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 27, 1999.
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 April 30, 1999
was 14,352,647.
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
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NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
(unaudited)
Mar. 27, June 27,
1999 1998
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 8,024 $ 10,823
Accounts receivable - net 51,952 50,985
Inventories 22,312 20,970
Direct mail advertising and prepaid expenses 12,365 12,289
Deferred income tax benefit 5,993 5,993
-------- --------
Total current assets 100,646 101,060
Property and equipment - net 54,506 51,930
Property held for sale 1,277 1,131
Deferred income tax benefit 2,652 2,652
Goodwill - net 64,926 75,586
Other assets - net 77,679 75,218
-------- --------
TOTAL ASSETS $301,686 $ 307,577
======== ========
LIABILITIES AND STOCKHOLDERS'EQUITY
Current Liabilities
Accounts payable $ 14,752 $ 16,038
Accrued expenses 29,058 34,639
-------- --------
Total current liabilities 43,810 50,677
Revolving line of credit 127,500 141,000
Deferred income taxes 1,144 1,395
STOCKHOLDERS'EQUITY
Common stock 15,321 15,185
Additional paid-in capital 48,715 44,559
Accumulated other comprehensive income (2,939) (2,337)
Retained earnings 82,930 71,962
-------- --------
Total 144,027 129,369
Less: Treasury stock (14,795) (14,864)
-------- --------
Stockholders' Equity 129,232 114,505
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $301,686 $307,577
======== ========
See Notes to Unaudited Consolidated Financial Statements
NEW ENGLAND BUSINESS SERVICE, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
Three Months Ended Nine Months Ended
Mar. 27, Mar. 28, Mar. 27, Mar. 28,
1999 1998 1999 1998
--------- --------- --------- ---------
NET SALES $115,044 $ 98,002 $355,027 $255,268
OPERATING EXPENSES:
Cost of sales 42,284 37,438 130,783 96,906
Selling and advertising 43,305 33,186 133,390 85,782
General and administrative 17,087 14,999 52,453 39,637
-------- -------- -------- --------
Total operating expenses 102,676 85,623 316,626 222,325
INCOME FROM OPERATIONS 12,368 12,379 38,401 32,943
OTHER INCOME/(EXPENSE):
Interest income 133 73 185 180
Interest expense (2,065) (1,725) (6,545) (2,679)
Gain on pension settlement - - 259 556
-------- -------- -------- --------
INCOME BEFORE TAXES 10,436 10,727 32,300 31,000
PROVISION FOR INCOME TAXES 4,217 4,345 12,691 12,174
-------- -------- -------- --------
NET INCOME 6,219 6,382 19,609 18,826
-------- -------- -------- --------
OTHER COMPREHENSIVE INCOME 167 423 (602) 215
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 6,386 $ 6,805 $ 19,007 $ 19,041
======== ======== ======== ========
PER SHARE AMOUNTS:
Basic Earnings Per Share $ .43 $ .46 $ 1.36 $ 1.37
======== ======== ======== ========
Diluted Earnings Per Share $ .42 $ .45 $ 1.32 $ 1.35
======== ======== ======== ========
Dividends $ .20 $ .20 $ .60 $ .60
======== ======== ======== ========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 14,481 13,781 14,402 13,712
Plus incremental shares from assumed
conversion of stock options 480 300 428 269
-------- -------- -------- --------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 14,961 14,081 14,830 13,981
======== ======== ======== ========
See Notes to Unaudited Consolidated Financial Statements
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(unaudited)
Nine Months Ended
Mar. 27 Mar. 28
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 19,609 $ 18,826
Adjustments to reconcile net income to cash:
Depreciation 9,897 8,091
Amortization 9,348 3,931
Deferred income taxes 82 (13)
Gain on pension curtailment 259 556
Other non-cash items 3,588 1,456
Changes in assets and liabilities:
Accounts receivable (4,167) (1,491)
Inventories and prepaid expenses (1,868) (3,016)
Accounts payable (916) (3,944)
Accrued expenses (4,650) 1,501
--------- ---------
Net cash provided by operating activities 31,182 25,897
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (13,246) (10,144)
Purchase of investments - (1,561)
Proceeds from sale of investments - 462
Proceeds from sale of building 545 -
Proceeds from sale of other assets 120 -
Acquisition of business (191) (82,706)
Other Assets (32) (386)
--------- ---------
Net cash used in investing activities (12,804) (94,335)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debt (58,000) (19,650)
Proceeds from credit line 44,500 89,900
Proceeds from issuing common stock upon stock
option exercise 2,462 2,433
Purchase of treasury stock (1,489) -
Dividends paid (8,641) (8,224)
--------- ---------
Net cash provided by (used in)financing (21,168) 64,459
activities
EFFECT OF EXCHANGE RATE ON CASH (9) (32)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,799) (4,011)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,823 7,365
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,024 $ 3,354
========= =========
See Notes to Unaudited 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 27, 1998 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, and the Independent Auditors' Report in the Company's Annual
Report on Form 10-K for the fiscal year ended June 27, 1998. 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 27, 1998. 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
- ----------------
On December 23, 1997, the Company acquired all of the outstanding common
stock of Rapidforms, Inc. ("Rapidforms"). As part of the purchase accounting
for the Rapidforms acquisition and included in the allocation of the
acquisition cost, a liability of $2,910,000 was recorded to cover the
anticipated costs related to a plan to close redundant Rapidforms'
manufacturing and warehouse facilities and to reduce manufacturing personnel.
Approximately $2,610,000 of the liability was allocated for employee
termination benefits and approximately $300,000 was designated for termination
of certain contractual obligations. The liability associated with the
Rapidforms integration plan remaining as of March 27, 1999 was $862,000. The
Company anticipates that the remaining liabilities will be resolved by the
second quarter of fiscal year 2000.
On June 3, 1998, the Company acquired all of the outstanding common stock of
McBee Systems, Inc. and all of the assets of McBee Systems of Canada, Inc.
(collectively "McBee"). As part of the purchase accounting for the McBee
acquisition and included in the allocation of the acquisition costs, a
liability of $2,642,000 was recorded to cover anticipated costs (primarily
employee termination benefits) related to a plan to close redundant McBee
manufacturing and warehouse facilities and to reduce manufacturing personnel.
The liability associated with the McBee integration plan remaining as of March
27, 1999 was $1,923,000.
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 27, 1999 and June 27, 1998 consisted of:
(unaudited)
Mar. 27, June 27,
1999 1998
----------- -----------
Raw paper $ 1,847,000 $ 1,622,000
Business forms, related office products
and shipping, warehouse and packaging
supplies 20,465,000 19,348,000
---------- -----------
Total $22,312,000 $20,970,000
=========== ===========
4. New Accounting Pronouncements
- -------------------------------
In March 1998, the AICPA issued Statement of Position 98-1 "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." The
Company has adopted this Statement in the current fiscal year. In the current
year-to-date period approximately $1,164,000 in costs which previously would
have been expensed have been capitalized under the caption "Property and
equipment, net." The Company also implemented the disclosure standard SFAS No.
130 "Reporting Comprehensive Income" in the first quarter of fiscal year 1999.
The AICPA has also issued Statement of Position 98-5 "Reporting on the Costs of
Start-Up Activities." The policies promulgated by this statement had
previously been followed by the Company and thus its implementation will not
impact the consolidated financial statements.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information." In
February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits." In June, 1998, the FASB issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
The former two statements are considered to be "disclosure only" standards and
are not anticipated to have a material impact on the consolidated financial
statements (these will be implemented in fiscal year 1999). The latter
standard does have a direct impact on the consolidated financial statements and
will be adopted by the Company in fiscal year 2000. The Company is currently
evaluating the impact this standard will have on its consolidated financial
statements.
Item 2. Management's Discussion and Analysis of Financial Condition
- -------------------------------------------------------------------
and Results of Operations
- ---------------------------------
Overview
- --------
New England Business Service, Inc. (the "Company"), a Delaware corporation
founded in 1952, incorporated in Massachusetts in 1955 and reincorporated in
Delaware in 1986, designs, produces and distributes business forms, checks,
envelopes, labels, greeting cards, signs, stationery and related printed
products and distributes packaging, shipping and warehouse supplies, software,
work clothing and other business products through mail order, direct sales,
telesales, dealers and the internet to small businesses throughout the United
States, Canada, the United Kingdom and France.
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 "Forward-
Looking Information and Risk Factors to Future Performance."
Results of Operations
- ---------------------
Net sales increased $17.0 million or 17.4% to $115.0 million in the third
quarter of fiscal year 1999 from $98.0 million in last year's third quarter.
The sales increase was composed of approximately a $17.8 million, or 18.1%,
increase associated with the acquisition of McBee Systems, Inc. and all of the
assets of McBee Systems of Canada, Inc. (collectively "McBee") during fiscal
year 1998, and a slight decline in sales of the Company's other business units.
McBee was acquired subsequent to the end of last year's first quarter.
Net sales increased $99.8 million or 39.1% to $355.0 million for the first
nine months of fiscal year 1999 from $255.3 million in last year's first nine
months. The sales increase was composed of approximately a $94.1 million, or
36.9%, increase associated with the acquisition of Rapidforms and McBee during
fiscal year 1998, and a $5.7 million, or 2.2%, increase in sales of the
Company's other business units.
<PAGE
For the third quarter of fiscal year 1999, cost of sales decreased to 36.8%
of sales from 38.2% in last year's comparable period. This decrease was due to
an increase in revenue generated by higher margin products associated with the
recent acquisition of McBee and increased efficiencies in the Company's U.S and
Canadian operating units primarily selling business forms and related printed
products. These factors counteracted the impact of $184,000 in costs incurred
in fiscal year 1999 in conjunction with activities related to integration of
manufacturing facilities among Rapidforms, McBee and the Company's other plants
as well as decreasing margins due to product mix shifts away from the Company's
core printed products at NEBS and Rapidforms. Cost of sales as a percent of
sales is anticipated to remain consistent with the third quarter's results for
the remainder of the fiscal year.*
For the first nine months of fiscal year 1999, cost of sales decreased to
36.8% of sales from 38.0% in last year's comparable period. This decrease was
due to similar reasons as in the third quarter results enumerated above, as
well as a non-recurring increase in freight costs in the previous year's first
quarter as a result of the UPS strike. Costs of $1,066,000 were also incurred
during the nine months of fiscal year 1999 related to plant integration
activities among Rapidforms, McBee and the Company's other plants.
Selling and advertising expense increased to 37.6% of sales in the third
quarter of fiscal year 1999 from 33.9% of sales in last year's comparable
quarter. The increase was due primarily to the direct sales force employed by
McBee which generates a higher selling and advertising expense as a percentage
of sales than in the Company's other businesses. The Company also incurred
$162,000 in costs during the quarter in connection with efforts to harmonize
product offerings among Rapidforms, McBee and the Company. In addition,
amortization expense related to the intangible assets of acquisitions climbed
from 2.4% of sales in the third quarter of fiscal year 1998 to 2.8% of sales in
the third quarter of fiscal year 1999 due to the effect of intangible assets
created in the McBee acquisition. Selling and advertising expense as a
percentage of sales is expected to remain consistent with the third quarter for
the remainder of the fiscal year.*
Selling and advertising expense increased to 37.6% of sales in the first nine
months of fiscal year 1999 from 33.6% of sales in last year's comparable
period. The increase was due to similar reasons as outlined above regarding the
second quarter results; the addition of McBee with its direct sales force
impact, $547,000 of costs related to product harmonization and the increase in
amortization expenses from year to year.
General and administrative expense decreased to 14.9% of sales in the third
quarter of fiscal year 1999 from 15.3% in last year's comparable quarter. The
decline was principally the result of a lower ratio of general and
administrative expense to sales associated with the Company's McBee subsidiary.
This mix change offset $215,000 of general and administrative spending related
primarily to systems integration efforts among Rapidforms, McBee and the
Company. Even with the decline above, during the third quarter, the Company
continued to increase spending levels associated with its program to re-
engineer financial and operational information systems. It should be noted that
the adoption of AICPA Statement of Position 98-1 reduced amounts charged to
expense in fiscal 1999 by $413,000 and $1,164,000 for the third quarter and the
third quarter year-to-date periods respectively. General and administrative
expense as a percent of sales is expected to remain consistent with the third
quarter throughout the remainder of the fiscal year.*
<PAGE
General and administrative expense decreased to 14.8% of sales in the first
nine months of fiscal year 1999 from 15.5% in last year's comparable nine
months. The decline was principally the result of a lower ratio of general and
administrative expense to sales associated with the Company's recently acquired
businesses, offset in part by spending for systems integration among
Rapidforms, McBee and the Company of $582,000.
Interest expense remained consistent with the prior year's third quarter at
1.8% of sales in the third quarter of fiscal year 1999. Interest expense was
1.8% of sales for the first nine months of fiscal year 1999 compared to 1.0% of
sales in the prior year's comparable period. This increase in expense was
attributable to debt incurred to finance the acquisition of Rapidforms in
December, 1997 and McBee in June of 1998.
The provision for income taxes as a percentage of pre-tax income remained
consistent with the third quarter of fiscal year 1998 at 40.4% compared to
40.5% last year. On a year-to-date basis, the overall tax rate has remained
consistent at 39.3% this year and the prior year. The mix of income or losses
from different businesses owned by the Company in any given period, including
foreign operations, effects the Company's consolidated tax rate.
In March 1998, the AICPA issued Statement of Position 98-1 "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." The
Company has adopted this Statement in the current fiscal year. In the current
year-to-date period approximately $1,164,000 in costs which previously would
have been expensed have been capitalized under the caption "Property and
equipment, net." The Company also implemented the disclosure standard SFAS No.
130 "Reporting Comprehensive Income" in the first quarter of fiscal year 1999.
The AICPA has also issued Statement of Position 98-5 "Reporting on the Costs of
Start-Up Activities." The policies promulgated by this statement had
previously been followed by the Company and thus its implementation will not
impact the financial statements.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information." In
February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits." In June, 1998, the FASB issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
The former two statements are considered to be "disclosure only" standards and
are not anticipated to have a material impact on the consolidated financial
statements (these will be implemented in fiscal year 1999). The latter
standard does have a direct impact on the consolidated financial statements and
will be adopted by the Company in fiscal year 2000. The Company is still
evaluating the impact of this standard on its consolidated financial
statements.
<PAGE
YEAR 2000
- ---------
During fiscal year 1996, the Company established a five year plan to upgrade
the majority of its critical operational information systems. This information
systems reengineering plan was developed to enhance system performance and to
address Year 2000 issues. The Company has experienced delays in certain facets
of the reengineering effort, and as a result has modified its Year 2000 plan to
focus on system remediation rather than system replacement. The majority of the
Company's operational information systems have been inventoried and assessed
for Year 2000 compliance, and approximately 45% of the Company's mission
critical systems have been remediated as of March 27, 1999. The Company
believes, based on available information, that it will be able to complete the
remediation of all critical operating systems by June 1999, which is expected
to leave an appropriate amount of time prior to the advent of the Year 2000 to
perform detailed system testing and compliance verification.*
In addition, the Company is communicating with key suppliers, vendors and
business partners in order to assess their ability to maintain normal
operations in the Year 2000. Such key suppliers include, but are not limited
to, MCI WorldCom, R.R. Donnelley and Sons, Appleton Papers, and United Parcel
Service of America, Inc. To the extent that the Company is not satisfied with
the status of a vendor's Year 2000 compliance or remediation plans, the Company
expects to develop and implement appropriate contingency plans.* Such
contingency plans will include the development of alternative sources for the
product or service provided by the non-compliant vendor. The Company is
currently not aware of any major Year 2000 compliance problems with any of its
key suppliers. In addition, the Company will monitor the Year 2000 activities
of U.S., Canadian and U.K. postal services and pertinent local and regional
utilities. However, due to the lack of alternative sources for such services
the Company can make no assurances that Year 2000 related disruptions in
postal, electrical or similar services would not have a material adverse effect
on the Company's financial performance or long-term prospects.
The Company has also inventoried and assessed the majority of the systems
associated with the functioning of its plant, property and equipment. The
date-related issues associated with the proper functioning of such assets are
insignificant and are not expected to represent a material risk to the
Company.* Further, the Company has approximately 1.9 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's cash outlays for capital improvements and period expenses
associated with the information systems reengineering project and for Year
2000 compliance were projected to cumulatively total $21 million during fiscal
years 1997 through 2000, of which over one-half has been spent as of March 27,
1999. Due to the modification of the Company's plans to focus on remediation
rather than replacement, $7 million has been allocated in the Company plans for
remediation in fiscal year 1999 and another $2-3 million is likely to be
allocated in fiscal year 2000.* While the Year 2000 issue involves additional
costs to the Company, the Company believes, based on available information,
that it will be able to manage the Year 2000 transition of its internal systems
without having any material adverse effect on its business operations or
financial prospects.*
<PAGE
For a further discussion of the risks and uncertainties associated with the
Year 2000 issue and the Company's reliance on individual third-party vendors to
provide raw materials and services critical to the Company's operation, see
"Forward Looking Information and Risk Factors to Future Performance" included
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities for the nine months ended March 27,
1999 was $ 31.2 million and represented an increase of $5.3 million from the
$25.9 million provided in the comparable period last year. The increase in
operating cash flow was the result of an increase in net income and non-cash
depreciation and amortization charges between the comparable periods, offset by
increased investment in working capital.
Working capital at March 27, 1999 amounted to $56.7 million, including $8.0
million of cash and short term investments. At June 27, 1998, working capital
amounted to $50.4 million, including cash and short term investments of $10.8
million. The $6.3 million increase in working capital during the year is
principally due to lower current tax liabilities and lower accrued incentives
at March 27, 1999. Of the $8.0 million cash balance at March 27, 1999, an
additional $3.0 million of debt under the Company's revolving line of credit
was paid down on the first working day of the subsequent quarter. During the
quarter and the first nine months of fiscal year 1999, $1,342,000 was spent to
repurchase 47,700 shares of the Company's common stock.
Capital expenditures for the nine months ended March 27, 1999 were $13.2
million versus the $10.1 million expended during last year's comparable period.
Capital expenditures in the first three quarters of fiscal year 1999 and fiscal
year 1998 included significant expenditures for information systems
infrastructure, including an upgrade to the Company's mainframe computer in
1998. In addition the Company constructed a $1.7 million addition to their
facility in Midland, Ontario in the first quarter of fiscal year 1999.
Significant upgrades to workspaces and furniture in the Groton, Massachusetts
facility also took place during the first quarter of fiscal year 1999 in order
to accommodate more employees at that location. The Company anticipates that
total capital outlays will approximate $17.0 million in fiscal year 1999, an
increase of $3.7 million, or 28%, over the $13.3 million expended during fiscal
year 1998.*
In addition to its present cash and short-term investment balances, the
Company has consistently generated sufficient cash internally to fund its needs
for working capital, dividends and capital expenditures. In anticipation of
the acquisitions in 1998, the Company amended on several occasions the terms of
its committed, unsecured, revolving line of credit agreement so that the total
committed line currently stands at $165 million. At March 27, 1999, the
Company had $127.5 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.
<PAGE
In order to effectively fix the interest rate on a portion of the debt
outstanding under the revolving line of credit, the Company has entered into
interest rate swap agreements with several of the banks party to the credit
agreement. These swap agreements contain notional principal amounts and other
terms determined with respect to the Company's forecasts of future cash flows
and borrowing requirements. At March 27, 1999, the notional principal amount
outstanding of the interest rate swap agreements totaled $90 million.
In order to minimize the Company's exposure to foreign currency fluctuations
with respect to intercompany loans to foreign subsidiaries and affiliates, the
Company has entered into short-term forward exchange rate contracts with a
major commercial bank in currency amounts directly corresponding to the short-
term intercompany loan amounts. At March 27, 1999, the Company had outstanding
forward exchange rate contracts for $ 2.0 million worth of Pound Sterling and
$92,100 worth of French Francs.
The Company anticipates that its current cash on hand, cash flow from
operations and additional availability under the line of credit will be
sufficient to meet the Company's liquidity requirements for its operations and
capital expenditures during fiscal year 1999.* However, the Company may pursue
additional acquisitions from time to time which would likely be funded through
the use of available cash, the issuance of stock, the obtaining of additional
credit, or any combination thereof.*
Forward-Looking Information and Risk Factors to Future Performance
- ------------------------------------------------------------------
From time to time, the Company or its representatives have made or may make
forward-looking statements that reflect the Company's current expectations,
orally or in writing, in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, elsewhere in this Quarterly
Report on Form 10-Q, in other reports filed under the Securities Act of 1934,
as amended, in press releases or in statements made with the approval of an
authorized executive officer. The words or phrases "is expected," "will
continue," "anticipates," "estimates," or similar expressions in any of these
communications are intended to identify "forward-looking statements" within
the meaning of Section 21E of the Securities Exchange Act of 1934 and Section
27A of the Securities Act of 1933, as enacted by the Private Securities
Litigation Reform Act of 1995.
There can be no assurance the Company's actual performance will not differ
materially from that projected in such forward-looking statements due to
important factors including but not limited to those described below. These
factors include increasing competition, economic cycles, technological change,
paper and postal costs, customer preferences, response rates, prospect lists,
governmental regulations, inherent risks in acquisitions, disruptions to the
Company's operating systems, Year 2000 risks to computer systems and reliance
on vendors, all of which are described in further detail below.
Increasing Competition; Pressure on Price and Margins
The Company operates in a highly competitive marketplace, in which it
competes with a variety of mail order marketers, retailers, dealers,
distributors and local printers in the marketing of business forms, checks,
stationery and business supplies to small businesses. Over the course of the
past decade, providers of business forms, checks, and stationery have
experienced growth in excess manufacturing capacity. In addition, the Company
has faced increasing competition from low-price, high-volume office supply
chain stores. Improvements in the cost and quality of printing technology have
increasingly allowed dealers, distributors and local printers to gain access
to products of complex design and functionality at competitive prices. The
Company currently anticipates that these trends will continue. No assurance
can be given that competition will not have an adverse effect on the Company's
business. In addition, if any of the Company's competitors were to seek to
gain or retain market share by reducing prices or increasing promotional
discounting, the Company could be compelled to reduce its prices or match the
discounts and thereby reduce its gross margin and profitability.
Economic Cycles; Variability of Performance.
The Company's standardized forms and check business accounts for a majority
of its sales and profitability. The forms and check industry is highly
competitive and generally characterized by mature products designed within
well-established industry standards. The Company relies, in part, on net small
business formations for growth in demand for its standardized form and check
products. As a result, the Company's growth rate is closely correlated to the
strength of its target small business market. The Company's revenue trends and
operating profitability have been materially adversely affected by recession-
related contractions in the small business economy in the past. The Company
will continue to experience quarterly and annual variations in net sales and
net income as a result of changes in the levels of small business formations
and failures or from other economic events having an impact on small
businesses generally.
Technological Change; Product Obsolescence and Risks to Competitive
Advantage.
The Company's standardized business forms and related products are designed
to provide small businesses with the financial and business records required
to manage a business. Steady technological improvements have provided small
businesses in several market segments with alternative means to enact and
record business transactions. PC-based, point-of-sale, electronic form and
electronic transaction systems have been designed to automate several of the
functions performed by the Company's products. The price and performance
characteristics of personal laser and ink-jet printing equipment have improved
markedly in the recent past, thereby allowing small businesses a cost-
competitive means to print low-quality versions of Company forms on plain
paper. In addition, the Internet has the potential to eliminate the Company's
advantage of scale in direct marketing by providing all competitors with equal
access to customers who purchase products over the Internet. In response, the
Company has focused resources on the acquisition, development and procurement
of new products less susceptible to technological obsolescence and has
aggressively moved to develop a comprehensive electronic catalog of products
to be utilized over the Internet. It should be noted that the Company's small
business customers have to-date proven to be relatively slow adopters of new
technology which has minimized the adverse impact of these technological
trends. However, the Company can give no assurance that continued technological
change will not have a material adverse impact on the long-term prospects for
the Company's business.
Paper Costs and Postal Rates; Risks to Margins.
The cost of paper used to produce the Company's products, catalogs and
advertising materials constitutes, directly or indirectly, approximately 30% of
consolidated revenues. In addition, the Company is reliant on the U.S. Postal
Service for delivery of most of the Company's promotional materials. Coated
paper costs for promotional materials have increased steadily over the past few
years until recently. In addition, certain segments of the paper market have
demonstrated considerable price volatility in that same time period. Postal
rates for third class mail have also increased sporadically and at times
significantly in the past decade. The Company has been able to counteract the
impact of postal and paper cost increases with cost reduction programs and
selected product price increases. Due to increased competition in the small
business forms, checks, stationery and supplies marketplace, no assurance can
be given that the Company will be able to increase product pricing to
compensate for future paper or postal cost increases. The inability to raise
prices in response to paper or postal cost increases could reduce the Company's
operating profitability and net income.
<PAGE
Customer Preferences; Investment Requirements & Sales Risk.
The Company's core business is the direct marketing, manufacturing and
distribution of standardized forms, checks, and related products to small
businesses. Newly-formed small business owners are increasingly demanding
custom and color-coordinated products to create an image in addition to
enabling the management of business transactions. The relative prices charged
by local printers, contract printers and dealers for providing these custom
and full-color printed products have been declining due to technological
advances in composition systems and printing equipment. As a direct result,
the cost advantage inherent to the Company's standardized forms and related
printed products has declined. The Company is responding with focused
investment in the infrastructure required to sell, compose, print and
distribute custom and full-color products. This effort includes installation
of an integrated and flexible information system architecture and the
reengineering of many of the Company's basic business functions. In addition,
the Company expects to continue to invest in its direct sales, dealer and
Internet-based channels that more readily support the interactive marketing
required to sell custom and full-color products. However, the Company can give
no assurance that the rate of decline in demand for standardized forms and
related printed products will not accelerate, that the electronic commerce
investments will prove successful, or that the information systems
reengineering effort will not result in operating inefficiencies or unplanned
expense. If any of such potential risks materialize, the Company's future net
sales and net income could be materially adversely affected.
Response Rates and Customer Retention; Sales Risk.
Customer and prospect response rates to the Company's catalogs and
promotional materials have remained relatively stable over time. Continued
stability in prospect response and customer retention is primarily dependent
on the continued relevancy of the range of the Company's products to the small
business marketplace. New product introductions, to date, have generally
offset declines in response rates and retention attributable to product
obsolescence. However, the Company can make no assurances that its new product
introductions will continue to offset the rate of obsolescence of its
standardized forms products in the future. An increase in the rate of product
obsolescence or a decline in new product introductions could negatively impact
response rates and customer retention which, in turn, would have a materially
adverse impact on the Company's long-term financial performance.
Prospect Lists; Sales Risk.
The Company's direct mail business has been characterized by a consistent
level of average annual sales per customer. As such, net sales growth is
dependent, in part, on an increase in customers served by the Company. Growth
in the total number of direct mail customers served by the Company depends
upon continued access to high-quality lists of newly-formed small businesses.
In the past, the Company's ability to compile proprietary prospect lists was a
distinct competitive advantage. However, the external list compilation
industry has grown more sophisticated and currently markets comprehensive
lists of newly-formed businesses to the Company and its competitors. At
present, the Company relies on the speed of its delivery of promotional
materials to prospective customers to gain advantage over competitors.
However, the Company can make no assurances that its promotional material
delivery advantage will be maintained over time. A deterioration in the
Company's delivery advantage could have a materially adverse impact on the
Company's business and financial performance.
Governmental Regulations; Sales Risk.
Future governmental legislation or regulation including, but not limited to,
the following potential regulatory actions have the potential to have a
material adverse impact on the Company's business prospects: 1) enactment
of privacy laws could constrain the Company's ability to mail promotional
materials or to telemarket to small businesses; 2) modification to U.S. Postal
Service regulations with the effect of increasing postal rates or reducing
postal delivery efficiency could have an adverse impact on the Company's
marketing efforts; and 3) institution of a "general sales tax", "value added
tax" or similar national tax could reduce demand for the Company's products.
Although the Company has no current knowledge or belief that such adverse
regulation, of a material nature, or similar governmental regulation is
pending or imminent, it can make no assurance that adverse governmental
regulation will not have a material adverse impact on the Company's business
in the future.
Acquisitions; Inherent Risk.
From time to time the Company has acquired, or may acquire in the future, a
majority ownership position in a company or substantially all of the assets
related to a specific line of business. Such acquisitions are undertaken to
enhance the Company's competitive position in the marketplace or to gain
access to new markets, products, competencies or technologies. The Company has
performed in the past and will perform in the future a business, financial and
legal due diligence review in advance of an acquisition to corroborate the
assumptions critical to projected future performance of an acquired entity and
to identify the risks inherent to such projections. However, the Company can
make no assurances that its due diligence review will identify all potential
risks associated with the purchase, integration or operation of any acquired
enterprise. If any of such potential risks materialize, the Company's future
net sales and net income could be materially adversely affected.
Operating Systems; Disasters and Disruptions.
The Company has become increasingly dependent upon its manufacturing,
administrative and computer processing infrastructure and operations to
process its high volume of small dollar value orders on an efficient, cost
competitive and profitable basis. The Company has implemented commercially
reasonable safeguards to reduce the likelihood of property loss or service
disruptions and has secured property and business interruption insurance to
minimize the adverse financial consequences arising from a select group of
risks. However, the Company can make no assurances that its infrastructure and
operations are not susceptible to loss or disruption, whether caused by (i)
intentional or unintentional acts of Company personnel or third party service
providers, or (ii) natural disasters including, but not limited to,
earthquakes, fire or severe storms. In addition, the Company can make no
assurance that its insurance coverage will adequately respond to all potential
causes of property loss or service disruption. In the event that any such acts
or disasters lead to property loss or operating system disruption for which
property and business interruption insurance coverage is unavailable or
insufficient, the Company's financial performance and long-term prospects
could be materially adversely affected.
<PAGE
Computer Systems; Year 2000 Impact
The Company and its vendors have become increasingly reliant on computer
systems to process transactions and to provide relevant business information.
The majority of computer systems designed prior to the mid-1990s are
susceptible to a well-publicized problem associated with an inability to
process date-related information beyond the Year 2000. Without proactive
modifications to routines and programs, many systems of the Company and its
vendors could be rendered useless as early as June of 1999. The Company has
created a comprehensive plan to address the Year 2000 issue with respect to
both internal systems and to systems employed by critical vendors. However,
the Company can make no assurance that all Year 2000 risks to Company and
critical vendor systems can be identified and successfully negated through
modification of existing programs or other means prior to June of 1999. In the
event that any Year 2000 program deficiencies remain undetected, or in the
event that any programming modifications do not adequately address the Year
2000 issues, the Company or its vendors could experience critical operating
system failures. Any such operating system failures could have a material
adverse impact on the Company's financial performance and long-term prospects.
Raw Materials and Services; Reliance on Certain Vendors
The Company has become increasingly reliant on certain individual third-
party vendors to provide raw materials and services critical to the Company's
operations in order to gain the advantage of volume-related favorable pricing
and, in some instances, favorable contract terms. Such critical vendors and the
nature of the products or services provided include, but are not limited to,
governmental postal services for the delivery of marketing materials and in
some countries, customer packages, MCI WorldCom for the provision of toll-free
telephone services, R.R. Donnelley and Sons, Inc. for printing and processing
of marketing materials, Appleton Papers, Inc. for carbonless paper, and United
Parcel Service of America, Inc. for product delivery services. In the past, the
Company has been adversely affected by disruption in the services provided or
lack of availability of the products produced by its critical vendors resulting
from a variety of factors including labor actions, inclement weather,
disasters, systems failures and market conditions. The Company can make no
assurance that its critical vendors will remain capable of providing the level
of service or quantity of product required to support the Company's business,
nor that the Company could immediately identify alternative sources for
provision of the product or service on a similar cost basis. Any such service
disruption or product shortage could have a material adverse impact on the
Company's operating performance and net income.
Other Risks; Variability of Performance
The Company has experienced in the past and will experience in the future
quarterly and annual variations in net sales and net income as a result of many
factors, including, but not limited to, the timing of catalog mailings, catalog
response rates, product mix, margins on new product introductions, the timing
and levels of selling, general and administrative expenses, cost reduction
programs, timing of holidays and inclement weather. The Company's planned
operating expenses are based on sales forecasts. If net sales performance falls
below expectations in any given quarter or year, the Company's operating
results could be materially adversely affected.
Item 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 Note 1 and Note 5 of the Notes to
Consolidated Financial Statements included in the Annual Report on Form 10-K
for the year ended June 27, 1998. The Company does not hold or issue financial
instruments for trading, profit or speculative purposes.
In order to minimize the Company's exposure to foreign currency fluctuations
with respect to the short-term intercompany loans created to fund the
operating cash requirements of the Company's European operations (see Note 2
in the Notes to Consolidated Financial Statements included in the Annual Report
on Form 10-K for the year ended June 27, 1998), the Company has entered into
forward exchange rate contracts for the amount of the loans and associated
interest. The currencies hedged are the British pound and the French franc.
While there are no specified repayment dates for the loans, the forward
exchange rate contracts are of limited duration and are replaced periodically
as they mature.
In order to effectively convert the interest rate of a portion of the
Company's debt from a Eurodollar based floating rate to a fixed rate, the
company has entered into 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.
<PAGE
PART II - OTHER INFORMATION
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Item 1. LEGAL PROCEEDINGS
- --------------------------
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
---------- -----------
10(a)* Change in Control agreement dated February 23, 1999 between
the Company and Joel S. Hughes.
10(b) Third Amendment to Amended and Restated Revolving Credit
Agreement dated as of March 24, 1999, 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.
11 Statement re: computation of per share earnings.
27 Financial Data Schedule
* Identifies a management contract or other compensatory plan or arrangement
in which an executive officer or director of the Company participates.
b. Reports on Form 8-K.
On March 17, 1999, on Form 8-K, the Company announced that it expected
revenue and earnings for the third fiscal quarter ending March 27, 1999 to be
below current analysts' estimates.
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 11, 1999 /s/Daniel M. Junius
- ----------------- --------------------
Date Daniel M. Junius
Senior Vice President-Chief
Financial Officer
(Principal Financial and
Accounting Officer)