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 March 25, 2000.
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-11427
NEW ENGLAND BUSINESS SERVICE, INC.
----------------------------------
(Exact name of the registrant as specified in its charter)
Delaware 04-2942374
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Main Street
Groton, Massachusetts, 01471
----------------------------
(Address of principal executive offices)
(Zip Code)
(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 May 8, 2000.
was 13,508,713.
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
(unaudited)
Mar. 25, June 26,
2000 1999
ASSETS
Current Assets
Cash and cash equivalents $ 9,816 $ 5,484
Accounts receivable - net 54,162 52,546
Inventories 23,516 21,538
Direct mail advertising and prepaid expenses 12,299 12,946
Deferred income tax benefit 7,271 7,189
--------- ---------
Total current assets 107,064 99,703
Property and equipment - net 60,067 55,172
Property held for sale - 839
Deferred income tax benefit 6,271 6,353
Goodwill - net 61,265 62,626
Customer Lists - net 25,881 31,590
Tradenames - net 30,997 31,610
Long-term investments 13,369 -
Other assets - net 11,303 12,369
--------- ---------
TOTAL ASSETS $ 316,217 $ 300,262
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 15,927 $ 15,478
Accrued expenses 31,794 30,297
--------- ---------
Total current liabilities 47,721 45,775
Revolving line of credit 141,500 128,000
Deferred income taxes 4,958 4,958
STOCKHOLDERS' EQUITY
Common stock 15,389 15,358
Additional paid-in capital 50,155 49,500
Accumulated other comprehensive loss (2,638) (2,654)
Retained earnings 100,774 86,902
--------- ---------
Total 163,680 149,106
Less: Treasury stock (41,642) (27,577)
--------- ---------
Stockholders' Equity 122,038 121,529
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 316,217 $ 300,262
========= =========
See Notes to Unaudited Condensed Consolidated Financial Statements
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
Three Months Ended Nine Months Ended
Mar. 25, Mar. 27, Mar. 25, Mar. 27,
2000 1999 2000 1999
------- -------- -------- --------
NET SALES $117,367 $115,044 $368,243 $355,027
OPERATING EXPENSES:
Cost of sales 42,555 41,920 132,224 129,728
Selling and advertising 44,403 43,444 139,014 133,779
General and administrative 17,543 17,312 56,168 53,119
-------- -------- -------- --------
Total operating expenses 104,501 102,676 327,406 316,626
INCOME FROM OPERATIONS 12,866 12,368 40,837 38,401
OTHER INCOME/(EXPENSE):
Interest income 56 133 95 185
Interest expense (2,097) (2,065) (6,122) (6,545)
Gain on pension settlement - - - 259
-------- -------- -------- --------
INCOME BEFORE TAXES 10,825 10,436 34,810 32,300
PROVISION FOR INCOME TAXES 3,344 4,217 12,657 12,691
-------- -------- -------- --------
NET INCOME 7,481 6,219 22,153 19,609
OTHER COMPREHENSIVE INCOME/(LOSS) (125) 167 16 (602)
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 7,356 $ 6,386 $ 22,169 $ 19,007
======== ======== ======== ========
PER SHARE AMOUNTS:
Basic Earnings Per Share $ .55 $ .43 $ 1.61 $ 1.36
======== ======== ======== ========
Diluted Earnings Per Share $ .55 $ .42 $ 1.59 $ 1.32
======== ======== ======== ========
Dividends $ .20 $ .20 $ .60 $ .60
======== ======== ======== ========
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 13,544 14,481 13,783 14,402
Plus incremental shares from
assumed conversion of
stock options 82 480 190 428
-------- -------- -------- --------
DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING 13,626 14,961 13,973 14,830
======== ======== ======== ========
See Notes to Unaudited Condensed Consolidated Financial Statements
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(unaudited)
Nine Months Ended
Mar. 25, Mar. 27,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,153 $ 19,609
Adjustments to reconcile net income to cash:
Depreciation 10,795 9,897
Amortization 8,670 9,348
Gain on disposal of assets (103) (22)
Deferred income taxes 59 82
Gain on pension settlement - (259)
Provision for losses on accounts receivable 3,143 3,038
Employee benefit charges 106 2,999
Changes in assets and liabilities:
Accounts receivable (4,751) (4,167)
Inventories and prepaid expenses (1,340) (1,350)
Accounts payable 470 (916)
Income taxes payable 1,174 (3,809)
Accrued expenses 597 (3,268)
-------- --------
Net cash provided by operating activities 40,973 31,182
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (16,045) (13,246)
Proceeds from sale of facility and equipment 1,153 545
Purchases of long-term investments (13,369) -
Acquisition of business-net of cash acquired - (191)
Other Assets - 88
-------- --------
Net cash used in investing activities (28,261) (12,804)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (75,250) (58,000)
Proceeds from borrowings under credit line 88,750 44,500
Proceeds from issuance of common stock 455 2,462
Acquisition of treasury stock (14,065) (1,489)
Dividends paid (8,280) (8,641)
-------- --------
Net cash used in financing activities (8,390) (21,168)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 10 (9)
-------- --------
NET INCREASE/ (DECREASE) IN CASH AND
CASH EQUIVALENTS 4,332 (2,799)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
5,484 10,823
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,816 $ 8,024
======== ========
See Notes to Unaudited Condensed Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation/Accounting Policies
- ---------------------------------------------
The consolidated financial statements contained in this report are unaudited
(except for June 26, 1999 amounts) but reflect all adjustments, consisting
only of normal recurring adjustments, which are, in the opinion of management,
necessary for a fair statement of the results of the interim periods
reflected. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to applicable rules and regulations of
the Securities and Exchange Commission. The consolidated financial statements
included herein should be read in conjunction with the financial statements
and notes thereto, appearing in the Company's Annual Report on Form 10-K for
the fiscal year ended June 26, 1999. 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 26, 1999. The Company has consistently followed those policies in
preparing this report. The results of operations for the interim period
reported herein are not necessarily indicative of results to be expected for
the full year.
2. Acquisitions
- ----------------
In fiscal 1998 the Company acquired both Rapidforms, Inc. and McBee Systems,
Inc. As part of the purchase accounting for both acquisitions, and included in
the allocation of the acquisition cost, were liabilities recorded to cover the
anticipated costs related to plans to close redundant facilities and reduce
personnel. Approximately $5,552,000 was accrued. The remaining liability as
of March 25, 2000 was $267,000 and was related to employee termination
benefits. For the three months ended March 25, 2000, $237,000 had been spent
to reduce this liability and for the nine months ended March 25, 2000, $868,000
had been spent.
The Company anticipates that the remaining liabilities will be resolved by
the end of fiscal year 2000. Should the integration liabilities for McBee and
Rapidforms be settled at amounts less than their original estimates, the excess
will reduce the amount of recorded goodwill.
3. Inventories
- ---------------
Inventories are carried at the lower of first-in, first-out cost or market.
Inventories at March 25, 2000 and June 26, 1999 consisted of:
(unaudited)
Mar. 25, June 26,
2000 1999
-------- --------
Raw paper $ 1,621,000 $ 1,692,000
Business forms and related office products 21,895,000 19,846,000
----------- ------------
Total $23,516,000 $ 21,538,000
=========== ============
4. Long-Term Investments
- -------------------------
In March 2000, the Company invested $12.9 million and $.5 million,
respectively, in the common stock of Advantage Business Services Holdings, Inc.
and the convertible preferred stock of WebNow.com, Inc. These investments
represent less than a 20% voting interest in these companies. Also, the
securities are not considered to be marketable equity securities under SFAS 115
because both of the companies are currently private. These investments are
carried at cost and will periodically be evaluated to determine whether a
decline in fair value below the original cost basis has occurred and is other
than temporary. Both of the investments are classified as long term assets on
the condensed consolidated balance sheet because of their non-marketable nature
and management's intent to hold these investments for the long-term.
5. Income Taxes
- ----------------
In the third quarter of fiscal 2000 the Company received a favorable tax
ruling from the Commonwealth of Massachusetts. This tax ruling allowed the
Company to not only revise its current year estimates of total taxes that it
will be required to pay (both now and in the future), but also to amend
previous years' tax returns. The financial impact of this ruling is reflected
in the results of operations for the quarter ended March 25, 2000.
6. Financial Information by Business Segment
- ---------------------------------------------
The Company has identified three reportable segments. The first is titled
"Printed Products-Direct Marketing" and represents those business operations
that sell primarily printed products such as checks and business forms to small
businesses through direct marketing. The second segment, "Printed Products-
Direct Sales," also sells checks and business forms to small businesses;
however, they sell through either distributors or by directly selling to the
customer. "Packaging and Display Products" is the third segment and primarily
resells items including packaging and shipping supplies and retail signage.
These products are marketed through a combination of direct marketing and
direct selling efforts.
The Company evaluates segment performance and allocates resources based on a
profit from operations measure. This measure is akin to income from operations
as reported on the statements of consolidated income and comprehensive 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 amortization, 401(k) expenses, integration charges
and corporate overhead. These items are not used by the chief operating
decision maker in assessing segment results. In order to reconcile the segment
numbers to the Company's income before income taxes, adjustments representing
the items listed above totaling $8,445,000 and $9,215,000 for the three months
ended March 25, 2000 and March 27, 1999 and $28,702,000 and $30,006,000 for the
nine months ended March 25, 2000 and March 27, 1999, 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 (unaudited).
Printed Products
----------------
Direct Packaging and
------ -------------
Marketing Direct Sales Display Products Total
--------- ------------ ---------------- -----
Three months ended
Mar. 25, 2000
Net sales $ 73,153,000 $ 26,352,000 $ 17,862,000 $117,367,000
Profit from
operations 16,513,000 1,824,000 933,000 19,270,000
Three months ended
Mar. 27, 1999
Net sales $ 74,265,000 $ 24,124,000 $ 16,655,000 $115,044,000
Profit from
operations 16,093,000 3,044,000 514,000 19,651,000
Nine months ended
Mar. 25, 2000
Net sales $235,332,000 $ 76,359,000 $ 56,552,000 $368,243,000
Profit from
operations 54,594,000 5,464,000 3,454,000 63,512,000
Nine months ended
Mar. 27, 1999
Net sales $232,974,000 $ 69,371,000 $ 52,682,000 $355,027,000
Profit from
operations 51,525,000 8,358,000 2,423,000 62,306,000
The amounts shown reflect a shift of the allocation of centralized information
systems costs to the Printed Products-Direct Sales segment in the first three
quarters of fiscal year 2000 from the Printed Products-Direct Marketing segment
due to conversion of McBee's order-taking system to the NEBS Direct Marketing
order entry system in August 1999.
7. New Accounting Pronouncements
- ---------------------------------
In June, 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
Company will adopt this standard in the beginning of fiscal 2001. The Company
has determined based on its preliminary assessment of the standard, that the
adoption of this standard will not have a material impact on its consolidated
financial statements.
8. Reclassifications
- ---------------------
Certain reclassifications have been made to the results of the comparative
prior quarter and nine-month period so as to be in conformity with the current
quarter and nine-month period presentation.
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 clothing 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 has identified three reportable segments. The first is titled
"Printed Products-Direct Marketing" and represents those business operations
that sell primarily printed products such as checks and business forms to small
businesses through direct marketing. The second segment, "Printed Products-
Direct Sales," also sells checks and business forms to small businesses;
however, they sell through either distributors or by directly selling to the
customer. "Packaging and Display Products" is the third segment and primarily
resells items including packaging and shipping supplies and retail signage.
These products are marketed through a combination of direct marketing and
direct selling efforts.
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 that 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 increased $2.3 million or 2.0% to $117.4 million in the third
quarter of fiscal year 2000 from $115.0 million in last year's third quarter.
Net sales from the Direct Selling Segment increased $2.2 million or 9.2%, and
was attributable to growth in bank referral contracts. Net sales from the
Packaging and Display Segment also increased $1.2 million or 7.2% and was
primarily a result of expanded distribution facilities. Net sales in the
Direct Marketing Segment decreased $1.1 million or 1.5% due to higher
discounting.
Net sales increased $13.2 million or 3.8% to $368.2 million for the first
nine months of fiscal year 2000 from $355.0 million in last year's nine months.
The sales increase was due to similar reasons as outlined above regarding the
third quarter results, in addition to growth in sales of seasonal holiday cards
and personalized work clothing during the first six months of fiscal year 2000.
These products are sold principally through the Direct Marketing Segment.
For the third quarter of fiscal year 2000, cost of sales decreased slightly
to 36.3% of sales from 36.4% in last year's comparable period. For the first
nine months of fiscal year 2000, cost of sales decreased to 35.9% of sales from
36.5% in last year's comparable period. The decrease can be attributed to
operational consolidations and increased handling charges to customers, which
reduce net freight costs.
Selling and advertising expense remained consistent at 37.8% of sales in the
third quarter of fiscal year 2000 from last year's comparable quarter. For the
first nine months of fiscal year 2000 selling and advertising expense increased
slightly to 37.8% of sales from 37.7% of sales in last year's comparable
period. Management anticipates that such costs will remain consistent for the
remainder of fiscal 2000.*
General and administrative expense remained consistent at 15.0% of sales in
the third quarter of fiscal year 2000 from last year's comparable quarter.
General and administrative costs increased to 15.3% of sales in the first nine
months of fiscal year 2000 from 15.0% of sales in the last year's comparable
period. The increase was principally the result of increased spending levels
associated with the Company's program to reengineer its financial and
operational information systems and ensure its capability to operate in the
year 2000. Management anticipates that these costs will continue to increase
slightly for the remainder of fiscal 2000.* As discussed below, the Company
has had no indication that its Y2K changeover was not successful.
Interest expense remained consistent at 1.8% of sales in the third quarter of
fiscal year 2000 and 1.7% for the first nine months of fiscal year 2000
compared to 1.8% of sales in the prior year's comparable periods. The decrease
can be attributed to lower average debt outstanding used for financing
activities, partially offset by an overall increase in the effective interest
rate.
The provision for income taxes as a percentage of pre-tax income decreased to
30.9% in the third quarter of fiscal year 2000 from 40.4% in the comparable
quarter in fiscal year 1999 primarily as a result of a one-time tax benefit due
to a favorable state revenue ruling effecting both current and prior years'
taxes. On a year-to-date basis the provision for income taxes decreased to
36.4% of pre-tax income from 39.3% of pre-tax income in the prior period due to
the reason stated above. The Company anticipates that its overall effective
tax rate for future years, based on the results of the ruling, will decrease to
approximately 38.4%.*
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard will be adopted by the
Company in fiscal year 2001. The Company has determined based on its
preliminary assessment of the standard, that the adoption of this standard will
have an immaterial impact on its consolidated financial statements.
YEAR 2000
- ---------
As part of a five-year plan instituted during fiscal year 1996 to enhance the
Company's information systems and address Year 2000 issues, the Company's
operational information systems were inventoried and assessed for Year 2000
compliance, and recommended remediation efforts with respect to all of the
Company's mission critical systems were completed. The Company conducted
extensive testing to ensure the efficiency of its remediation efforts, and
based on currently available information derived from such testing and the
passing of the January 1, 2000 date, the Company is not aware of any Year 2000
compliance problems affecting its internal systems.
In addition, the Company communicated with key vendors in order to assess
their ability to maintain normal operations in the Year 2000. Based on its
assessment of the Year 2000 readiness of its key vendors and the passing of the
January 1, 2000 date, the Company is not aware of any Year 2000 compliance
problems affecting these vendors.
The Company also inventoried and assessed the majority of the systems
associated with the functioning of its plant, property and equipment. There
were no significant Year 2000 compliance problems that occurred subsequent to
January 1, 2000.
Further, the Company has approximately 2.5 million active customers, and the
failure of any one customer due to a Year 2000 issue would not have a material
adverse impact on the Company's financial performance or long-term prospects.
The Company is not aware of any Year 2000 compliance problems affecting any
major grouping of its customers since January 1, 2000.
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities for the nine months ended March 25,
2000 was $40.9 million and represented an increase of $9.7 million from the
$31.2 million provided in the comparable period last year. The increase in
operating cash flow was primarily the result of an increase in net income,
taxes payable and other accrued expenses, offset by a decrease in non-cash
items. The Company anticipates that cash provided by operating activities by
the full year will approximate that seen in the third quarter. Increases in
net income will be offset by commensurate reductions in other working capital
line items as certain liability balances are reduced.*
Capital expenditures for the nine months ended March 25, 2000 were $16.0
million versus the $13.2 million expended during last year's comparable period.
Capital expenditures in the first nine months of fiscal year 1999 and fiscal
year 2000 included expenditures for information systems infrastructure and
manufacturing related equipment. In addition, the Company constructed a $1.2
million warehouse distribution facility in Lithia Springs, Georgia and $1.7
million addition to the Midland, Ontario location in the first nine months of
fiscal years 2000 and 1999, respectively. The Company anticipates that total
capital outlays will approximate $22 million in fiscal year 2000.* In addition
to capital expenditures, the Company invested approximately $13.4 million in
two separate companies. These investments were partially funded by borrowings
under the Company's lines of credit. Significant cash outflows also occurred
in the first nine months of fiscal 2000 to pay dividends and repurchase common
stock. Stock repurchases totaled approximately $14.1 million for the nine
months ended March 25, 2000. The Company anticipates that such stock
repurchases will continue to occur in the future.*
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 continues
to amend the terms of its committed, unsecured, revolving line of credit
agreement in order to facilitate certain transactions. The total committed
line currently stands at $165 million. At March 25, 2000, the Company had
$141.5 million of outstanding debt under this credit facility. The credit
agreement contains various restrictive covenants which, among other things,
require the Company to maintain certain minimum levels of consolidated net
worth and specific consolidated debt and fixed charge ratios. The Company is
currently in compliance with these covenants.
In order to effectively fix the interest rate on a portion of the debt
outstanding under the revolving line of credit, the Company has entered into
interest rate swap agreements with two banks. These swap agreements contain
notional principal amounts and other terms determined with respect to the
Company's forecasts of future cash flows and borrowing requirements. At March
25, 2000, the notional principal amount outstanding of the interest rate swap
agreements totaled $77.5 million.
The Company anticipates that its current cash on hand, cash flow from
operations and additional availability under the line of credit will be
sufficient to meet the Company's liquidity requirements for its operations and
capital expenditures during fiscal year 2000.* However, the Company may pursue
additional acquisitions from time to time which would likely be funded through
the use of available cash, the issuance of stock, the obtaining of additional
credit, or any combination thereof.*
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, and the ability to attract and retain a large
number of individual customers. Known material risks that may affect those
critical success factors are described below.
Our core business faces increased competition from new sources, such as
office supply superstores and Internet-based vendors. 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 have entered our core
business of selling standardized business forms, checks and related products to
small businesses. Because of their size, these superstores have the buying
power to offer 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, these national superstore
competitors have greater financial strength to reduce prices or increase
promotional discounts in order to seek or retain market share.
Recently, Internet-based vendors have begun to compete in our core business.
These vendors include both start-up ventures as well as the online stores of
the office supply national chains. We believe that the favored business model
for many Internet-based vendors is to seek market share as rapidly as possible
through significantly reduced prices and deep discounting.
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 has 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 long-term 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 mature products. Our sales and profits have
been adversely affected in the past by recession-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 long-term 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 grown 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 telemarket to prospective customers.
The cost of paper to produce our products, catalogs and advertising materials
makes up a significant portion of our total costs. We also 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 increase prices for our products
sufficiently to offset increases in paper costs and postal rates. If we are
unable to offset these cost 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.
In order to obtain favorable pricing, we have selected a limited number of
vendors to provide key services to our business. Examples of this are as
follows:
- MCI WorldCom provides most of the toll-free telephone lines that
we use in connection with our mail order business,
- we use United Parcel Service to deliver most of the products
that we ship to customers,
- we use R.R. Donnelley and Sons for the printing and processing
of most of the catalogs that we mail each year,
- we rely on the postal services of the countries in which we do
business to deliver our catalogs and other advertising 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 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 out-sourced 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.
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 borrowing, 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 confirm 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
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The Company is exposed to a number of market risks, including the effects of
changes in foreign currency exchange rates and interest rates. Investments in
and advances to foreign subsidiaries and branches, and their resultant
operations, denominated in foreign currencies, create exposures to changes in
exchange rates. The Company's utilization of its revolving line of credit
creates an exposure to changes in interest rates. The effect of changes in
exchange rates and interest rates on the Company's earnings generally has been
small relative to other factors that also affect earnings, such as business
unit sales and operating margins. For more information on these market risks
and financial exposures, see the Notes to Consolidated Financial Statements
included in the Annual Report on Form 10-K for the year ended June 26, 1999.
The Company does not hold or issue financial instruments for trading, profit or
speculative purposes.
In order to effectively convert the interest rate of a portion of the
Company's debt from a Eurodollar based floating rate to a fixed rate, the
company has entered into 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 interest rate instruments, based on
historical foreign currency rate movements and the fair value of market-rate
sensitive instruments , the Company does not believe that near term changes in
foreign currency or interest rates will have a material impact on its future
earnings, fair values or cash flows.
PART II - OTHER INFORMATION
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Item 1. LEGAL PROCEEDINGS
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To the Company's knowledge, no material legal proceedings are pending on the
date hereof to which the Company is a party or to which any property of the
Company is subject.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable
Item 5. OTHER INFORMATION
- --------------------------
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a. Exhibits
Exhibit No. Description
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10(a) Fifth Amendment to Amended and Restated Revolving Credit
Agreement dated as of January 21, 2000, by and among New
England Business Service, Inc., BankBoston, N.A. and
Fleet National Bank )together with certain other
Financial institutions, the "Banks"), BankBoston, N.A.,
as agent for the Banks, and Fleet National Bank, as
documentation agent for the Banks.
27 Financial Data Schedule
99 Independent Accountant's Review Report for the
three-month and nine-month period ended March 25, 2000.
b. Reports on Form 8-K.
Not applicable
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 9, 2000 /s/Daniel M. Junius
- ----------- -------------------
Date Daniel M. Junius
Senior Vice President-Chief
Financial Officer
(Principal Financial and
Accounting Officer)