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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 2003.
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
The number of common shares of the Registrant outstanding on May 12, 2003
was 12,984,153.
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
- ----------------------------
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
Mar. 29, June 29,
2003 2002
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 5,728 $ 6,112
Accounts receivable, net 52,795 55,738
Inventories, net 35,036 34,095
Direct mail advertising materials, net
and prepaid expenses 13,107 13,374
Deferred income tax benefit 11,474 13,240
-------- --------
Total current assets 118,140 122,559
Property and Equipment, net 70,478 73,602
Net Property Held for Sale 328 328
Deferred Income Tax Benefit 19,368 18,934
Goodwill, net 68,066 67,964
Other Intangible Assets, net 47,233 51,884
Long-Term Investment - 30,521
Other Assets 2,909 3,130
-------- --------
TOTAL ASSETS $326,522 $368,922
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 12,779 $ 16,858
Accrued expenses 44,207 48,126
Obligations under capital lease-current portion 514 1,102
-------- --------
Total current liabilities 57,500 66,086
Long-Term Debt 96,177 148,358
Deferred Income Taxes 18,008 17,758
STOCKHOLDERS' EQUITY
Common stock 15,888 15,829
Additional paid-in capital 59,214 57,885
Unamortized value of restricted stock awards (633) (62)
Accumulated other comprehensive loss (3,845) (7,411)
Retained earnings 143,875 125,905
-------- --------
Total 214,499 192,146
Less Treasury stock, at cost (59,662) (55,426)
-------- --------
Stockholders' Equity 154,837 136,720
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $326,522 $368,922
======== ========
See Notes to Condensed Consolidated Financial Statements
NEW ENGLAND BUSINESS SERVICE, INC.
STATEMENTS OF CONSOLIDATED INCOME
(In thousands, except per share data)
Three Months Ended Nine Months Ended
Mar. 29, Mar. 30, Mar. 29, Mar. 30,
2003 2002 2003 2002
-------- -------- -------- --------
NET SALES $127,267 $132,879 $408,717 $423,926
COST OF SALES 54,765 58,554 172,182 184,310
-------- -------- -------- --------
GROSS PROFIT 72,502 74,325 236,535 239,616
OPERATING EXPENSES:
Selling and advertising 44,519 46,147 140,117 145,639
General and administrative 17,393 17,313 55,908 53,655
-------- -------- -------- --------
Total operating expenses 61,912 63,460 196,025 199,294
INCOME FROM OPERATIONS 10,590 10,865 40,510 40,322
OTHER (EXPENSE)/INCOME:
Interest income 35 37 110 135
Interest expense (1,622) (3,361) (6,677) (10,196)
Loss on settlement of interest rate swaps - - (3,277) -
Gain on sale of long-term investment 1,027 - 11,424 -
-------- -------- -------- --------
Total other(expense)/income (560) (3,324) 1,580 (10,061)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 10,030 7,541 42,090 30,261
PROVISION FOR INCOME TAXES 4,144 2,895 16,309 11,620
-------- -------- -------- --------
INCOME BEFORE THE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE 5,886 4,646 25,781 18,641
-------- -------- -------- --------
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE - - - (2,792)
-------- -------- -------- --------
NET INCOME $ 5,886 $ 4,646 $ 25,781 $ 15,849
======== ======== ======== ========
PER SHARE AMOUNTS:
Basic Earnings Per Share Before the Effect
of a Change in Accounting Principle $ .46 $ .36 $ 1.98 $ 1.47
======== ======== ======== ========
Effect of a Change in Accounting Principle $ .00 $ .00 $ .00 $ (.22)
-------- -------- ------- --------
Basic Earnings Per Share $ .46 $ .36 $ 1.98 $ 1.25
======== ======== ======== ========
Diluted Earnings Per Share Before the Effect
of a Change in Accounting Principle $ .44 $ .35 $ 1.93 $ 1.45
======== ======== ======== =======
Effect of a Change in Accounting Principle $ .00 $ .00 $ .00 $ (.22)
-------- -------- -------- --------
Diluted Earnings Per Share $ .44 $ .35 $ 1.93 $ 1.23
======== ======== ======== ========
Dividends $ .20 $ .20 $ .60 $ .60
======== ======== ======== ========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 12,932 12,763 12,991 12,648
Plus incremental shares from assumed
conversion of stock options and
contingently returnable shares 342 326 333 197
-------- -------- -------- --------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 13,274 13,089 13,324 12,845
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
Mar. 29, Mar. 30,
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 25,781 $ 15,849
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 14,774 13,945
Amortization 5,342 6,692
Deferred income taxes (79) -
Loss on disposal of equipment 52 57
Gain on sale of long-term investment (11,424) -
Change in accounting principle - 2,792
Provision for losses on accounts receivable 4,267 3,767
Deferred grants (6) -
Employee benefit charges 694 3,849
Changes in assets and liabilities:
Accounts receivable (1,124) (426)
Inventories and prepaid expenses (17) 8,143
Accounts payable (4,123) (5,460)
Income taxes payable 1,725 2,434
Other accrued expenses (1,418) (607)
-------- --------
Net cash provided by operating activities 34,444 51,035
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (11,501) (11,368)
Purchase of long-term investment (5,421) (17,652)
Proceeds from sale of long-term investment 47,366 -
Proceeds from sale of equipment 11 24
-------- --------
Net cash provided by/(used in)
investing activities 30,455 (28,996)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (90,769) (98,140)
Proceeds from borrowings - net of issuance costs 37,309 84,181
Proceeds from issuance of common stock 619 2,813
Acquisition of treasury stock (4,894) -
Dividends paid (7,811) (7,585)
-------- --------
Net cash used in
financing activities (65,546) (18,731)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 263 (127)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (384) 3,181
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,112 7,154
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,728 $ 10,335
======== ========
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 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 began 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 charge in fiscal year
2001 of $3,645 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 closed manufacturing facility in Ogden, Utah is classified on the balance sheet as
property held for sale. The property is carried at net book value which approximates fair value less the
cost to sell. 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 ------------- ------------- ------------- ---------
Mar. 29, 2003
Balance
Dec. 28, 2002 $ 850 $ 116 $ 0 $ 966
Payments
for the period (124) (34) 0 (158)
------- -------- ------ -------
Balance
Mar. 29, 2003 $ 726 $ 82 $ 0 $ 808
======= ======== ====== =======
First Restructuring Second Restructuring
Employee
Facility termination Facility
closure costs benefit costs closure costs Total
Nine Months Ended ------------- ------------- ------------- ---------
Mar. 29, 2003
Balance
June 29, 2002 $1,038 $ 166 $ 451 $ 1,655
Payments
for the period (312) (84) (451) (847)
------- -------- ------ -------
Balance
Mar. 29, 2003 $ 726 $ 82 $ 0 $ 808
====== ======== ====== ========
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 March 29, 2003 and June 29, 2002 consisted of:
Mar.29, June 29,
2003 2002
------- -------
Raw Material $ 1,566 $ 1,709
Work in Process - 124
Finished Goods 33,470 32,262
------ -------
Total $35,036 $34,095
======= =======
4. Long-Term Investment
- -----------------------
In July 2002, the Company invested, through the exercise of warrants, an
additional $5,421 in the common stock of Advantage Payroll Services, Inc.
("Advantage"). 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. In the second quarter, the Company received the
second payment of proceeds and recognized a gain of $4,075. In the third
quarter, Company received the third and final payment of proceeds and
recognized a gain of $1,027. The Company recognized a total gain of $11,424
for the nine months ended March 29, 2003.
The Company used the proceeds from the sale of the Advantage investment
to pay down floating rate debt and to terminate three interest rate swap
agreements with a notional amount of $75,000 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 termination
payments equivalent to the fair value of the swaps totaling $3,277. This
amount, which was reclassified 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. In fiscal year 2002, 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".
Intangible assets consist of the following:
June 29, Mar. 29,
2002 2003
---------- ---------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------------- ------------ -------------- ------------
Intangible assets with
defined lives:
Customer lists $46,327 $36,562 $46,327 $40,894
Covenant not to compete 1,183 1,183 1,183 1,183
Debt issue costs 2,729 1,209 3,420 1,693
Long-term contracts 5,300 663 5,300 913
Bank referral agreements 7,400 1,511 7,400 1,787
Intangible assets with
indefinite lives:
Tradenames 32,800 2,727 32,800 2,727
-------- -------- -------- --------
Total intangible assets $95,739 $43,855 $96,430 $49,197
======== ======== ======== ========
Changes in the carrying amount of goodwill (net) for the nine months ended
March 29, 2003, by segment are as follows:
June 29, Mar. 29,
2002 Adjustments 2003
-------- ------------ ----------
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 $ 102 3,458
-------- -------- --------
Total $67,964 $ 102 $68,066
======== ======== ========
The adjustment of $102 in the International segment is the effect of the change in foreign currency
translation rates.
Amortization of intangible assets for the nine months ended March 29, 2003 was $5,342. 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 $7,098, $5,325,
$1,259, $1,085 and $749, respectively.
6. Stock Options
- ------------------
The Company accounts for stock-based compensation to employees using the
intrinsic value method. Accordingly, no compensation cost has been
recognized for fixed stock option grants since the options granted to
date have exercise prices per share of not less than the fair value of the
Company's common stock at the date of the grant.
If compensation cost for stock option grants had been determined based
on the fair value of the grant for the three and nine months ended March 29,
2003 the Company's net income and net income per share would have been reduced
to the pro forma amounts shown below:
Three Months Ended Nine Months Ended
Mar. 29, Mar. 30, Mar. 29, Mar. 30,
2003 2002 2003 2002
-------- ------- -------- --------
Net income:
As reported $ 5,886 $ 4,646 $25,781 $15,849
Pro forma 5,514 4,279 24,831 14,907
Net income per diluted share:
As reported $ .44 $ .35 $ 1.93 $ 1.23
Pro forma .42 .33 1.86 1.16
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model. The weighted-average grant date
fair value of options granted during the nine months ended March 29, 2003 was
$5.72. No options were granted during the three months ended March 29, 2003.
7. 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 Nine Months Ended
Mar. 29, Mar. 30, Mar. 29, Mar. 30,
2003 2002 2003 2002
-------- ------- -------- --------
Net Income $ 5,886 $ 4,646 $ 25,781 $ 15,849
Changes in:
Unrealized (losses)/gains
on investments,
net of tax (102) (20) 109 (65)
Foreign currency
translation adjustments, net 1,091 (60) 746 (698)
Unrealized gains/(losses) on derivatives
held for hedging purposes, net of tax 284 1,102 2,711 (331)
-------- ------- -------- --------
Comprehensive income $ 7,159 $ 5,668 $ 29,347 $ 14,755
======== ======= ======== ========
The Company's accumulated other comprehensive loss is set forth below:
Balance Balance
Mar. 29, June 29,
2003 2002
--------- ----------
Unrealized losses
on investments,
net of tax $ (183) $ (292)
Foreign currency
translation adjustments, net (2,872) (3,618)
Pension adjustments, net of tax (305) (305)
Unrealized losses on derivatives
held for hedging purposes, net of tax (485) (3,196)
-------- -------
Total $(3,845) $(7,411)
======== =======
8. 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 statements of consolidated 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 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
$4,994 and $8,646 for the three months and $14,975 and $26,438 for the nine
months ended March 29, 2003 and March 30, 2002, 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
Direct Direct and Display
Marketing-US Sales-US Apparel Products International Total
----------- ----------- ----------- ----------- ------------- ------
Three months ended
Mar. 29, 2003
Net sales $62,626 $27,439 $ 9,319 $18,577 $ 9,306 $127,267
Profit (loss)
from
operations 13,126 2,815 (1,347) 278 152 15,024
Less
adjustments
listed above 4,994
Income before
income taxes $ 10,030
Three months ended
Mar. 30, 2002
Net sales $66,466 $27,066 $11,960 $18,342 $9,045 $132,879
Profit (loss)
from
operations 13,691 2,620 (992) 411 457 16,187
Less
adjustments
listed above 8,646
Income before
income taxes $ 7,541
Packaging
Direct Direct and Display
Marketing-US Sales-US Apparel Products International Total
----------- ----------- ----------- ----------- ------------- ------
Nine months ended
Mar. 29, 2003
Net sales $207,406 $82,350 $28,924 $60,891 $29,146 $408,717
Profit (loss)
from
operations 47,060 8,824 (2,440) 1,863 1,758 57,065
Less
adjustments
listed above 14,975
Income before
income taxes $ 42,090
Nine months ended
Mar. 30, 2002
Net sales $217,674 $79,958 $36,951 $59,877 $29,466 $423,926
Profit (loss)
from
operations 47,851 6,769 (1,348) 1,369 2,058 56,699
Less
adjustments
listed above 26,438
Income before
income taxes $ 30,261
9. 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)". Adoption of this Statement is required for exit activities
initiated after December 31, 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, the statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the effect of the
method used in reported results. The Company adopted this Statement in the
third quarter of fiscal year 2003.
10. 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.
11. Subsequent Events
- ------------------------
On March 31, 2003, the Company acquired certain assets of the payroll
division of Parkwood Computer Services, Inc. for consideration of
approximately $1,121. The newly formed NEBS Payroll Service Limited will
offer payroll services to small businesses across Canada. The purchase price,
including acquisition costs, was allocated to the net tangible assets
acquired based on the fair value of such assets. The excess cost over fair
value of the net tangible assets acquired was $445, of which $41 and $37 were
allocated to customer lists and tradenames, respectively, and the balance of
$367 to goodwill. These allocations are subject to final valuations. The
Company does not believe these initial allocations will change materially.
On April 23, 2003, the Company entered into a definitive agreement to
acquire all the outstanding shares and retire the debt of Safeguard Business
Systems, Inc., a manufacturer and marketer of checks, check-writing systems
and business forms to small businesses. The Company will pay $72,500 in cash,
subject to a post-closing working capital adjustment. The transaction is
anticipated to close in early June 2003, subject to regulatory and Safeguard
Business Systems shareholder approvals.
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 and golf pro shops, 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 and golf industries. "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 $5.6 million or 4.2% to $127.3 million in the third
quarter of fiscal year 2003 from $132.9 million in last year's third quarter.
The sales change included decreases of approximately $3.8 million in the
Direct Marketing-US segment and $2.6 million in the Apparel segment and are
primarily attributable to weakness in the economy and, with respect to the
Apparel segment, reduced discretionary business spending by corporate
customers. These decreases were partially offset by an increase of $.4
million in sales of the Company's Direct Sales-US segment which is benefiting
from the implementation of direct marketing strategies and $.2 million in
sales in the Packaging and Display Segments which is benefiting from improved
order rates from larger customers in the manufacturing market. Net sales in
the International segment increased $.2 primarily as a result of foreign
currencies strengthening against the U.S. dollar.
Net sales decreased $15.2 million or 3.6% to $408.7 million for the first
nine months of fiscal year 2003 from $423.9 million in last year's comparable
period. The sales change included decreases of approximately $10.3 million in
the Direct Marketing-US segment, $8.0 million in the Apparel segment and are
primarily attributable to weakness in the economy and, with respect to the
Apparel segment, reduced discretionary business spending by corporate
customers. A decrease of $.3 million in the International segment was
principally due to the timing of shipments in the first quarter offset by
foreign currencies strengthening against the U.S. dollar for the first nine
months. These decreases were partially offset by increases of $2.4 million in
sales of the Company's Direct Sales-US segment which is benefiting from the
implementation of direct marketing strategies and $1.0 million in the
Packaging and Display segment which is benefiting from improved order rates
from larger customers in the manufacturing market.
For the third quarter of fiscal year 2003, cost of sales improved to 43.0%
of sales from 44.1% in last year's comparable period. For the first nine
months of fiscal year 2003, cost of sales improved to 42.1% from 43.5% in
last year's comparable period. This is the result of a shift in channel and
product mix, which resulted in a lower percentage of total sales coming from
the Apparel segment. The Apparel segment has higher cost of sales as a
percentage of sales than the other segments. In addition, gross margin in
the Apparel segment improved due to a shift in their sales mix tied to lower
sales to wholesalers. The Company also benefited from improvements in
material costs as a result of favorable vendor negotiations. Cost of sales as
a percent of sales is expected to increase slightly for the remainder of the
fiscal year.*
Selling and advertising expense increased to 35.0% of sales in the third
quarter of fiscal year 2003 as compared to 34.7% of sales in last year's
comparable quarter as a result of the effect of call center fixed costs and
the sales decrease as well as an increase in the channel mix percent of the
Direct Sales-US segment which has a higher selling and advertising percent of
sales relative to the other segments. These increases were partially offset
by lower amortization expense. For the first nine months of fiscal year 2003,
selling and advertising expense decreased to 34.3% as compared to 34.4% of
sales in last year's comparable period the result of cost management and
lower amortization expense. Selling and advertising expense as a percentage
of sales is expected to decrease slightly for the remainder of the fiscal
year.*
General and administrative expense increased to 13.7% of sales in the
third quarter of fiscal year 2003 from 13.0% of sales in last year's
comparable quarter. The increase is due to higher legal expense and the
effect of the sales decrease offset by lower incentive compensation. For the
first nine months of fiscal year 2003, general and administrative expense
increased to 13.7% of sales from 12.7% in last year's comparable period. The
increase is due to higher incentive compensation, legal costs and realized
losses on deferred compensation investments in the first nine months in
fiscal year 2003 as compared to last year's comparable period. General and
administrative expense as a percent of sales is expected to increase slightly
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
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 began 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 charge in
fiscal year 2001 of $3.6 million 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 closed manufacturing facility in Ogden,
Utah is classified on the balance sheet as property held for sale. The property is carried at net
book value which approximates fair value less the cost to sell. 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 ------------- ------------- ------------- ---------
Mar. 29, 2003
Balance
Dec. 28, 2002 $ 850 $ 116 $ 0 $ 966
Payments
for the period (124) (34) 0 (158)
------- ------- ------- -------
Balance
Mar. 29, 2003 $ 726 $ 82 $ 0 $ 808
======= ======= ======= =======
First Restructuring Second Restructuring
Employee
Facility termination Facility
closure costs benefit costs closure costs Total
Nine Months Ended ------------- ------------- ------------- ---------
Mar. 29, 2003
Balance
June 29, 2002 $1,038 $ 166 $ 451 $1,655
Payments
for the period (312) (84) (451) (847)
------- ------- ------- -------
Balance
Mar. 29, 2003 $ 726 $ 82 $ 0 $ 808
======= ======= ======= =======
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 1.3% of sales in the third quarter of fiscal year
2003 as compared to 2.5% of sales in the prior year's comparable period. In
the first nine months of fiscal 2003 interest expense was 1.6% of sales as
compared to 2.4% of sales in the prior year's comparable period. The
decrease is the result of a lower average balance of debt outstanding as
compared to the same period last year. Proceeds from the sale of the
Company's investment in Advantage Payroll Services, Inc., along with net
cash provided by operating activities, were used to reduce the debt.
The provision for income taxes as a percentage of pretax income was 41.3%
for the third quarter and 38.8% for the first nine months of fiscal year 2003
compared to 38.4% for both the same quarter in the prior year and the first
nine months of fiscal year 2002. The change is the result of an increase in
the required state tax provision due to recently enacted tax legislation.
The provision for income taxes as a percentage of pretax income is expected
to remain consistent with the first nine months of fiscal year 2003 for the
remainder of the current year.*
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 extensive
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 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)". Adoption of this Statement is required for exit activities
initiated after December 31, 2003
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In addition, the
statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the effect
of the method used in reported results. The Company adopted this Statement in
the third quarter of fiscal year 2003.
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities for the nine months ended March 29,
2003 was $34.4 million and represented a decrease of $16.6 million from the
$51.0 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 and income taxes related to the gain
on the sale of equity interests in Advantage Payroll Services, Inc., as well
as the benefit from an inventory reduction in last year's comparable period
versus an increase in the current year.
Working capital at March 29, 2003 totaled $60.6 million, including $5.7
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
terminating interest rate swaps and timing of accounts payable partially
offset by a decrease in accounts receivable due to a reduction in days sales
outstanding.
Capital expenditures for the nine months ended March 29, 2003 were $11.5
million as compared to $11.4 million during last year's comparable period.
Capital expenditures in the first nine months of fiscal year 2003 included
improvements in our information systems' 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 systems'
capabilities and investments to enhance manufacturing capability.*
In July 2002, the Company invested, through the exercise of warrants, an
additional $5.4 million in the common stock of Advantage Payroll Services,
Inc. ("Advantage"). 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. In the second quarter, the
Company received the second payment of proceeds and recognized a gain of $4.1
million. In the third quarter, the Company received the third and final
payment of proceeds and recognized a gain of $1.0 million. The Company
recognized a total gain of $11.4 million for the nine months ended March 29,
2003.
The Company used the proceeds from the sale of the Advantage investment to
pay down floating rate debt and to terminate three interest rate swap
agreements with a notional amount of $75.0 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
termination payments equivalent to the fair value of the swaps totaling $3.3
million. This amount, which was reclassified from other comprehensive income
to other expense, represents a loss on settlement of interest rate swaps to
terminate the agreements.
During the nine months ended March 29, 2003, $4.9 million was spent to
repurchase 221 thousand shares of the Company's common stock. There were no
repurchases of the Company's common stock during fiscal year 2002.
In addition to its present cash and short-term investment balances, the
Company has historically 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 March 29, 2003,
the Company had $46.0 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 borrowed at the Eurodollar rate plus a spread for one
year, after which the interest rate was 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 March 29, 2003, the Company had $50.0
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 as of March 29,
2003 had one interest rate swap agreement with one of the banks party to the
credit agreement. This swap agreement contains a notional principal amount
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. At March 29, 2003 the notional principal amount
outstanding under the interest rate swap agreement totaled $20.0 million. In
the first nine months of fiscal year 2003, a credit of approximately $16
thousand was transferred from other comprehensive income to earnings related
to the ineffective portion of the Company's swaps. A credit of approximately
$25 thousand was transferred during the comparable period in the prior year.
During the first nine months of fiscal year 2003, the Company terminated
three other interest rate swaps at a pretax cost of $3.3 million.
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, 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 and golf industries. 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 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
has been to a relatively small number of wholesalers serving the promotional
products/advertising specialty market. Sales to these wholesalers has been
recently decreasing, and has been partially offset by increases in direct
sales to advertising specialty dealers and golf pro shops. 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 and the customers of acquired
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 and/or performance inconsistent with our pre-
acquisition expectations may adversely affect the benefits that we expect to
obtain from any given acquisition and could result in an impairment of
intangible assets, which would reduce our reported earnings for the period
the impairment occurs.
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.
During the first nine months of fiscal year 2003 as part of paying down
floating rate debt, the Company terminated three interest rate swap
agreements with a notional amount of $75.0 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
termination payments equivalent to the fair value of the swaps totaling $3.3
million. This amount, which was reclassified from other comprehensive income
to other expense, represents a loss on settlement of interest rate swaps to
terminate the agreements.
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
- --------------------------
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a. Exhibits
Exhibit No. Description
---------- -----------
10.1 Third Amendment to Second Amended and Restated
Revolving Credit Agreement dated as of March 13,
2003, by and between the Company, Fleet National
Bank, and certain other financial institutions.
10.2 Fourth Amendment to Second Amended and Restated
Revolving Credit Agreement dated as of April 18,
2003, by and between the Company, Fleet National
Bank, and certain other financial institutions.
10.3* New England Business Service, Inc. Deferred
Compensation Plan Trust Agreement dated August 29,
2002.
10.4* New England Business Service, Inc. Supplemental
Executive Retirement Plan, effective January 4,
1999, as amended and restated effective April 25,
2003.
10.5* First Amendment to Change in Control and Severance
Agreement dated May 5, 2003 between the Company and
Robert J. Murray.
10.6* Form of First Amendment to Change in Control Severance
Agreement dated May 5, 2003 between the Company and
certain executive officers of the Company listed in
Exhibit 10.18.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended June 29, 2002.
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).
* 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.
None
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)
May 12, 2003
- ----------------- /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.
May 12, 2003 /s/Robert J. Murray
- ----------------- --------------------
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.
May 12, 2003 /s/Daniel M. Junius
- ----------------- --------------------
Date Daniel M. Junius
Executive Vice President-Chief
Financial Officer
(Principal Financial Officer)