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 24, 2001.
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 3, 2001
was 12,496,447.
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
- ----------------------------
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
Mar. 24, June 24,
2001 2000
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 7,425 $ 3,469
Accounts receivable - net 60,689 55,483
Inventories 45,137 24,578
Direct mail advertising and prepaid expenses 14,128 16,445
Deferred income tax benefit 10,005 8,241
-------- --------
Total current assets 137,384 108,216
Property and Equipment - net 74,223 64,406
Deferred Income Tax Benefit 15,700 8,796
Goodwill - net 73,172 60,567
Customer Lists - net 18,447 23,974
Tradenames - net 30,277 30,792
Long-Term Investments 13,369 13,369
Other Assets - net 12,729 13,551
-------- --------
TOTAL ASSETS $375,301 $323,671
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 19,638 $ 18,951
Accrued expenses 40,203 32,484
Current portion of long term debt 1,286 819
-------- --------
Total current liabilities 61,127 52,254
Long Term Debt 190,912 135,110
Deferred Income Taxes 10,542 10,578
STOCKHOLDERS' EQUITY
Common stock 15,508 15,399
Additional paid-in capital 52,024 50,337
Unamortized value of restricted stock awards (209) (115)
Accumulated other comprehensive loss (7,413) (3,399)
Retained earnings 112,555 105,278
-------- --------
Total 172,465 167,500
Less Treasury stock, at cost (59,745) (41,771)
-------- --------
Stockholders' Equity 112,720 125,729
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $375,301 $323,671
======== ========
See Notes to Unaudited Condensed Consolidated Financial Statements
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
Mar. 24, Mar. 25, Mar. 24, Mar. 25,
2001 2000 2001 2000
-------- -------- -------- ---------
NET SALES $123,179 $117,367 $409,271 $368,243
COST OF SALES 48,707 42,555 160,511 132,224
-------- -------- -------- --------
GROSS PROFIT 74,472 74,812 248,760 236,019
OPERATING EXPENSES:
Selling and advertising 47,211 44,403 148,738 139,014
General and administrative 18,310 17,543 62,198 56,168
Exit costs 42 0 3,429 0
-------- -------- -------- --------
Total operating expenses 65,563 61,946 214,365 195,182
INCOME FROM OPERATIONS 8,909 12,866 34,395 40,837
OTHER INCOME/(EXPENSE):
Interest income 274 56 376 95
Interest expense (3,368) (2,097) (9,897) (6,122)
-------- -------- -------- -------
INCOME BEFORE INCOME TAXES 5,815 10,825 24,874 34,810
PROVISION FOR INCOME TAXES 2,268 3,344 9,701 12,657
-------- -------- -------- -------
NET INCOME $ 3,547 $ 7,481 $ 15,173 $ 22,153
======== ======== ======== ========
PER SHARE AMOUNTS:
Basic Earnings Per Share $ .27 $ .55 $ 1.15 $ 1.61
======== ======== ======== ========
Diluted Earnings Per Share $ .27 $ .55 $ 1.14 $ 1.59
======== ======== ======== ========
Dividends $ .20 $ .20 $ .60 $ .60
======== ======== ======== ========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 12,928 13,544 13,174 13,783
Plus incremental shares from assumed
conversion of stock options 203 82 126 190
-------- -------- -------- --------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 13,131 13,626 13,300 13,973
======== ======== ======== ========
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. 24, Mar. 25,
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 15,173 $ 22,153
Adjustments to reconcile net income to cash:
Depreciation 12,841 10,795
Amortization 9,295 8,670
Loss/(gain) on disposal of asset 169 (103)
Asset impairment loss 1,707 0
Deferred income taxes 0 59
Exit costs 2,153 (878)
Provision for losses on accounts receivable 3,543 3,143
Employee benefit charges 175 106
Changes in assets and liabilities:
Accounts receivable 2,031 (4,751)
Inventories and prepaid expenses (5,149) (1,590)
Accounts payable (4,159) 470
Income taxes payable (824) 1,174
Accrued expenses (713) 1,475
-------- --------
Net cash provided by operating activities 36,242 40,723
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (20,464) (16,045)
Proceeds from sale of facility and equipment 33 1,153
Purchases of long-term investments - (13,369)
Acquisition of business-net of cash acquired (38,613) -
-------- --------
Net cash used in investing activities (59,044) (28,261)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (73,091) (75,250)
Proceeds from credit line 124,400 88,750
Proceeds from issuance of common stock 1,104 455
Acquisition of treasury stock (17,640) (14,065)
Dividends paid (7,897) (8,280)
-------- --------
Net cash provided by (used in)financing 26,876 (8,390)
activities
EFFECT OF EXCHANGE RATE CHANGES ON CASH (118) 10
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,956 4,082
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,469 3,684
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,425 $ 7,766
======== ========
See Notes to Unaudited Condensed Consolidated Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation/Accounting Policies
- --------------------------------------------
The condensed consolidated financial statements contained in this report are
unaudited (except for June 24, 2000 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 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 24, 2000.
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 24, 2000. 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.
2. Acquisitions
- ----------------
In fiscal 1998 the Company acquired McBee Systems, Inc. As part of the
purchase accounting for the acquisition, and included in the allocation of the
acquisition cost, a liability was recorded to cover the anticipated costs
related to a plan to close redundant McBee manufacturing and warehouse
facilities and to reduce the number of manufacturing personnel. Approximately
$1,642,000 was accrued. The remaining liability as of March 24, 2001 was
$58,000 and was related to employee termination benefits. For the nine months
ended March 24, 2001, $89,000 has been spent. There have been no changes in
estimate over this period.
Should the integration liabilities for McBee be settled at amounts less than
their original estimates, the excess will reduce the amount of recorded
goodwill. Should such settlements be in excess of original estimates, the
Company will record a charge to current period operations.
On July 10, 2000, the Company acquired all the outstanding shares of
PremiumWear, Inc. The purchase price was $13.50 per share in cash and totaled
approximately $38,030,000 (net of cash acquired) for the shares plus debt
assumed of $3,856,000. The Company also incurred fees of approximately
$583,000 in connection with the acquisition. Integration liabilities
established in this transaction were not material to the financial statements.
The Company is presently undertaking, but has not yet completed, an allocation
of this purchase price, but anticipates that approximately $15,000,000 will be
allocated to certain intangible assets. These intangible assets are
anticipated to be amortized over approximately 15-20 years.
3. Restructuring and Impairment of Assets
- ----------------------------------------
In the first quarter of fiscal year 2001, the Company recorded a
restructuring charge of $3,387,000 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 has been relocated from Parsippany, New Jersey to the existing
RapidForms facility in Thorofare, New Jersey. In addition, the McBee
manufacturing plant in Damascus, Virginia will be closed and
a portion of leased warehousing space currently occupied by Chiswick in
Sudbury, Massachusetts has been vacated. In Canada, the McBee sales and
marketing organizations have been combined with NEBS Direct Marketing and are
operating under the NEBS name. Approximately 140 employees have been or will
be affected by the restructuring either through elimination of their positions
or relocation. Pursuant to this plan, the following charges and payments have
been recorded (unaudited):
Nine Months Ended
Mar. 24, 2001
Balance Charge Payments or Balance
Type of June 24, (credit) for reductions for Mar. 24,
Liability 2000 the period the period 2001
- --------- --------- ----------- ------------ ------------
Employee termination
benefit costs $0 $2,156,000 $(921,000) $1,235,000
Facility closure
costs $0 $1,273,000 $(272,000) $1,001,000
Additionally, during the first quarter, the Company recognized an impairment charge of $1,707,000 for
the write-off of capitalized internal-use software related to an enterprise resource planning system the
Company no longer plans to implement. This charge is included in general and administrative expenses.
<PAGE
4. Inventories
- --------------
Inventories are carried at the lower of first-in, first-out cost or market.
Inventories at March 24, 2001 and June 24, 2000 consisted of:
(unaudited)
Mar. 24, June 24,
2001 2000
----------- -----------
Raw Material $ 1,994,000 $ 1,804,000
Work in Process 2,157,000 -
Finished Goods 40,986,000 22,774,000
-------- -----------
Total $45,137,000 $24,578,000
=========== ===========
5. Adoption of Statement of Financial Accounting Standard No. 133
Derivatives and Hedging Activities
-----------------------------------
In the first quarter of fiscal 2001, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Such adoption resulted in an initial
credit of $391,000 (net of tax) to Accumulated Other Comprehensive Loss.
The Company is exposed to interest rate risk relating to its variable
rate debt. As part of its overall strategy to manage the level of exposure
to the risk of interest rate fluctuations, the Company uses interest rate
swaps which qualify and are designated as cash flow hedges.
On the date the Company enters into a derivative contract, management
designates the derivative as a hedge of the identified cash flow exposure.
The Company does not enter into derivative transactions that do not qualify
as hedges.
The Company formally documents all relationships between hedging instruments
and hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. In this documentation, the Company
specifically identifies the asset, liability, firm commitment, or forecasted
transaction that has been designated as a hedged item and states how the
hedging instrument is expected to hedge the risks related to the hedged item.
The Company formally measures effectiveness of its hedging relationships both
at the hedge inception and on an ongoing basis in accordance with its risk
management policy.
The Company may discontinue hedge accounting prospectively when it is
determined that the derivative is no longer effective in offsetting changes
in the fair value or cash flows of a hedged item; when the derivative expires
or is sold, terminated, or exercised; or when the derivative is redesignated
to no longer be a hedge instrument.
As discussed above, the Company designates certain derivatives as cash flow
hedges. For all qualifying and highly effective cash flow hedges, the changes
in the fair value of the derivative are recorded in other comprehensive income
<PAGE
(OCI)(see note 6). There can be, however, a portion of the hedge that is
deemed "ineffective" and which can result in a charge to the Company's income
statement. For the quarter ending March 24, 2001 and for the nine months
ended March 23, 2001, the Company's ineffective portion of the hedge was
immaterial to interest expense.
6. Comprehensive Income
- --------------------------
Other Comprehensive Income consists of foreign currency translation
adjustments, unrealized gains and losses on investments and changes in the
fair market value of cash flow hedges. Comprehensive income for the nine months
ending March 24, 2001 also includes the impact of the Company's adoption of
SFAS No. 133 discussed in note 5. The Company's comprehensive income is set
forth below (unaudited):
Three Months Ended Nine Months Ended
Mar. 24, Mar. 25, Mar. 24, Mar. 25,
2001 2000 2001 2000
----------- --------- -------- ----------
Net Income $ 3,547,000 $ 7,481,000 $15,173,000 $22,153,000
Change in unrealized gains and losses
on investments (266,000) - (251,000) -
Change in foreign currency
translation adjustments, net (672,000) (125,000) (1,003,000) 16,000
Unrealized losses on interest
rate swaps, net of tax (1,096,000) - (3,150,000) -
---------- ---------- ---------- ----------
Other comprehensive income 1,513,000 7,356,000 10,769,000 22,169,000
before cumulative effect adjustment
Cumulative effect adjustment recorded
upon the adoption of SFAS 133 - - 391,000 -
---------- ---------- --------- ---------
Comprehensive Income $ 1,513,000 $ 7,356,000 $11,160,000 $22,169,000
=========== =========== =========== ===========
<PAGE
7. Financial Information by Business Segment
- --------------------------------------------
In the first quarter of 2001, the Company changed its internal reporting for
segments. This change was precipitated by the acquisition of PremiumWear,
Inc. and the realignment of the Company's international subsidiaries. The
Company has now identified five reportable segments. Prior year figures have
been restated so as to match the current year presentation. The first 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 primarily through distributors or by directly
selling to the customer in the United States. The third segment, "Apparel",
utilizes independent sales representatives to market its specialty clothing
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 akin 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, 401(k) expenses, 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 $10,731,000 and $8,650,000 for the three months ended
March 24, 2001 and March 25, 2000 and $40,097,000 and $28,907,000 for the nine
months ended March 24, 2001 and March 25, 2000, 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).
Packaging and
Direct Direct Display
Marketing-US Sales-US Apparel Products International Total
----------- ----------- ----------- ----------- ------------- ------
Three months ended
Mar. 24, 2001
Net sales $62,350,000 $23,074,000 $12,351,000 $16,490,000 $8,914,000 $123,179,000
Profit from
operations 13,807,000 1,673,000 506,000 209,000 351,000 16,546,000
Less
adjustments
listed above 10,731,000
Income before
income taxes $ 5,815,000
Three months ended
Mar. 25, 2000
Net sales $66,263,000 $23,733,000 - $17,862,000 $9,509,000 $117,367,000
Profit from
operations 16,274,000 2,144,000 - 933,000 124,000 19,475,000
Less
adjustments
listed above 8,650,000
Income before
income taxes $ 10,825,000
Nine months ended
Mar. 24, 2001
Net sales $210,478,000 $70,917,000 $41,707,000 $57,246,000 $28,923,000 $409,271,000
Profit from
operations 51,478,000 6,616,000 2,628,000 2,633,000 1,616,000 64,971,000
Less
adjustments
listed above 40,097,000
Income before
income taxes $24,874,000
Nine months ended
Mar. 25, 2000
Net sales $213,232,000 $68,528,000 - $56,552,000 $29,931,000 $368,243,000
Profit from
operations 53,254,000 6,146,000 - 3,454,000 863,000 63,717,000
Less
adjustments
listed above 28,907,000
Income before
income taxes $ 34,810,000
<PAGE
8. New Accounting Pronouncements
- -------------------------------
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition." This SAB was intended to
clarify certain elements of revenue recognition. It has been supplemented by a
"frequently asked questions" document and will be required to be implemented
by the Company no later than the fourth quarter of fiscal 2001. Management
believes that this SAB will not materially impact its revenue recognition
practices.
In July 2000, the Emerging Issues Task Force reached a consensus on Issue
No. 00-10, "Accounting for Shipping and Handling Fees and Costs". The
consensus states that a seller of goods should classify fees attributable to
shipping and handling in the income statement as revenues. The Company
currently nets such fees against shipping and handling costs in the cost of
sales line. The consensus will be applied to financial statement presentation
in the fourth quarter of fiscal year 2001. Management will effect such a
reclassification, and will restate previous periods, as appropriate. There
will be no effect on reported net income. If such a reclassification had been
made in the third quarter and for the nine months ended March 24, 2001, both
the net sales and cost of sales line items would have increased by
approximately $10.0 million and $31.0 million, respectively.
9. Reclassifications
- ---------------------
Certain reclassifications have been made to the comparative periods so as to
be in conformity with the current quarter and year to date presentations.
10. Contingencies
- -----------------
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.
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 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 specialty apparel products through distributors and independent sales
representatives to the promotional products/advertising specialty industry,
primarily in the United States.
The Company has identified five reportable segments. The first 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 principally through distributors or by directly selling
to the customer in the United States. The third segment, "Apparel",
utilizes independent sales representatives to market its specialty
clothing products and to solicit orders from customers in the promotional
products/advertising specialty industry. "Packaging and Display Products",
the fourth segment, primarily resells packaging and shipping supplies
and retail signage marketed through a combination of direct marketing
and direct selling efforts. The fifth segment, "International"
sells primarily printed products such as checks and business forms to
small businesses in Europe and Canada through direct marketing,
distributors or by directly selling to the customer.
Any sentence followed by an asterisk (*) in this section constitutes a
forward-looking statement which reflects the Company's current expectations.
There can be no assurance the Company's actual performance will not differ
materially from those projected in such forward-looking statements due to the
important factors described in the section to this Management's Discussion and
Analysis of Financial Condition and Results of Operations titled "Certain
Factors That May Affect Future Results."
Results of Operations
- ---------------------
Net sales increased $5.8 million or 5.0% to $123.2 million in the third
quarter of fiscal year 2001 from $117.4 million in last year's third quarter.
The PremiumWear, Inc. operation, which makes up the Apparel segment, was
purchased in July 2000 and hence not part of the comparable figures for the
third quarter of fiscal 2000. The Apparel segment net sales of $12.4 million
offset declines of $3.9 million or 5.9% in the Direct Marketing-US segment,
$.7 million or 2.8% in the Direct Sales-US segment, $1.4 million or 7.7% in
the Packaging and Display segment and $.6 million or 6.3% in the International
segment. Management believes that these declines were a result of an economic
slowdown in the U.S., weaker foreign currencies impacting the International
segment and declining demand for some of the Company's core products such as
manual and continuous forms.
Net sales increased $41.1 million or 11.2% to $409.3 million for the first
nine months of fiscal year 2001 from $368.2 million in last year's comparable
nine months. The increase was attributable to the Apparel segment net sales
of $41.7 million as discussed above. There were small increases in the Direct
Sales - U.S. and Packaging & Display Products segments which offset declines
in the Company's Direct Marketing - U.S. and International segments.
For the third quarter of fiscal year 2001, cost of sales increased to 39.5%
of sales from 36.3% in last year's comparable period. For the first nine
months of fiscal year 2001, cost of sales increased to 39.2% of sales from
35.9% in last year's comparable period. The increases were due primarily to
the addition of PremiumWear, Inc., which incurs a higher cost of sales as a
percent of sales than in the Company's other businesses. Excluding
PremiumWear, Inc., cost of sales was 36.0% and 35.4% of sales for the third
quarter and the first nine months of fiscal year 2001, respectively, a
decrease from the comparable periods last year due primarily to increased
shipping and handling revenue currently classified as an offset to cost of
sales and increased vendor discounts for transportation charges. These
improvements offset unfavorable comparisons in material costs year-to-year due
to a shift of product mix towards outsourced products. On a year-to-date
basis, fulfillment costs also improved as a percent of sales due to increased
leverage of plant overhead from increased sales during the holiday card
season. Cost of sales as a percent of sales is anticipated to increase
slightly for the remainder of 2001.*
Selling and advertising expense increased to 38.3% of sales in the third
quarter of fiscal year 2001 from 37.8% of sales in last year's comparable
quarter due to the impact of the declining sales for the fiscal 2001 third
quarterg. For the first nine months of fiscal year 2001, selling and
advertising expense decreased to 36.3% of sales from 37.8% of sales in last
year's comparable period. The year to date decrease was due primarily to the
addition of PremiumWear, Inc., which has a significantly lower selling and
advertising expense as a percentage of sales than in the Company's other
businesses. Management anticipates that such costs as a percent of net sales
will remain consistent with the first nine months for the remainder of fiscal
2001.*
General and administrative expense remained relatively constant at
approximately 14.9% and 15.2% of sales in the third quarters and first nine
months of fiscal years 2001 and 2000, respectively. Management anticipates
that these costs as a percent of net sales will remain consistent with the
first nine months throughout the remainder of fiscal 2001.*
In the first nine months of fiscal year 2001, the Company recorded a
restructuring charge of $3,429,000 based on a decision to more closely align
its direct marketing and direct sales activities. The restructuring consists
of employee termination benefit costs of $2,156,000 and facility closure
charges of $1,273,000 related primarily to lease terminations. It is expected
that employee termination benefit payments will be complete by the second
quarter of fiscal year 2002.* Additionally, the Company recognized an
impairment charge of $1,707,000, included in general and administrative
expenses, for the write off of capitalized internal-use software related to an
enterprise resource planning system the Company no longer plans to implement.
After an income tax benefit of $2,032,000, these actions reduced earnings for
the nine months ended March 24, 2001 by $3,104,000.
Interest expense increased to 2.7% of sales in the third quarter of fiscal
year 2001 and to 2.4% for the first nine months of the year from 1.8% and 1.7%
of sales in the prior year's comparable periods. The increase is the result
of additional debt, primarily from the PremiumWear, Inc. acquisition in July
2000, and higher interest rates in the current year.
The provision for income taxes as a percentage of pre-tax income increased
to 39.0% in the third quarter of fiscal year 2001 from 30.9% in the comparable
quarter in fiscal year 2000. For the first nine months of fiscal year 2001,
the provision for income taxes as a percentage of pre-tax income increased to
39.0% from 36.4% in last year's comparable period. The lower fiscal year 2000
provision was due to a favorable revenue ruling effecting prior years' state
tax rates. Management anticipates that the provision for taxes as a percent
of net sales will remain consistent with the first nine months provision of
39.0% throughout the remainder of fiscal 2001.*
In the first quarter of fiscal 2001, the Company adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This adoption resulted in an initial credit of
$391,000 (net of tax) to Accumulated Other Comprehensive Loss. However, the
adoption of the Standard had an immaterial impact on net income for the
period.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition". This SAB was intended to
clarify certain elements of revenue recognition. It has been supplemented by a
"frequently asked questions" document and will be required to be implemented
by the Company no later than the fourth quarter of fiscal 2001. Management
believes that this SAB will not materially impact its revenue recognition
practices.
In July 2000, the Emerging Issues Task Force reached a consensus on Issue
No. 00-10, "Accounting for Shipping and Handling Fees and Costs". The
consensus states that a seller of goods should classify fees attributable to
shipping and handling in the income statement as revenues. The Company
currently nets such fees against shipping and handling costs in the cost of
sales line. The consensus will be applied to financial statement presentation
in the fourth quarter of fiscal year 2001. Management will effect such a
reclassification, and will restate previous periods, as appropriate. There
will be no effect on reported net income. If such a reclass had been made in
the third quarter and for the nine months ended March 24, 2001, both the net
sales and cost of sales line items would have increased by approximately $9.7
million and $31.2 million, respectively.
<PAGE
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities for the nine months ended March 24,
2001 was $ 36.2 million and represented a decrease of $4.5 million from the
$40.7 million provided in the comparable period last year. The primary reason
for the decrease was that net income decreased $7.0 million relative to the
comparable period of 2000. Increases in non-cash exit costs, amortization and
depreciation compared to the same period last year were more than offset by
increases in inventory and accounts receivable levels from the Apparel
segment. The increase in amortization was the result of the acquisition of
PremiumWear, Inc. in July 2000 and the increase in exit charges was the result
of the restructuring (see note 3 to the consolidated financial statements) in
the first nine months of fiscal year 2001.
Working capital at March 24, 2001 amounted to $76.3 million, including $7.4
million of cash and short term investments. At June 24, 2000, working capital
amounted to $55.9 million, including cash and short term investments of $3.5
million. The $20.4 million increase in working capital during the period is
principally due to the effect of the PremiumWear, Inc. acquisition in July
2000.
On July 10, 2000, the Company acquired all the outstanding shares of
PremiumWear, Inc. The purchase price was $13.50 per share in cash and totaled
approximately $38,030,000 (net of cash acquired) for the shares plus debt
assumed of $3,856,000. The Company also incurred fees of approximately
$583,000 in connection with the acquisition. The Company is presently
undertaking, but has not yet completed, an allocation of this purchase price,
but anticipates that approximately $15,000,000 will be allocated to certain
intangible assets. These intangible assets are anticipated to be amortized
over approximately 15-20 years.
Capital expenditures for the nine months ended March 24, 2001 were $20.5
million versus $16.0 million expended during last year's comparable period.
Capital expenditures in the first nine months of fiscal year 2001 included
expenditures for information systems, facility infrastructure and office
equipment improvements and manufacturing-related equipment. In addition, the
effect of the PremiumWear, Inc. capital expenditures are included in the first
nine months of 2001. Capital expenditures for the first nine months of fiscal
year 2000 included expenditures for information systems and manufacturing-
related equipment. In addition, the Company constructed a warehouse
distribution facility in Lithia Springs, Georgia. The Company anticipates that
total capital outlays will approximate $25 million in fiscal year 2001.*
During the nine months ended March 24, 2001, $17.6 million was spent to
repurchase 1,095,900 shares of the Company's common stock. For the nine
months ended March 25, 2000, $14.1 million was spent to repurchase 585,857
shares of the Company's common stock.
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
has, over time, amended the terms of its committed, unsecured, revolving line
of credit agreement in order to facilitate certain transactions. The total
committed line currently stands at $200 million. At March 24, 2001, the
Company had $188.5 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 several of the banks party to the credit
agreement. These swap agreements contain notional principal amounts and other
terms determined with respect to the Company's forecast of future cash flows
and borrowing requirements. At March 24, 2001, the notional principal amount
outstanding of the interest rate swap agreements totaled $160.0 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 2001.* 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.*
<PAGE
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. Known
material risks that may affect those critical success factors are described
below.
A majority of the sales in our newly-acquired apparel business come from
selling knit and woven sport shirts under labels licensed from third parties
to the promotional products/advertising specialty industry. We believe that
the critical success factors to compete in this market include product
quality, timely fulfillment of customer orders and brand awareness. Known
material risks that may affect those success factors are also described below.
Our printed product lines face increased competition from 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, 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 sites of
the office supply national chains. One 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 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 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.
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. 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 direct marketing 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 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.
Our growth strategy depends, in part, on the acquisition of complementary
businesses that address our target small business market.
The acquisition of complementary businesses that address our target small
business market has been important to our growth strategy. We intend to
continue this acquisition activity in the future. The success of this activity
depends on the following:
- -our ability to identify suitable businesses and to negotiate agreements on
acceptable terms,
- -our ability to obtain financing through additional borrowings, by issuing
additional shares of common stock, or through internally generated cash flow,
and
- -our ability to achieve anticipated savings and growth and avoid disruption to
our existing businesses.
In evaluating a potential acquisition, we conduct a business, financial and
legal review of the target. This review is intended to support our assumptions
with respect to the projected future performance of the target and to identify
the benefits and risks associated with those assumptions. We cannot be certain
that our review will identify all potential risks associated with the
purchase, integration or operation of acquired businesses. Unanticipated risks
may adversely affect the benefits that we expect to obtain from any given
acquisition.
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 either from "full package"
manufacturers in the Far East, Central and South America, or through 807
programs (assembly only) in Central America. 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 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 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 overstocked items.
Failure of our 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.
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 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
24, 2000. 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 other foreign currency and interest rate
instruments, based on historical foreign currency rate movements and the fair
value of market-rate sensitive instruments at year-end, the Company does not
believe that near term changes in foreign currency or interest rates will have
a material impact on its future earnings, fair values or cash flows.
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.
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(a) Seventh Amendment to Amend and Restated Revolving Credit
Agreement dated as of January 30, 2001, by and among New
England Business Service, Inc., Fleet National Bank
(together with certain other financial instituions, the
"Banks"), Fleet National Bank, as agent for the Banks,
and Fleet National Bank, as documentation agent for the
Banks.
15 Awareness Letter of Independent Accountants
99 Independent Accountants' Review Report
b. Reports on Form 8-K.
On March 7, 2001, on Form 8-K, the Company announced that, as of that
date, it had repurchased a total of 797,400 shares of its common stock
pursuant to its share repurchase program, approved by the Board of Directors
on October 20, 2000, including 715,000 shares during the third quarter of
fiscal 2001.
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 4, 2001 /s/Daniel M. Junius
- ----------- --------------------
Date Daniel M. Junius
Senior Vice President-Chief
Financial Officer
(Principal Financial and
Accounting Officer)