condensed Consolidated Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
1. Basis of Presentation/Accounting Policies
- --------------------------------------------
The condensed consolidated financial statements contained in this report are
unaudited but reflect all adjustments, consisting only of normal recurring
adjustments, which are, in the opinion of management, necessary for a fair
presentation of the results of the interim periods reflected. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been omitted pursuant to applicable rules and
regulations of the Securities and Exchange Commission. The condensed
consolidated financial statements included herein should be read in
conjunction with the consolidated financial statements and notes thereto, and
the Independent Auditors' Report in the Company's Annual Report on Form 10-K
for the fiscal year ended June 29, 2002. Reference is made to the accounting
policies of the Company described in the notes to the consolidated financial
statements in the Company's Annual Report on Form 10-K for the fiscal year
ended June 29, 2002. The Company has consistently followed those policies in
preparing this report. The results from operations for the interim periods
reported herein are not necessarily indicative of results to be expected for
the full year.
Certain reclassifications have been made to the comparative periods so as
to be in conformity with the current quarter presentations.
2. Restructuring and Impairment of Assets
- ----------------------------------------
During fiscal year 2001, the Company undertook two distinct restructuring
actions. The first resulted in a restructuring charge of $3,500 in fiscal year
2001 and an additional charge of $1,023 in fiscal year 2002 to provide for costs
primarily associated with the Company's decision to more closely align its
direct marketing and direct sales activities. As part of the restructuring
program, the McBee US headquarters was relocated from Parsippany, New Jersey to
the existing RapidForms facility in Thorofare, New Jersey. In addition, the
McBee manufacturing plant in Damascus, Virginia was closed and a portion of
leased warehousing space occupied by Chiswick in Sudbury, Massachusetts was
vacated. In Canada, the McBee sales and marketing organizations were combined
with NEBS Direct Marketing and are operating under the NEBS name. Approximately
140 employees were affected by the restructuring either through elimination of
their positions or relocation.
The second restructuring action resulted in the Company recording an
additional restructuring charge in fiscal year 2001 of $3,645 and a credit of
$(323) in fiscal year 2002 to provide for costs associated with the Company's
decision to eliminate excess capacity by closing a manufacturing facility in
Ogden, Utah and a leased distribution facility in Sudbury, Massachusetts, along
with other actions to reduce the workforce in various locations. Approximately
175 employees were affected by this restructuring, either through elimination of
their positions or relocation. The following is a table of the charges incurred
and the cash paid in fiscal 2003 pursuant to these actions:
First Restructuring Second Restructuring
Employee
Facility termination Facility
closure costs benefit costs closure costs Total
Three Months Ended ------------- ------------- ------------- ---------
Sept. 28, 2002
Balance
June 29, 2002 $1,038 $ 166 $451 $1,655
Payments
for the period (87) (48) (423) (558)
------ ------ ------ ------
Balance
Sept. 28, 2002 $ 951 $ 118 $ 28 $1,097
====== ======= ====== ======
The activities related to all restructuring actions identified above are
anticipated to be completed by the Company during fiscal year 2003 with the
exception of lease payments, which may extend beyond this time frame.
3. Inventories
- --------------
Inventories are carried at the lower of first-in, first-out cost or market.
Inventories at September 28, 2002 and June 29, 2002 consisted of:
Sept.28, June 29,
2002 2002
------- -------
Raw Material $ 1,669 $ 1,709
Work in Process 72 124
Finished Goods 33,691 32,262
------ -------
Total $35,432 $34,095
======= =======
4. Long-Term Investment
- -----------------------
In July 2002, the Company invested $5,421 in the common stock of
Advantage Payroll Services, Inc. ("Advantage") through the exercise of
warrants. This investment was in addition to the Company's holdings at June
29, 2002. In September 2002, Advantage merged with Paychex, Inc. At closing,
the Company received the first payment of proceeds from the merger
transaction of $42,264 and the Company recognized a $6,322 gain on the sale
of its long-term investment. Subject to certain potential post-closing
adjustments, the Company expects to receive up to another $5,100 in proceeds
during the fiscal year, which would result in an additional gain.
In addition to paying down floating rate debt, the Company used the
proceeds to terminate two interest rate swap agreements with a notional
amount of $50,000 with two commercial banks. These interest rate swaps were
no longer needed to hedge the reduced level of the Company's floating rate
debt. The Company was required to make a termination payment equivalent to
its fair value of $3,211. This amount, which was reclassed from other
comprehensive income to other expense, represents a loss on settlement of
interest rate swaps to terminate the agreements.
5. Goodwill and Other Intangible Assets
- ------------------------------------------
In the first quarter of fiscal 2002 SFAS No. 142 "Goodwill and Other
Intangible Assets" was adopted. SFAS No. 142 eliminates the current
requirement to amortize goodwill and indefinite-lived intangible assets,
addresses the amortization of intangible assets with a defined life and
addresses the impairment testing and recognition for goodwill and intangible
assets.
In applying SFAS No. 142, the Company completed the transitional
intangible asset impairment test by determining the carrying amount of its
various reporting units and comparing that with their fair value, determined
by using a multiple of earnings before interest, taxes,
depreciation and amortization. As a result, the Company recognized an impairment
charge to write off goodwill in the amount of $2,792 relating to its European
business within its International business segment. The impairment loss is
recognized in the condensed consolidated statements of income under the caption
"Effect of a Change in Accounting Principle". The Company completed the fiscal
2002 annual intangible asset impairment test for all reporting units as of April
27, 2002. The Company determined there was no impairment as of the measurement
date.
Intangible assets consist of the following:
June 29, Sept. 28,
2002 2002
---------- ---------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------------- ------------ -------------- ------------
Intangible assets with
defined lives:
Customer lists $46,327 $36,562 $46,327 $38,006
Covenant not to compete 1,183 1,183 1,183 1,183
Debt issue costs 2,729 1,209 2,731 1,374
Long-term contracts 5,300 663 5,300 746
Bank referral agreements 7,400 1,511 7,400 1,603
Intangible assets with
indefinite lives:
Tradenames 32,800 2,727 32,800 2,727
-------- -------- -------- --------
Total intangible assets $95,739 $43,855 $95,741 $45,639
======== ======== ======== ========
Changes in the carrying amount of goodwill (net) for the three months ended
September 28, 2002, by segment are as follows:
June 29, Sept. 28,
2002 Adjustments 2002
-------- ------------ ----------
Direct Marketing-US $24,237 - $24,237
Direct Sales-US 7,501 - 7,501
Apparel 9,624 - 9,624
Packaging and
Display Products 23,246 - 23,246
International 3,356 $ (153) 3,203
-------- -------- --------
Total $67,964 $ (153) $67,811
======== ======== ========
The adjustment of $153 in the International segment is the effect of
the change in foreign currency translation rates.
Amortization of intangible assets for the three months ended
September 28, 2002 was $1,784. Estimated amortization of intangible
assets for fiscal years 2003, 2004, 2005, 2006 and 2007, without consideration
of any other increases or decreases in the balance of the assets, is $7,134,
$5,434, $759, $752 and $749, respectively.
6. Comprehensive Income and Accumulated Other Comprehensive Income
- -------------------------------------------------------------------
Other Comprehensive Income consists of foreign currency translation
adjustments, pension adjustments, unrealized gains and losses on investments
and changes in the fair market value of cash flow hedges. The Company's
comprehensive income is set forth below:
Three Months Ended
Sept. 28, Sept. 29,
2002 2001
----------- ---------
Net Income $ 6,974 $ 1,854
Changes in:
Unrealized losses
on investments,
net of tax 159 (41)
Foreign currency
translation adjustments, net (766) (558)
Unrealized gains/(losses) on derivatives
held for hedging purposes, net of tax 2,076 (2,057)
------- -------
Comprehensive income/(loss) $ 8,443 $ (802)
======= =======
The Company's accumulated other comprehensive income is set forth below:
Balance Balance
Sept. 28, June 29,
2002 2002
--------- ----------
Unrealized losses
on investments,
net of tax $ (133) $ (292)
Foreign currency
translation adjustments, net (4,384) (3,618)
Pension adjustments, net of tax (305) (305)
Unrealized gains/(losses) on derivatives
held for hedging purposes, net of tax (1,120) (3,196)
-------- -------
Total $(5,942) $(7,411)
======== =======
7. Financial Information by Business Segment
- --------------------------------------------
The Company has identified five reportable segments. The first segment
is "Direct Marketing-US" and represents those business operations that sell
primarily printed products such as checks and business forms to small
businesses through direct marketing in the United States. The second
segment, "Direct Sales-US", also sells primarily checks and business forms
to small businesses; however, they sell through a direct sales force to the
customer in the United States and, to a lesser extent, through
distributors. The third segment, "Apparel", utilizes independent sales
representatives to market its specialty apparel products and to solicit
orders from customers in the promotional products/advertising specialty
industry. "Packaging and Display Products", the fourth segment, primarily
resells packaging and shipping supplies and retail signage marketed through
a combination of direct marketing and direct selling efforts. The fifth
segment, "International", sells primarily printed products such as checks
and business forms to small businesses in Europe and Canada through direct
marketing, distributors or by directly selling to the customer.
The Company evaluates segment performance and allocates resources
based on a profit from operations measure. This measure is similar to
income from operations as reported on the condensed consolidated statement
of income in that it excludes interest and other income and expense. This
measure, however, also excludes certain items that are reported within
income from operations. These include management incentive compensation,
amortization, integration charges, restructuring charges, impairment
charges investment gains and corporate expenses. The chief operating
decision-maker, in assessing segment results, does not consider these
items. In order to reconcile the segment numbers to the Company's income
before income taxes, adjustments representing the items listed above
totaling $6,162 and $8,794 for the three months ended September 28, 2002
and September 29, 2001, respectively, need to be made to the reported
segment results.
Net sales and profit from operations for each of the Company's
business segments are set forth below:
Packaging and
Direct Direct Display
Marketing-US Sales-US Apparel Products International Total
----------- ----------- ----------- ----------- ------------- ------
Three months ended
Sept. 28, 2002
Net sales $63,886 $26,546 $ 9,758 $19,629 $ 9,032 $128,851
Profit from
operations 14,967 2,356 (708) 419 450 17,484
Less
adjustments
listed above 6,162
Income before
income taxes $ 11,322
Three months ended
Sept. 29, 2001
Net sales $66,789 $25,720 $11,846 $19,525 $ 9,635 $133,515
Profit from
operations 14,138 1,403 11 306 478 16,336
Less
adjustments
listed above 8,794
Income before
income taxes $ 7,542
8. New Accounting Pronouncements
- -------------------------------
In July 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-
lived assets. This Statement supercedes SFAS No. 121 on the same topic and
the accounting and certain reporting provisions of APB Opinion 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as defined in
that Opinion). This Statement also amends Accounting Research Bulletin
("ARB") 51, "Consolidated Financial Statements," to eliminate the exception
to consolidation for a subsidiary for which control is likely to be
temporary. The Company adopted this Statement in the first quarter of fiscal
2003. The implementation of this Statement did not impact the Company's
consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 addresses the
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Consensus No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". The Company will adopt this Statement in fiscal 2003.
Management believes that the impact of this Statement on its consolidated
financial statements will not be material.
9. Contingencies
- -----------------
On June 30, 2000, a complaint entitled "Perry Ellis International, Inc.
v. PremiumWear Inc.", was filed. The Company was subsequently named a co-
defendant. The amended complaint relates to a Right of First Refusal
Agreement dated as of May 22, 1996 (the "RFR Agreement") between the
plaintiff and PremiumWear, Inc., and to the Company's acquisition of all the
outstanding shares of PremiumWear in July 2000. In the amended complaint, the
plaintiff alleges breach of the RFR Agreement and breach of an implied
covenant of good faith and fair dealing against PremiumWear as a result of
PremiumWear's alleged failure to notify the plaintiff of certain discussions
between PremiumWear and the Company preceding the Company's agreement to
purchase all of the outstanding shares of PremiumWear. The amended complaint
also alleges that the Company tortiously interfered with the plaintiff's
rights under the RFR Agreement by allegedly inducing PremiumWear to breach
its obligations to the plaintiff under the RFR Agreement. The plaintiff is
seeking damages in an unspecified amount, attorneys' fees, interest and
costs. The Company believes the allegations in the amended complaint are
without merit and intends to defend the lawsuit vigorously.
On July 24, 2002, a class action lawsuit entitled "OLDAPG, Inc. v. New
England Business Service, Inc." was filed in the Court of Common Pleas of the
Ninth Judicial Circuit in and for Charleston County, South Carolina. The
named plaintiff in the lawsuit seeks to represent a class consisting of all
persons who allegedly received facsimiles containing unsolicited advertising
from the Company in violation of the Telephone Consumer Protection Act of
1991 (the "TCPA"). The plaintiff is seeking statutory damages in the amount
of $500.00 per individual violation, which amount can be trebled to $1,500.00
for each violation found to have been "willful and knowing". The plaintiff is
also seeking injunctive relief with respect to further violations of the TCPA
and attorneys' fees and costs. The Company believes that it has valid
defenses to the claims asserted in the complaint and intends to defend the
lawsuit vigorously.
Item 2. Management's Discussion and Analysis of Financial Condition
- -------------------------------------------------------------------
and Results of Operations
- ---------------------------------
Overview
- --------
New England Business Service, Inc. (the "Company") was founded in 1952,
incorporated in Massachusetts in 1955 and reincorporated in Delaware in 1986.
The Company 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 and promotional apparel and other business products through
direct mail, direct sales, telesales, dealers and the Internet to small
businesses throughout the United States, Canada, the United Kingdom and
France. The Company also markets and sells payroll services provided by a
payroll services company on a private label basis to small businesses in the
United States as well as designs, embroiders and sells specialty apparel
products through distributors and independent sales representatives to the
promotional/advertising specialty industry, primarily in the United States.
The Company has identified five reportable segments. The first segment
is "Direct Marketing-US" and represents those business operations that sell
primarily printed products such as checks and business forms to small
businesses through direct marketing in the United States. The second segment,
"Direct Sales-US," also sells primarily checks and business forms to small
businesses; however, they sell through a direct sales force to the customer
in the United States and, to a lesser extent, through distributors. The third
segment, "Apparel", utilizes independent sales representatives to market its
specialty apparel products and to solicit orders from customers in the
promotional products/advertising specialty industry. "Packaging and Display
Products", the fourth segment, primarily resells packaging and shipping
supplies and retail signage marketed through a combination of direct marketing
and direct selling efforts. The fifth segment, "International", sells
primarily printed products such as checks and business forms to small
businesses in Europe and Canada through direct marketing, distributors or
by directly selling to the customer.
Any sentence followed by an asterisk (*) in this section constitutes a
forward-looking statement which 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 "Certain
Factors That May Affect Future Results."
Results of Operations
- ---------------------
Net sales decreased $4.6 million or 3.5% to $128.9 million in the first
quarter of fiscal year 2003 from $133.5 million in last year's first quarter.
The sales change included decreases of approximately $2.9 million in the
Direct Marketing-US segment and $2.0 million in the Apparel segment and are
attributable to the economic slowdown and reduction in discretionary business
spending by corporate customers, respectively. A decrease of $.6 million in
the International segment was principally due to the timing of shipments.
These decreases were offset by an increase of $.8 million and $.1 million in
sales of the Company's Direct Sales-US segment which is benefiting from
direct marketing strategies and Packaging and Display Segments which is
benefiting from an economic stabilization of the manufacturing market,
respectively.
For the first quarter of fiscal year 2003, cost of sales declined to 42.1%
of sales from 43.5% in last year's comparable period. The Company benefited
from favorable channel and product mix which includes a lower percentage of
Apparel sales, this segment has higher cost of sales as a percentage of
sales. In addition, manufacturing efficiencies, partly as a result of past
integration activities, offset the impact of the decrease in sales on cost of
sales. Cost of sales as a percent of sales is expected to increase slightly
for the remainder of the fiscal year.*
Selling and advertising expense decreased to 34.2% of sales in the first
quarter of fiscal year 2003 as compared to 34.8% of sales in last year's
comparable quarter. The decrease was mainly due to reduced direct mail
spending from more efficient mailing strategies. In addition, cost management
and lower amortization expense favorably impacted selling and advertising
expense for the current period. Selling and advertising expense as a
percentage of sales is expected to be slightly lower for the remainder of the
fiscal year.*
General and administrative expense increased to 15.0% of sales in the first
quarter of fiscal year 2003 from 13.5% of sales in last year's comparable
quarter due to higher incentive compensation, legal costs and realized losses
on deferred compensation investments in the first quarter in fiscal year 2003
as compared to last year's comparable quarter. General and administrative
expense as a percent of sales is expected to be slightly lower for the
remainder of the fiscal year.*
During fiscal year 2001, the Company undertook two separate restructuring
actions. The first resulted in a restructuring charge of $3.5 million in fiscal
year 2001 and an additional charge of $1.0 million in fiscal year 2002 to
provide for costs primarily associated with the Company's decision to more
closely align its direct marketing and direct sales activities. As part of the
restructuring program, the McBee US headquarters was relocated from Parsippany,
New Jersey to the existing RapidForms facility in Thorofare, New Jersey. In
addition, the McBee manufacturing plant in Damascus, Virginia was closed and a
portion of leased warehousing space occupied by Chiswick in Sudbury,
Massachusetts was vacated. In Canada, the McBee sales and marketing
organizations were combined with NEBS Direct Marketing and are operating under
the NEBS name. Approximately 140 employees were affected by the restructuring
either through elimination of their positions or relocation.
The second restructuring action resulted in the Company recording an
additional restructuring charge in fiscal year 2001 of $3.6 million and a credit
of $.3 million in fiscal year 2002 to provide for costs associated with the
Company's decision to eliminate excess capacity by closing a manufacturing
facility in Ogden, Utah and a leased distribution facility in Sudbury,
Massachusetts, along with other actions to reduce the workforce in various
locations. Approximately 175 employees were affected by the restructuring,
either through elimination of their positions or relocation. The following is a
table of the charges incurred and the cash paid in fiscal 2003 pursuant to these
actions (in thousands of dollars):
First Restructuring Second Restructuring
Employee
Facility termination Facility
closure costs benefit costs closure costs Total
Three Months Ended ------------- ------------- ------------- --------
Sept. 28, 2002
Balance
June 29, 2002 $1,038 $ 166 $ 451 $1,655
Payments
for the period (87) (48) (423) (558)
------ ------- ------ ------
Balance
Sept. 28, 2002 $ 951 $ 118 $ 28 $1,097
======= ======= ====== ======
The activities related to all restructuring actions identified above are
anticipated to be completed by the Company during fiscal year 2003 with the
exception of lease payments, which may extend beyond this time frame.
Interest expense was 2.4% of sales in the first quarter of fiscal year 2003
as compared to 2.5% of sales in the prior year's comparable period. An
overall decrease in the average balance of debt outstanding was offset by an
increase in the average interest rate in the first quarter of fiscal year
2003 as compared to the same period last year.
The provision for income taxes as a percentage of pre-tax income was 38.4%
for the first quarter of fiscal years 2003 and 2002.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations are based upon the consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets and liabilities, the disclosure of contingent liabilities
and the reported amounts of revenues and expenses. On an on-going basis, the
Company evaluates its estimates and judgments, including those related to
revenue recognition, bad debts, inventories, intangible assets, and income
taxes. Estimates and judgments are based on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ materially from these estimates
under different assumptions or conditions. The Company believes the following
critical accounting policies affect its more significant estimates and
judgments used in preparation of its consolidated financial statements.
Revenue is recognized on product sales at the point in time when
persuasive evidence of an arrangement exists, the price is fixed and final,
delivery has occurred and there is reasonable assurance of collection of the
sales proceeds. The Company generally obtains purchase authorizations from
its customers for a specified amount of product at a specified price and
considers delivery to have occurred at the point of shipment. While the
Company does provide its customers with a right of return, revenue is not
deferred. Rather, a reserve for sales returns is provided based on
significant historical experience.
Asset valuation includes assessing the recorded value of certain assets,
including accounts receivable, inventories, property, plant and equipment,
investments, capitalized software, goodwill, deferred mail costs and
intangible and other assets. Asset valuation is governed by various
accounting principles, including Statement of Financial Accounting Standards
("SFAS") No. 144 "Accounting for the Impairment of Disposal of Long-Lived
Assets, SFAS No. 142 "Goodwill and Other Intangible Assets" and Accounting
Research Bulletin No. 43, among others. Management uses a variety of factors
to assess valuation, depending on the asset. For example, accounts receivable
are evaluated based upon an aging schedule. The recoverability of inventories
is based upon the types and levels of inventory held. Property, plant and
equipment, capitalized software and intangible and other assets are evaluated
utilizing various factors, including the expected period the asset will be
utilized, forecasted cash flows, the cost of capital and customer demand.
Investments are evaluated for impairment based upon market conditions and the
viability of the investment. Changes in judgments on any of these factors
could impact the value of the asset.
As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each jurisdiction
in which we operate that imposes a tax on income. This process involves
estimating our actual current tax exposure together with assessing temporary
differences resulting from different treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in our consolidated balance sheet. We must
then assess the likelihood that our deferred tax assets will be recovered
from future taxable income, and to the extent we believe that recovery is not
likely, we must establish a valuation allowance. To the extent we establish a
valuation allowance, we must include an expense within the tax provision in
the consolidated statements of income. In the event that actual results
differ from these estimates, our provision for income taxes could be
materially impacted.
New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This Statement supercedes SFAS No. 121 on the same topic and the accounting
and certain reporting provisions of APB Opinion 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
for the disposal of a segment of a business (as defined in that Opinion).
This Statement also amends Accounting Research Bulletin ("ARB") 51,
"Consolidated Financial Statements," to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary.
The Company adopted this Statement in the first quarter of fiscal 2003. The
implementation of this Statement did not impact the Company's consolidated
financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 addresses the
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues ask Force Consensus No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". The Company will adopt this Statement in fiscal 2003.
Management believes that the impact of this Statement on its consolidated
financial statements will not be material.
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities for the three months ended
September 28, 2002 was $ 1.1 million and represented a decrease of $7.0
million from the $8.1 million provided in the comparable period last year.
This decrease in cash provided by operating activities was due to the impact
of the after tax cost of terminating interest rate swaps during the quarter
and income taxes related to the gain on the sale of equity interests in
Advantage Payroll Services, Inc., as well as the benefit from a higher
inventory reduction in last year's first quarter than this year.
Working capital at September 28, 2002 totaled $65.9 million, including
$6.8 million of cash and short-term investments. At June 29, 2002, working
capital was $56.5 million, including cash and short term investments of $6.1
million. The increase in working capital is primarily the result of higher
mail and product inventory due to the anticipated sales of seasonal products
in the Company's second quarter.
Capital expenditures for the three months ended September 28, 2002 were
$4.1 million versus $3.8 million expended during last year's comparable period.
Capital expenditures in the first three months of fiscal year 2003 included
improvements in our information system's infrastructure and investments to
enhance manufacturing capability. The Company anticipates that total capital
outlays will approximate $16.0 million in fiscal year 2003, which will include
additional planned improvements in our information system's capabilities and
investments to enhance manufacturing capability.*
In July 2002, the Company invested $5.4 million in the common stock of
Advantage Payroll Services, Inc. ("Advantage") through the exercise of
warrants. This investment was in addition to the Company's holdings at June
29, 2002. In September 2002, Advantage merged with Paychex, Inc. At closing,
the Company received the first payment of proceeds from the merger
transaction of $42.3 million and the Company recognized a $6.3 million gain
on the sale of its long-term investment. Subject to certain potential post-
closing adjustments, the Company expects to receive up to another $5.1
million in proceeds during the fiscal year, which would result in an
additional gain.
In addition to paying down floating rate debt, the Company used the
proceeds to terminate two interest rate swap agreements with a notional
amount of $50.0 million with two commercial banks. These interest rate swaps
were no longer needed to hedge the reduced level of the Company's floating
rate debt. The Company was required to make a termination payment equivalent
to its fair value of $3.2 million. This amount, which was reclassed from
other comprehensive income to other expense, represents a loss on settlement
of interest rate swaps to terminate the agreements.
There were no repurchases of the Company's common stock during fiscal
years 2003 and 2002.
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. The Company
currently has a committed, unsecured, revolving credit agreement for $200
million. 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. The Company is in compliance with these covenants. At September 28,
2002, the Company had $68.0 million outstanding under this arrangement.
In November 2001, the Company entered into a $50 million Note Purchase
Agreement with The Prudential Insurance Company of America. Under this
agreement, the Company will borrow at the Eurodollar rate plus a spread for
one year, after which the interest rate will be fixed at a rate of 7.23%.
This 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. The Company is in compliance with these covenants. At September 28,
2002, the Company had $50 million outstanding under this arrangement.
In order to effectively fix the interest rate on a portion of the debt
outstanding under the revolving credit agreement, the Company has entered
into four interest rate swap agreements with three of the banks party to the
credit agreement. These swap agreements contain notional principal amounts
and other terms (including rate of interest paid and received and maturity
date) determined with respect to the Company's forecasts of future cash flows
and borrowing requirements. During the first quarter fiscal year 2002, the
Company terminated two interest rate swaps at a pretax cost of $3.2 million.
At September 28, 2002 the notional principal amount outstanding under the
interest rate swap agreements totaled $95.0 million. In the first quarter of
fiscal years 2003 and 2002, there were no amounts transferred from other
comprehensive income to earnings related to the Company's swaps as the
ineffective portion of the swaps was insignificant.
The Company anticipates that its current cash on hand, cash flow from
operations and additional availability under the revolving credit agreement
will be sufficient to meet the Company's liquidity requirements for its
operations and capital expenditures during fiscal year 2003.* However, the
Company may pursue additional acquisitions from time to time, such as the
acquisitions mentioned in the Overview section of Management's Discussion and
Analysis, which would likely be funded through the use of available cash,
issuance of stock, obtaining of additional credit, or any combination
thereof.*
Certain Factors That May Affect Future Results
- ------------------------------------------------------------------
References in this section to "we", "us" and "our" refer to New England
Business Service, Inc.
We may make forward-looking statements in this report and in other
documents filed with the SEC, in press releases, and in discussions with
analysts, investors and others. These statements include:
- descriptions of our operational and strategic plans,
- expectations about our future sales and profits,
- views of conditions and trends in our markets, and
- other statements that include words like "expects", "estimates",
"anticipates", "believes" and "intends", and which describe opinions
about future events.
You should not rely on these forward-looking statements as though they
were guarantees. These statements are based on our expectations at the time
the statements are made, and we are not required to revise or update these
statements based on future developments. Known and unknown risks may cause
our actual results, performance or achievements to be materially different
from those expressed or implied by these statements.
A majority of our sales and profits come from selling standardized
business forms, checks and related products by mail order, telesales and
direct sales to a target market consisting mainly of small businesses. We
believe that the critical success factors to compete in this market include
competitive pricing, breadth of product offering, product quality and the
ability to attract and retain a large number of individual customers. These
critical success factors are also applicable to the success of our packaging,
shipping and warehouse supplies markets as well. Known material risks that
may affect those critical success factors are described below.
A majority of the sales in our apparel business come from selling knit and
woven sport shirts under labels licensed from third parties to the
promotional products/advertising specialty industry. We believe that the
critical success factors to compete in this market include product quality,
timely fulfillment of customer orders and brand awareness. Known material
risks that may affect those success factors are also described below.
Our printed product lines face increased competition from various sources,
such as office supply superstores. Increased competition may require us to
reduce prices or offer other incentives in order to attract new customers and
retain existing customers, which could reduce our profits.
Low-price, high-volume office supply chain stores offer standardized
business forms, checks and related products to small businesses. Because of
their size, these superstores have the buying power to offer many of these
products at competitive prices. These superstores also offer the convenience
of "one-stop shopping" for a broad array of office supplies that we do not
offer. In addition, national superstore competitors have greater financial
strength to reduce prices or increase promotional discounts in order to seek
or retain market share.
If any of these new competitors seek to gain or retain market share
through price reductions or increased discounting, we may be forced to reduce
our prices or match the discounts in order to stay competitive, which could
reduce our profits.
Technological improvements may reduce our competitive advantage over our
smaller competitors, which could reduce our profits.
Historically, our relatively greater financial strength and size have
enabled us to offer a broader array of products, particularly those having a
complex construction, at lower prices than the small local and regional
dealers, distributors and printers who constitute our primary competition.
Improvements in the cost and quality of printing technology are enabling
these smaller competitors to gain access to products of complex design and
functionality at competitive costs. Increased competition from local and
regional competitors could force us to reduce our prices in order to attract
and retain customers, which could reduce our profits.
Because our sales growth is dependent on our ability to continually
attract new customers in our target small business market, economic events
that adversely affect the small business economy may reduce our sales and
profits.
Average annual sales per customer of our core products have remained
relatively stable over time. As a result, we rely, in part, on continually
attracting new customers for these products. Our sales and profits have been
adversely affected by economic-related contractions in the small business
economy. We expect that our sales and profits will continue to be affected by
changes in the levels of small business formations and failures and from
other economic events that affect the small business economy generally.
Because our sales growth is dependent on our ability to continually
attract new customers in our target small business market, changes in the
direct marketing industry that reduce our competitive advantage in contacting
prospective customers may reduce our sales and profits.
Growth in the total number of our direct mail customers depends on
continued access to high-quality lists of newly-formed small businesses. In
the past, our ability to compile proprietary prospect lists was a distinct
competitive advantage. However, the external list compilation industry has
become more sophisticated and comprehensive lists of new small business
formations are now commercially available to our competitors. In addition,
the Internet has the potential to eliminate our advantage of scale in direct
marketing by providing all competitors, regardless of current size, with
access to prospective customers.
We currently rely on the speed of our delivery of promotional materials to
prospective customers to gain advantage over competitors. We are also
expanding our Internet product offerings and capabilities and seeking to
increase our visibility on the Internet. Notwithstanding these efforts, a
deterioration in our competitive advantage in contacting prospective
customers could reduce our sales and profits.
In addition, the enactment of privacy laws could constrain our ability to
obtain prospect lists or to telemarket to prospective customers.
Declining response rates to the Company's catalogs and other direct mail
promotional materials could reduce our sales and profits.
Our direct mail-based businesses have recently experienced declines in the
response rates to our catalogs and other direct mail promotional materials
from both existing customers and prospects. We believe that these declines
are attributable to a number of factors, including current economic
conditions, the overall increase in direct mail solicitations received by our
target customers generally, and the gradual obsolescence of our standardized
forms products. To the extent that we cannot compensate for reduced response
rates through increases in average order value or improve response rates
through new product introductions and improved direct mail contact
strategies, our sales and profits may be adversely affected.
Increases in the cost of paper and in postal rates adversely impact our
costs, which we may be unable to offset by reducing costs in other areas or
by raising prices.
The cost of paper to produce our products, catalogs and advertising
materials makes up a significant portion of our total costs. Also, we rely on
the U.S. Postal Service to deliver most of our promotional materials. Prices
for the various types of paper that we use have been volatile, and we expect
them to continue to be so. Third class postal rates have generally increased
over the past ten years, at times significantly. We are not sure that we will
always be able to reduce costs in other areas or to increase prices for our
products sufficiently to offset increases in paper costs and postal rates. If
we are unable to offset these cost and expense increases, our profits will be
adversely affected.
Disruption in the services provided by certain of our critical vendors may
adversely affect our operating performance and profits.
We use a limited number of vendors to provide key services to our
business. Examples of this are as follows:
- we use MCI WorldCom and Qwest Communications International to
provide a majority of the toll-free telephone lines for our direct
marketing business,
- we use United Parcel Service to deliver most of the products that
we ship to customers,
- we rely on the postal services of the countries in which we do
business to deliver our catalogs and other advertising material to
customers.
In the past, we have been adversely affected by disruption of some of
these services due to labor actions, system failures, adverse weather
conditions and other natural disasters. If there are future interruptions in
service from one or more of these vendors, we believe that there could be a
significant disruption to our business due to our inability to readily find
alternative service providers at comparable rates.
Sales of our standardized forms products face technological obsolescence
and changing customer preferences, which could reduce our sales and profits.
Our standardized business forms, checks and related products provide our
customers with financial and business records to manage their businesses.
Continual technological improvements have provided our target customers in
several market segments with alternative means to enact and record business
transactions. For example, the price and performance capabilities of personal
computers and related printers now provide a cost-competitive means to print
low-quality versions of our business forms on plain paper. In addition,
electronic transaction systems and off-the-shelf business software
applications have been designed to automate several of the functions
performed by our business form products.
In response to the gradual obsolescence of our standardized forms
business, we continue to develop our capability to provide custom and full-
color products. However, we have less of a cost advantage with these products
than with standardized forms, due to improvements in the cost and quality of
printing technology available to our smaller local and regional competitors.
We are also seeking to introduce new products and services that are less
susceptible to technological obsolescence. We may develop new products
internally, procure them from third party vendors, or obtain them through the
acquisition of a new business. We generally realize lower gross margins on
outsourced products than on products that we manufacture ourselves. The risks
associated with the acquisition of new businesses are described below.
If new printing capabilities and new product introductions do not continue
to offset the obsolescence of our standardized business forms products, there
is a risk that the number of new customers we attract and existing customers
we retain may diminish, which could reduce our sales and profits. Decreases
in sales of our historically high margin standardized business forms products
due to obsolescence could also reduce our gross margins. This reduction could
in turn adversely impact our profits unless we are able to offset the
reduction through the introduction of new high margin products and services
or realize cost savings in other areas.
We source our apparel products from offshore third party manufacturers.
Difficulty in securing reliable sources for these products could adversely
affect our ability to maintain inventory levels that are adequate to satisfy
customer demand.
We purchase a majority of our apparel products from "full package"
manufacturers outside the United States. In most cases, these same
manufacturers supply other apparel companies, many of which are significantly
larger than our apparel business and are able, when necessary, to secure
preferential treatment from the manufacturers. The availability of product
from these manufacturers can also be adversely affected by social, political
and economic conditions in their respective regions. Any significant
disruption in our relationships with our current manufacturers could
adversely affect our apparel business to the extent we cannot readily find
alternative sources of supply at comparable levels of price and quality.
Inaccurate forecasting of the demand for specific apparel styles and sizes
could reduce our sales and profits.
We believe that success in our apparel business depends in part on our
ability to immediately ship ordered products, either directly or through our
distributors. Given the relatively long lead time in procuring inventory, we
must estimate demand for specific styles and sizes well in advance of
receiving firm orders from customers in order to ensure the timely
availability of these products. Inaccurate forecasting of demand for specific
styles and sizes can result in either lost sales due to product
unavailability, or reduced margins from liquidating overstocked items.
Failure of our apparel licensors to adequately promote our licensed brands
and protect those brands from infringement could reduce our sales and
profits.
We believe that brand awareness is an important factor to the end-user of
our apparel products, and in that regard we market and sell a majority of our
apparel products under nationally-recognized brands licensed from third
parties. In each case, the licensor is primarily responsible for promoting
its brand and protecting its brand from infringement. The failure of one or
more of our licensors to adequately promote or defend their brands could
diminish the perceived value of those brands to our customers, which could
lead to reduced sales and profits.
Reductions in the number of apparel lines carried by wholesalers in the
promotional products/advertising specialty industry may adversely impact our
sales and profits.
Until recently, a significant portion of the sales in our apparel business
have been to a relatively small number of wholesalers serving the promotional
products/advertising specialty market. Sales to these wholesalers have been
recently decreasing, and have been partially offset by increases in direct
sales to our advertising specialty dealers. We believe that the wholesale
apparel business serving this market is undergoing fundamental change, with
wholesalers increasingly carrying only private label lines and branded lines
on an exclusive basis. We believe that these changes, together with current
economic conditions, are likely to result in an accelerated decrease in our
sales to wholesalers. To the extent that increases in our direct sales to
advertising specialty dealers, together with increases in our apparel sales
to other markets, cannot keep pace with the erosion in our sales to
wholesalers, sales and profits could be adversely impacted.
Our growth strategy depends, in part, on the acquisition of complementary
businesses that address our target small business market.
The acquisition of complementary businesses that address our target small
business market has been important to our growth strategy. We intend to
continue this acquisition activity in the future. The success of this
activity depends on the following:
- our ability to identify suitable businesses and to negotiate
agreements on acceptable terms,
- our ability to obtain financing through additional borrowings, by
issuing additional shares of common stock, or through internally
generated cash flow, and
- our ability to achieve anticipated savings and growth and avoid
disruption to our existing businesses.
In evaluating a potential acquisition, we conduct a business, financial
and legal review of the target. This review is intended to support our
assumptions with respect to the projected future performance of the target
and to identify the benefits and risks associated with those assumptions. We
cannot be certain that our review will identify all potential risks
associated with the purchase, integration or operation of acquired
businesses. Unanticipated risks may adversely affect the benefits that we
expect to obtain from any given acquisition.
Item 3. 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 (which carries a variable interest rate) creates an exposure to
changes in interest rates. The effect, however, 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 the Notes to Consolidated Financial Statements
included in the Annual Report on Form 10-K for the year ended June 29, 2002.
The Company does not hold or issue financial instruments for trading, profit
or speculative purposes.
In order to effectively convert the interest rate on a portion of the
Company's debt from a Eurodollar-based floating rate to a fixed rate, the
Company has entered into 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 changes in foreign currency or interest rates will have a
material impact on its near-term earnings, fair values or cash flows.
Item 4. Controls and Procedures
- -----------------------------------
Within the 90-day period prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation
of management, including its principal executive officer and principal
financial officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-
14(c)promulgated under the Securities Exchange Act of 1934). Based upon that
evaluation, the principal executive officer and principal financial officer
concluded that the Company's disclosure controls and procedures are
effective.
There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in the Company's
internal controls or in other factors that could significantly affect
internal controls subsequent to the date that the Company carried out its
evaluation referenced in the preceding paragraph.
PART II - OTHER INFORMATION
- ---------------------------
Item 1. LEGAL PROCEEDINGS
- --------------------------
On June 30, 2000, a lawsuit entitled "Perry Ellis International, Inc. v.
PremiumWear, Inc.", was filed in the Circuit Court of the Eleventh Judicial
Circuit in and for Miami-Dade County, Florida. The case has been removed to
federal court and is currently pending in the United States District Court
for the Southern District of Florida. On April 11, 2001, the court granted
the plaintiff's motion to amend its complaint to add the Company as a co-
defendant. The amended complaint relates to a Right of First Refusal
Agreement dated as of May 22, 1996 (the "RFR Agreement") between the
plaintiff and PremiumWear, Inc., and to the Company's acquisition of all the
outstanding shares of PremiumWear in July 2000. In the amended complaint, the
plaintiff alleges breach of the RFR Agreement and breach of an implied
covenant of good faith and fair dealing against PremiumWear as a result of
PremiumWear's alleged failure to notify the plaintiff of certain discussions
between PremiumWear and the Company preceding the Company's agreement to
purchase all of the outstanding shares of PremiumWear. The amended complaint
also alleges that the Company tortiously interfered with the plaintiff's
rights under the RFR Agreement by allegedly inducing PremiumWear to breach
its obligations to the plaintiff under the RFR Agreement. The plaintiff is
seeking damages in an unspecified amount, attorneys' fees, interest and
costs. The Company believes the allegations in the amended complaint are
without merit and intends to defend the lawsuit vigorously.
On July 24, 2002, a class action lawsuit entitled "OLDAPG, Inc. v. New
England Business Service, Inc." was filed in the Court of Common Pleas of the
Ninth Judicial Circuit in and for Charleston County, South Carolina. The
named plaintiff in the lawsuit seeks to represent a class consisting of all
persons who allegedly received facsimiles containing unsolicited advertising
from the Company in violation of the Telephone Consumer Protection Act of
1991 (the "TCPA"). The plaintiff is seeking statutory damages in the amount
of $500.00 per individual violation, which amount can be trebled to $1,500.00
for each violation found to have been "willful and knowing". The plaintiff is
also seeking injunctive relief with respect to further violations of the TCPA
and attorneys' fees and costs. The Company believes that it has valid
defenses to the claims asserted in the complaint and intends to defend the
lawsuit vigorously.
From time to time the Company is involved in other 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 other
outstanding matters will have a material effect on the Company's business,
operating results or financial condition.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
Not applicable.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
- ----------------------------------------------------------
Not applicable.
Item 5. OTHER INFORMATION
- --------------------------
In accordance with Section 10A (i)(2) of the Securities and Exchange Act
of 1934, as amended by Section 202 of the Sarbanes-Oxley Act of 2002 ("the
Act"), we are required to disclose the non-audit services approved by our
Audit Committee to be performed by Deloitte & Touche LLP, our independent
auditor. Non-audit services are defined in the Act as services other than
those provided in connection with an audit or a review of the financial
statements of a company. The Audit Committee of the Board of Directors of New
England Business Service, Inc. has approved the performance of certain
employee benefit plan audits, statutory audits and tax-related services by
our auditor, Deloitte & Touche LLP.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a. Exhibits
Exhibit No. Description
---------- -----------
10.1* NEBS 2002 Equity Incentive Plan.
15 Awareness Letter of Independent Accountants.
99.1 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 (Chief Executive Officer).
99.2 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 (Chief Financial Officer).
99.3 Independent Accountants' Review Report.
* Identifies a management contract or compensatory plan or arrangement in
which an executive officer or director of the Company participates.
b. Reports on Form 8-K.
On July 16, 2002, the Company filed a Current Report on Form 8-K
announcing that the Company exercised a common stock purchase warrant in part
and purchased 427,909 shares of Advantage's common stock for an aggregate
purchase price of $5,421,607.03 on July 2, 2002.
On September 19, 2002, the Company filed a Current Report on Form 8-K
announcing that it had issued a press release on September 18, 2002 relating
to the pending disposition of its investment in Advantage Payroll Services,
Inc.
On September 24, 2002, the Company filed a Current Report on Form 8-K
announcing that it had issued a press release on September 23, 2002 relating
to the closing of its sale of equity interests in Advantage Payroll Services,
Inc.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NEW ENGLAND BUSINESS SERVICE,INC.
---------------------------------
(Registrant)
November 12, 2002 /s/Daniel M. Junius
- ----------------- --------------------
Date Daniel M. Junius
Executive Vice President-Chief
Financial Officer
(Principal Financial Officer)
Certifications
I, Robert J. Murray, certify that:
1. I have reviewed this quarterly report on Form 10-Q of New England
Business Service, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report it being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
November 12, 2002 /s/Robert J. Murray
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Robert J. Murray
Chairman and Chief Executive
Officer
(Principal Executive Officer)
I, Daniel M. Junius, certify that:
1. I have reviewed this quarterly report on Form 10-Q of New England
Business
Service, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report it being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
November 12, 2002 /s/Daniel M. Junius
- ----------------- --------------------
Date Daniel M. Junius
Executive Vice President-Chief
Financial Officer
(Principal Financial Officer)