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 December 25, 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 February 4, 2000
was 13,530,595.
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
<TABLE>
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
<CAPTION>
(unaudited)
Dec. 25, June 26,
1999 1999
------- -------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 11,052 $ 5,484
Accounts receivable - net 58,786 52,546
Inventories 23,076 21,538
Direct mail advertising and prepaid expenses 11,872 12,946
Deferred income tax benefit 7,272 7,189
------- -------
Total current assets 112,058 99,703
Property and equipment - net 58,986 55,172
Property held for sale - 839
Deferred income tax benefit 6,271 6,353
Goodwill - net 61,837 62,626
Customer Lists - net 28,032 31,590
Tradenames - net 31,201 31,610
Other assets - net 11,390 12,369
------- -------
TOTAL ASSETS $ 309,775 $ 300,262
======= =======
LIABILITIES AND STOCKHOLDERS'EQUITY
Current Liabilities
Accounts payable $ 23,988 $ 15,478
Accrued expenses 31,713 30,297
------- -------
Total current liabilities 55,701 45,775
Revolving line of credit 130,000 128,000
Deferred income taxes 4,958 4,958
STOCKHOLDERS'EQUITY
Common stock 15,389 15,358
Additional paid-in capital 50,142 49,500
Accumulated other comprehensive loss (2,513) (2,654)
Retained earnings 96,001 86,902
------- -------
Total 159,019 149,106
Less: Treasury stock (39,903) (27,577)
------- -------
Stockholders' Equity 119,116 121,529
------- -------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 309,775 $ 300,262
======= =======
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
<PAGE>
<TABLE>
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
Dec. 25, Dec. 26, Dec. 25, Dec. 26,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET SALES $137,452 $127,297 $250,876 $239,983
OPERATING EXPENSES:
Cost of sales 49,720 46,253 89,669 87,808
Selling and advertising 51,409 48,028 94,611 90,335
General and administrative 20,100 18,262 38,625 35,807
------- ------- ------- -------
Total operating expenses 121,229 112,543 222,905 213,950
INCOME FROM OPERATIONS 16,223 14,754 27,971 26,033
OTHER INCOME/(EXPENSE):
Interest income 24 25 39 52
Interest expense (2,041) (2,301) (4,025) (4,480)
Gain on pension settlement - 259 - 259
------- ------- ------- -------
INCOME BEFORE TAXES 14,206 12,737 23,985 21,864
PROVISION FOR INCOME TAXES 5,511 4,825 9,313 8,474
------- ------- ------- -------
NET INCOME 8,695 7,912 14,672 13,390
------- ------- ------- -------
OTHER COMPREHENSIVE INCOME/(LOSS) (88) (563) 141 (769)
------- ------- ------- -------
COMPREHENSIVE INCOME $ 8,607 $ 7,349 $ 14,813 $ 12,621
======= ======= ======= =======
PER SHARE AMOUNTS:
Basic Earnings Per Share $ .63 $ .55 $ 1.06 $ .93
======= ======= ======= =======
Diluted Earnings Per Share $ .62 $ .53 $ 1.04 $ .91
======= ======= ======= =======
Dividends $ .20 $ .20 $ .40 $ .40
======= ======= ======= =======
BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING 13,799 14,401 13,891 14,365
Plus incremental shares from assumed
conversion of stock options 202 439 236 390
------- ------- ------- -------
DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING 14,001 14,840 14,127 14,755
======= ======= ======= =======
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
<PAGE>
<TABLE>
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(unaudited)
<CAPTION>
Six Months Ended
Dec. 25, Dec. 26,
1999 1998
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 14,672 $ 13,390
Adjustments to reconcile net income to cash:
Depreciation 7,247 6,807
Amortization 5,808 6,079
Gain on disposal of assets (87) -
Deferred income taxes 45 82
Gain on pension settlement - (259)
Provision for losses on accounts receivable 2,104 2,074
Employee benefit charges 94 2,492
Changes in assets and liabilities:
Accounts receivable (8,314) (8,784)
Inventories and prepaid expenses (543) 584
Accounts payable 8,592 (342)
Income taxes payable 2,223 (2,570)
Accrued expenses (631) (2,850)
-------- -------
Net cash provided by operating activities 31,210 16,703
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (11,340) (9,637)
Proceeds from sale of facility and equipment 1,122 -
Acquisition of business - (174)
Other Assets - (32)
-------- -------
Net cash used in investing activities (10,218) (9,843)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (67,000) (40,000)
Proceeds from borrowings under credit line 69,000 31,500
Proceeds from issuance of common stock 455 1,466
Acquisition of treasury stock (12,326) (147)
Dividends paid (5,571) (5,742)
-------- -------
Net cash used in financing (15,442) (12,923)
activities
EFFECT OF EXCHANGE RATE CHANGES ON CASH 18 (51)
-------- -------
NET INCREASE/ (DECREASE) IN CASH AND
CASH EQUIVALENTS 5,568 (6,114)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,484 10,823
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,052 $ 4,709
======== =======
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation/Accounting Policies
- --------------------------------------------
The consolidated financial statements contained in this report are
unaudited(except for June 26, 1999 amounts) but reflect all adjustments,
consisting only of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair statement of the results of the interim
periods reflected. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to applicable rules
and regulations of the Securities and Exchange Commission. The consolidated
financial statements included herein should be read in conjunction with the
financial statements and notes thereto, and the Independent Auditors' Report
in the Company's Annual Report on Form 10-K for the fiscal year ended June
26, 1999. Reference is made to the accounting policies of the Company
described in the notes to the consolidated financial statements in the
Company's Annual Report on Form 10-K for the fiscal year ended June 26, 1999.
The Company has consistently followed those policies in preparing this
report. The results of operations for the interim period reported herein are
not necessarily indicative of results to be expected for the full year.
2. Acquisitions
- ----------------
In fiscal 1998 the Company acquired both Rapidforms, Inc. and McBee Systems,
Inc. As part of the purchase accounting for the both acquisitions, and
included in the allocation of the acquisition cost, were liabilities recorded
to cover the anticipated costs related to plans to close redundant facilities
and reduce personnel. Approximately $5,552,000 was accrued. The remaining
liability as of December 25, 1999 was $504,000 and was related to employee
termination benefits. For the three months ended December 25, 1999, $217,000
had been spent to reduce this liability and for the six months ended December
25, 1999, $631,000 had been spent.
The company anticipates that the remaining liabilities will be resolved by
the end of fiscal year 2000. Should the integration liabilities for McBee
and Rapidforms be settled at amounts less than their original estimates, the
excess will reduce the amount of recorded goodwill.
3. Inventories
- --------------
Inventories are carried at the lower of first-in, first-out cost or market.
Inventories at December 25, 1999 and June 26, 1999 consisted of:
<TABLE>
<CAPTION>
(unaudited)
Dec. 25, June 26,
1999 1999
----------- -----------
<S> <C> <C>
Raw paper $ 1,747,000 $ 1,692,000
Business forms and related office products 21,329,000 19,846,000
---------- -----------
Total $23,076,000 $21,538,000
=========== ===========
</TABLE>
<PAGE>
4. Financial Information by Business Segment
- --------------------------------------------
The Company has identified three reportable segments. The first is titled
"Printed Products-Direct Marketing" and represents those business operations
that sell primarily printed products such as checks and business forms to
small businesses through direct marketing. The second segment, "Printed
Products-Direct Sales," also sells checks and business forms to small
businesses; however, they sell through either distributors or by directly
selling to the customer. "Packaging and Display Products" is the third
segment and primarily resells items including packaging and shipping supplies
and retail signage. These products are marketed through a combination of
direct marketing and direct selling efforts.
The Company evaluates segment performance and allocates resources based
on a profit from operations measure. This measure is akin to income from
operations as reported on the statements of consolidated income and
comprehensive income in that it excludes interest and other income and
expense. This measure, however, also excludes certain items that are
reported within income from operations. These include amortization, 401(k)
expenses, integration charges and corporate overhead. These items are not
used by the chief operating decision maker in assessing segment results. In
order to reconcile the segment numbers to the Company's income before income
taxes, adjustments representing the items listed above totaling $10,502,000
and $10,296,000 for the three months ended December 25, 1999 and December 26,
1998 and $20,257,000 and $20,790,000 for the six months ended December 25,
1999 and December 26, 1998, 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.
<PAGE>
<TABLE>
<CAPTION>
Printed Products
------------------------------ Packaging and
Direct Marketing Direct Sales Display Products Total
---------------- ------------ ---------------- -----
(unaudited)
Three months ended
Dec. 25, 1999
<S> <C> <C> <C> <C>
Net sales $89,763,000 $26,512,000 $21,177,000 $137,452,000
Profit from
operations 21,200,000 2,065,000 1,443,000 24,708,000
</TABLE>
<TABLE>
<CAPTION>
(unaudited)
Three months ended
Dec. 26, 1998
<S> <C> <C> <C> <C>
Net sales $85,183,000 $22,716,000 $19,398,000 $127,297,000
Profit from
operations 18,831,000 2,888,000 1,314,000 23,033,000
</TABLE>
<TABLE>
<CAPTION>
Printed Products
------------------------------ Packaging and
Direct Marketing Direct Sales Display Products Total
---------------- ------------ ---------------- -----
(unaudited)
Six months ended
Dec. 25, 1999
<S> <C> <C> <C> <C>
Net sales $162,179,000 $50,007,000 $38,690,000 $250,876,000
Profit from
operations 38,081,000 3,640,000 2,521,000 44,242,000
</TABLE>
<TABLE>
<CAPTION>
(unaudited)
Six months ended
Dec. 26, 1998
<S> <C> <C> <C> <C>
Net sales $158,709,000 $45,247,000 $36,027,000 $239,983,000
Profit from
operations 35,430,000 5,315,000 1,909,000 42,654,000
</TABLE>
The amounts shown reflect a shift of the allocation of centralized
information systems costs to the Printed Products-Direct Sales segment in the
first two quarters of fiscal year 2000 from the Printed Products-Direct
Marketing segment due to conversion of McBee's order-taking system to the
NEBS Direct Marketing order entry system in August 1999.
5. New Accounting Pronouncements
- -------------------------------
In June, 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
Company will adopt this standard in fiscal 2001. The Company has determined
based on its preliminary assessment of the standard, that the adoption of
this standard will have an immaterial impact on its consolidated financial
statements.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
- -------------------------------------------------------------------
and Results of Operations
- ---------------------------------
Overview
- --------
New England Business Service, Inc. (the "Company"), was founded in 1952,
incorporated in Massachusetts in 1955 and reincorporated in Delaware in 1986.
The Company designs, produces and distributes business forms, checks,
envelopes, labels, greeting cards, signs, stationery and related printed
products and distributes packaging, shipping and warehouse supplies,
software,work clothing and other business products through direct mail,
direct sales, telesales, dealers and the internet to small businesses
throughout the United States, Canada, the United Kingdom and France.
The Company has identified three reportable segments. The first is titled
"Printed Products-Direct Marketing" and represents those business operations
that sell primarily printed products such as checks and business forms to
small businesses through direct marketing. The second segment, "Printed
Products-Direct Sales," also sells checks and business forms to small
businesses; however, they sell through either distributors or by directly
selling to the customer. "Packaging and Display Products" is the third
segment and primarily resells items including packaging and shipping supplies
and retail signage. These products are marketed through a combination of
direct marketing and direct selling efforts.
Any sentence followed by an asterisk (*) in this section constitutes a
forward-looking statement which reflects the Company's current expectations.
There can be no assurance the Company's actual performance will not differ
materially from that projected in such forward-looking statements due to the
important factors described in the section to this Management's Discussion
and Analysis of Financial Condition and Results of Operations titled "Certain
Factors That May Affect Future Results."
Results of Operations
- ---------------------
Net sales increased $10.1 million or 7.9% to $137.5 million in the second
quarter of fiscal year 2000 from $127.3 million in last year's second
quarter. Sales were favorably impacted as a result of the growth in sales of
seasonal holiday cards and personalized work clothing. These products are
sold principally through the Direct Marketing Segment. Sales in this segment
increased $4.5 million or 5.4%. The Direct Selling Segment increased $3.8
million or 16.7% attributable to growth in bank referral contracts and the
Packaging and Display Segment increased $1.8 million or 9.2% benefiting from
expanded distribution facilities.
Net sales increased $10.9 million or 4.6% to $250.9 million for the first six
months of fiscal year 2000 from $239.9 million in last year's six months.
The sales increase was due to similar reasons as outlined above regarding the
second quarter results.
<PAGE>
For the second quarter of fiscal year 2000, cost of sales decreased
slightly to 36.1% of sales from 36.3% in last year's comparable period. For
the first six months of fiscal year 2000, cost of sales decreased to 35.7% of
sales from 36.5% in last year's comparable period. The decrease can be
attributed to operational consolidations and increased handling charges which
reduce freight costs.
Selling and advertising expense decreased slightly to 37.4% of sales in the
second quarter of fiscal year 2000 from 37.7% of sales in last year's
comparable quarter. This was the result of increased sales leverage against
advertising and consistent amortization costs for the period. For the first
six months of fiscal year 2000 selling and advertising expense increased
slightly to 37.7% of sales from 37.6% of sales in last year's comparable
period. Management anticipates that such costs will remain consistent for
the remainder of fiscal 2000.*
General and administrative expense increased to 14.6% of sales in the
second quarter of fiscal year 2000 from 14.3% in last year's comparable
quarter. The increase was principally the result of increased spending
levels associated with the Company's program to reengineer its financial and
operational information systems and ensure its capability to operate in the
year 2000 and higher incentive compensation expense than the prior year.
General and administrative costs increased to 15.4% of sales in the first six
months of fiscal year 2000 from 14.9% of sales in the last year's comparable
period. The increase was due to similar reasons as outlined above regarding
the second quarter results. Management anticipates that these costs will
continue to increase slightly for the remainder of fiscal 2000.* As
discussed below, the Company has had no indication that its Y2K changeover
was not successful.
Interest expense decreased to 1.5% of sales in the second quarter of fiscal
year 2000 and to 1.6% for the first six months of the year from 1.8% of sales
in the prior year's comparable periods. The decrease is the result of a
decrease in the principal amount of debt used for financing activities and a
favorable effective interest rate.
The provision for income taxes as a percentage of pre-tax income increased
to 38.8% in the second quarter of fiscal year 2000 from 37.9% in the
comparable quarter in fiscal year 1999 due to an increase in the Company's
overall effective state tax rate.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard will be adopted by the
Company in fiscal year 2001. The Company has determined based on its
preliminary assessment of the standard, that the adoption of this standard
will have an immaterial impact on its consolidated financial statements.
<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 experienced delays
in certain facets of the reengineering effort, and as a result modified its
Year 2000 plan to focus on system remediation rather than system replacement.
The Company's operational information systems have been inventoried and
assessed for Year 2000 compliance, and recommended remediation efforts with
respect to all of the Company's mission critical systems have been completed.
The Company had conducted extensive testing to ensure the efficiency of its
remediation efforts, and based on currently available information derived
from such testing and the passing of the January 1, 2000 date, the Company is
not aware of any Year 2000 compliance problems affecting its internal
systems.
In addition, the Company had communicated with key vendors in order to
assess their ability to maintain normal operations in the Year 2000. Such
key vendors include, but are not limited to, MCI Worldcom, R.R. Donnelley and
Sons, Appleton Papers, and United Parcel Service of America, Inc. The
Company has also monitored the Year 2000 compliance activities of the U.S.,
Canadian and U.K. postal services and pertinent local and regional utilities.
Relying on public announcements and other information provided by these key
vendors, the Company is currently not aware of any Year 2000 compliance
problems with any of them that could have a material adverse effect on the
Company's business operations or financial prospects. Based on its
assessment of the Year 2000 readiness of its key vendors and the passing of
the January 1, 2000 date, the Company is not aware of any Year 2000
compliance problems affecting these vendors.
The Company had 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 were not expected to represent a material risk to the
Company. There were no significant Year 2000 compliance problems that
occurred subsequent to January 1, 2000.
Further, the Company has approximately 2.5 million active customers, and
the failure of any one customer due to a Year 2000 issue would not have a
material adverse impact on the Company's financial performance or long-term
prospects.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities for the six months ended December 25,
1999 was $ 31.2 million and represented an increase of $14.5 million from the
$16.7 million provided in the comparable period last year. The increase in
operating cash flow was primarily the result of changes in accounts payable
and taxes payable accounts which will likely reverse by the end of the fiscal
year as well as an increase in net income.*
Working capital at December 25, 1999 amounted to $56.3 million, including
$11.0 million of cash and short term investments. At June 26, 1999, working
capital amounted to $53.9 million, including cash and short term investments
of $5.5 million. The $2.4 million increase in working capital during the
period is principally due to an increase in accounts receivable due to the
effect of the seasonal nature of the greeting card and workwear businesses.
During the three months ended December 25, 1999, $7.8 million was spent to
repurchase 339,900 shares of the Company's common stock.
Capital expenditures for the six months ended December 25, 1999 were $11.3
million versus the $9.6 million expended during last year's comparable
period. Capital expenditures in the first two quarters of fiscal year 1999
and fiscal year 2000 included expenditures for information systems
infrastructure and manufacturing related equipment. In addition, the Company
constructed a $1.2 million warehouse distribution facility in Douglasville,
Georgia and $1.7 million addition to the Midland, Ontario location in the
first two quarters of fiscal year 2000 and 1999, respectively. The Company
anticipates that total capital outlays will approximate $20 million in fiscal
year 2000.*
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. The total committed line currently stands at $165 million. At
December 25, 1999, the Company had $130 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 two banks. These swap agreements contain
notional principal amounts and other terms determined with respect to the
Company's forecasts of future cash flows and borrowing requirements. At
December 25, 1999, the notional principal amount outstanding of the interest
rate swap agreements totaled $85 million.
In order to minimize the Company's exposure to foreign currency
fluctuations with respect to an intercompany loan to a foreign subsidiary,
the Company has entered into a short-term forward exchange rate contract with
a major commercial bank in a currency amount directly corresponding to the
short-term intercompany loan amount. At December 25, 1999, the Company had
an outstanding forward exchange rate contract for $ 1.5 million worth of
Pounds Sterling.
The Company anticipates that its current cash on hand, cash flow from
operations and additional availability under the line of credit will be
sufficient to meet the Company's liquidity requirements for its operations
and capital expenditures during fiscal year 2000.* However, the Company may
pursue additional acquisitions from time to time which would likely be funded
through the use of available cash, the issuance of stock, the obtaining of
additional credit, or any combination thereof.*
<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.
<PAGE>
A majority of our sales and profits come from selling standardized
business forms, checks and related products by mail order, telesales and
direct sales to a target market consisting mainly of small businesses. We
believe that the critical success factors to compete in this market include
competitive pricing, breadth of product offering, and the ability to attract
and retain a large number of individual customers. Known material risks that
may affect those critical success factors are described below.
Our core business faces increased competition from new sources, such as
office supply superstores and Internet-based vendors. Increased competition
may require us to reduce prices or offer other incentives in order to attract
new customers and retain existing customers, which could reduce our profits.
Low-price, high-volume office supply chain stores have entered our core
business of selling standardized business forms, checks and related products
to small businesses. Because of their size, these superstores have the
buying power to offer these products at competitive prices. These
superstores also offer the convenience of "one-stop shopping" for a broad
array of office supplies that we do not offer. In addition, these national
superstore competitors have greater financial strength to reduce prices or
increase promotional discounts in order to seek or retain market share.
Recently, Internet-based vendors have begun to compete in our core
business. These vendors include both start-up ventures as well as the online
stores of the office supply national chains. We believe that the favored
business model for many Internet-based vendors is to seek market share as
rapidly as possible through significantly reduced prices and deep
discounting.
If any of these new competitors seek to gain or retain market share
through price reductions or increased discounting, we may be forced to reduce
our prices or match the discounts in order to stay competitive, which could
reduce our profits.
Technological improvements may reduce our competitive advantage over our
smaller competitors, which could reduce our profits.
Historically, our relatively greater financial strength and size has
enabled us to offer a broader array of products, particularly those having a
complex construction, at lower prices than the small local and regional
dealers, distributors and printers who constitute our primary competition.
Improvements in the cost and quality of printing technology are enabling
these smaller competitors to gain access to products of complex design and
functionality at competitive costs. Increased competition from local and
regional competitors could force us to reduce our prices in order to attract
and retain customers, which could reduce our profits.
Because our long-term sales growth is dependent on our ability to
continually attract new customers in our target small business market,
economic events that adversely affect the small business economy may reduce
our sales and profits.
<PAGE>
Average annual sales per customer of our core products have remained
relatively stable over time. As a result, we rely, in part, on continually
attracting new customers for these mature products. Our sales and profits
have been adversely affected in the past by recession-related contractions in
the small business economy. We expect that our sales and profits will
continue to be affected by changes in the levels of small business formations
and failures and from other economic events that affect the small business
economy generally.
Because our long-term sales growth is dependent on our ability to
continually attract new customers in our target small business market,
changes in the direct marketing industry that reduce our competitive
advantage in contacting prospective customers may reduce our sales and
profits.
Growth in the total number of our direct mail customers depends on
continued access to high-quality lists of newly-formed small businesses. In
the past, our ability to compile proprietary prospect lists was a distinct
competitive advantage. However, the external list compilation industry has
grown more sophisticated, and comprehensive lists of new small business
formations are now commercially available to our competitors. In addition,
the Internet has the potential to eliminate our advantage of scale in direct
marketing by providing all competitors, regardless of current size, with
access to prospective customers.
We currently rely on the speed of our delivery of promotional materials
to prospective customers to gain advantage over competitors. We are also
expanding our Internet product offerings and capabilities and seeking to
increase our visibility on the Internet. Notwithstanding these efforts, a
deterioration in our competitive advantage in contacting prospective
customers could reduce our sales and profits.
In addition, the enactment of privacy laws could constrain our ability
to obtain prospect lists or telemarket to prospective customers.
The cost of paper to produce our products, catalogs and advertising
materials makes up a significant portion of our total costs. We also rely on
the U.S. Postal Service to deliver most of our promotional materials. Prices
for the various types of paper that we use have been volatile, and we expect
them to continue to be so. Third class postal rates have generally increased
over the past ten years, at times significantly. We are not sure that we
will always be able to reduce costs in other areas or increase prices for our
products sufficiently to offset increases in paper costs and postal rates.
If we are unable to offset these cost increases, our profits will be
adversely affected.
Disruption in the services provided by certain of our critical vendors
may adversely affect our operating performance and profits.
<PAGE>
In order to obtain favorable pricing, we have selected a limited number
of vendors to provide key services to our business. Examples of this are as
follows:
- MCI WorldCom provides most of the toll-free telephone lines that
we use in connection with our mail order business,
- we use United Parcel Service to deliver most of the products
that we ship to customers,
- we use R.R. Donnelley and Sons for the printing and processing
of most of the catalogs that we mail each year,
- we rely on the postal services of the countries in which we do
business to deliver our catalogs and other advertising to
customers.
In the past we have been adversely affected by disruption of some of
these services due to labor actions, system failures, adverse weather
conditions and other natural disasters. If there are future interruptions in
service from one or more of these vendors, we believe that there could be a
significant disruption to our business due to our inability to readily find
alternative service providers at comparable rates.
Sales of our standardized forms products face technological obsolescence
and changing customer preferences, which could reduce our sales and profits.
Our standardized business forms, checks and related products provide our
customers with financial and business records to manage their businesses.
Continual technological improvements have provided our target customers in
several market segments with alternative means to enact and record business
transactions. For example, the price and performance capabilities of
personal computers and related printers now provide a cost-competitive means
to print low-quality versions of our business forms on plain paper. In
addition, electronic transaction systems and off-the-shelf business software
applications have been designed to automate several of the functions
performed by our business form products.
In response to the gradual obsolescence of our standardized forms
business, we continue to develop our capability to provide custom and full-
color products. However, we have less of a cost advantage with these
products than with standardized forms, due to improvements in the cost and
quality of printing technology available to our smaller local and regional
competitors. We are also seeking to introduce new products that are less
susceptible to technological obsolescence. We may develop new products
internally, procure them from third party vendors, or obtain them through the
acquisition of a new business. We generally realize lower gross margins on
out-sourced products than on products that we manufacture ourselves. The
risks associated with the acquisition of new businesses are described below.
<PAGE>
If new printing capabilities and new product introductions do not
continue to offset the obsolescence of our standardized business forms
products, there is a risk that the number of new customers we attract and
existing customers we retain may diminish, which could reduce our sales and
profits. Decreases in sales of our historically high margin standardized
business forms products due to obsolescence could also reduce our gross
margins. This reduction could in turn adversely impact our profits unless we
are able to offset the reduction through the introduction of new high margin
products and services or realize cost savings in other areas.
Our growth strategy depends, in part, on the acquisition of
complementary businesses that address our target small business market.
The acquisition of complementary businesses that address our target
small business market has been important to our growth strategy. We intend
to continue this acquisition activity in the future. The success of this
activity depends on the following:
- our ability to identify suitable businesses and to negotiate
agreements on acceptable terms,
- our ability to obtain financing through additional borrowing, by
issuing additional shares of common stock, or through internally
generated cash flow, and
- our ability to achieve anticipated savings and growth and avoid
disruption to our existing businesses.
In evaluating a potential acquisition, we conduct a business, financial
and legal review of the target. This review is intended to confirm our
assumptions with respect to the projected future performance of the target
and to identify the benefits and risks associated with those assumptions. We
cannot be certain that our review will identify all potential risks
associated with the purchase, integration or operation of acquired
businesses. Unanticipated risks may adversely affect the benefits that we
expect to obtain from any given acquisition.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
The Company is exposed to a number of market risks, including the effects
of changes in foreign currency exchange rates and interest rates. Investments
in and 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 26, 1999. 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 loan created to fund
the operating cash requirements of the Company's European operations (see the
Notes to Consolidated Financial Statements included in the Annual Report on
Form 10-K for the year ended June 26, 1999), the Company has entered into a
forward exchange rate contract for the amount of the loan and associated
interest. The currency hedged is the British pound. While there is no
specified repayment date for the loan, the forward exchange rate contract is
of limited duration and is replaced periodically as it matures.
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
- ---------------------------
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
- ------------------------------------------------------------
a. The annual Meeting of Stockholders was held on October 22, 1999
b. See Item 4(c) below.
c. The stockholders fixed the number of Directors to be elected at nine and
elected the following as Directors:
For Authority Withheld
--- -------------------
Robert J. Murray 12,084,179 6,778
Neil S. Fox 12,084,179 6,778
Robert L. Gable 12,084,179 6,778
Benjamin H. Lacy 12,082,679 8,278
Thomas J. May 11,793,679 297,278
Herbert W. Moller 12,084,179 6,778
Richard H. Rhoads 12,084,179 6,778
Brian E. Stern 12,084,179 6,778
M. Anne Szostak 12,084,179 6,778
The stockholders voted to ratify the selection of Deloitte and Touche
LLP as independent auditors of the Company for the fiscal year ending June
24, 2000.
For Against Abstain
--- -------- --------
12,088,310 1,060 1,587
d. Not applicable
Item 5. OTHER INFORMATION
- --------------------------
Proposals of stockholders intended to be presented at the 2000 annual
meeting of stockholders must be received by the Company, at its offices at
500 Main Street, Groton, Massachusetts 01471, no later than May 13, 2000, in
order to be considered for inclusion in the Company's proxy statement and
proxy card relating to that meeting in accordance with Rule 14a-8 under the
Securities Exchange Act of 1934.
Additionally, under advance notice provisions in our by-laws, director
nominations or any other proposals to be presented outside of the processes
of Rule 14a-8 by a stockholder from the floor of the 2000 annual meeting of
stockholders must be submitted by the stockholder to our corporate secretary
at the above address no later than July 24, 2000 and no earlier than June 24,
The notice must contain the information required by the by-laws. These
advance notice provisions are separate from the requirements, which a
stockholder must meet in order to have a proposal included in the Company's
proxy statement under Rule 14a-8.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a. Exhibits
Exhibit No. Description
---------- -----------
27 Financial Data Schedule
b. Reports on Form 8-K.
Not applicable
<PAGE>
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)
February 8, 2000 /s/Daniel M. Junius
- ----------------- --------------------
Date Daniel M. Junius
Senior Vice President-Chief
Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF NEW ENGLAND BUSINESS SERVICE, INC. AND
ITS SUBSIDIARIES AS OF DECEMBER 25, 1999 AND THE RELATED STATEMENTS OF
CONSOLIDATED INCOME AND CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-24-2000
<PERIOD-START> JUN-27-1999
<PERIOD-END> DEC-25-1999
<CASH> 11,052
<SECURITIES> 0
<RECEIVABLES> 63,881
<ALLOWANCES> 5,095
<INVENTORY> 23,076
<CURRENT-ASSETS> 112,058
<PP&E> 155,878
<DEPRECIATION> 96,892
<TOTAL-ASSETS> 309,775
<CURRENT-LIABILITIES> 55,701
<BONDS> 0
0
0
<COMMON> 15,389
<OTHER-SE> 103,727
<TOTAL-LIABILITY-AND-EQUITY> 309,775
<SALES> 250,876
<TOTAL-REVENUES> 250,876
<CGS> 89,669
<TOTAL-COSTS> 89,669
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,104
<INTEREST-EXPENSE> 4,025
<INCOME-PRETAX> 23,985
<INCOME-TAX> 9,313
<INCOME-CONTINUING> 14,672
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,672
<EPS-BASIC> 1.06
<EPS-DILUTED> 1.04
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