-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ABMOtrWk2xzMqLao8m0D3GltkKs5RSUz88zQETqCi1hYcEWseeXCKSUUiGHiLN0j Q5ZD0gxZGjWm8+lihnjk3Q== 0000205700-02-000121.txt : 20021112 0000205700-02-000121.hdr.sgml : 20021111 20021112094436 ACCESSION NUMBER: 0000205700-02-000121 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020928 FILED AS OF DATE: 20021112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW ENGLAND BUSINESS SERVICE INC CENTRAL INDEX KEY: 0000205700 STANDARD INDUSTRIAL CLASSIFICATION: MANIFOLD BUSINESS FORMS [2761] IRS NUMBER: 042942374 STATE OF INCORPORATION: DE FISCAL YEAR END: 0629 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11427 FILM NUMBER: 02815503 BUSINESS ADDRESS: STREET 1: 500 MAIN ST CITY: GROTON STATE: MA ZIP: 01471 BUSINESS PHONE: 9784486111 10-Q 1 form10qq1_03.txt NEW ENGLAND BUSINESS SERVICE, INC. FORM 10Q 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 September 28, 2002. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number 1-11427 NEW ENGLAND BUSINESS SERVICE, INC. ---------------------------------- (Exact name of the registrant as specified in its charter) Delaware 04-2942374 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 Main Street Groton, Massachusetts, 01471 ---------------------------- (Address of principal executive offices) (Zip Code) (978) 448-6111 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of common shares of the Registrant outstanding on November 12, 2002 was 13,095,058. PART I - FINANCIAL INFORMATION - ------------------------------ Item 1. Financial Statements - ---------------------------- NEW ENGLAND BUSINESS SERVICE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
Sept. 28, June 29, 2002 2002 -------- -------- ASSETS Current Assets Cash and cash equivalents $ 6,784 $ 6,112 Accounts receivable, net 55,247 55,738 Inventories, net 35,432 34,095 Direct mail advertising materials, net and prepaid expenses 19,406 13,374 Deferred income tax benefit 11,863 13,240 -------- -------- Total current assets 128,732 122,559 Property and Equipment, net 72,541 73,602 Property Held for Sale 328 328 Deferred Income Tax Benefit 19,356 18,934 Goodwill and Other Intangible Assets, net 117,913 119,848 Long-Term Investment - 30,521 Other Assets 2,997 3,130 -------- -------- TOTAL ASSETS $341,867 $368,922 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 16,836 $ 16,858 Accrued expenses 45,075 48,126 Obligations under capital lease-current portion 901 1,102 -------- -------- Total current liabilities 62,812 66,086 Long-Term Debt 118,325 148,358 Deferred Income Taxes 17,981 17,758 STOCKHOLDERS' EQUITY Common stock 15,882 15,829 Additional paid-in capital 58,995 57,885 Unamortized value of restricted stock awards (1,011) (62) Accumulated other comprehensive loss (5,942) (7,411) Retained earnings 130,270 125,905 -------- -------- Total 198,194 192,146 Less Treasury stock, at cost (55,445) (55,426) -------- -------- Stockholders' Equity 142,749 136,720 -------- -------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $341,867 $368,922 ======== ========
See Notes to Condensed Consolidated Financial Statements NEW ENGLAND BUSINESS SERVICE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
Three Months Ended Sept. 28, Sept. 29, 2002 2001 -------- -------- NET SALES $128,851 $133,515 COST OF SALES 54,279 58,137 -------- -------- GROSS PROFIT 74,572 75,378 OPERATING EXPENSES: Selling and advertising 43,999 46,497 General and administrative 19,317 18,042 -------- -------- Total operating expenses 63,316 64,539 INCOME FROM OPERATIONS 11,256 10,839 OTHER INCOME/(EXPENSE): Interest income 32 50 Interest expense (3,077) (3,347) Loss on settlement of interest rate swaps (3,211) - Gain on sale of long-term investment 6,322 - -------- -------- INCOME BEFORE INCOME TAXES 11,322 7,542 PROVISION FOR INCOME TAXES 4,348 2,896 -------- -------- INCOME BEFORE THE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 6,974 4,646 -------- -------- EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE - (2,792) -------- -------- NET INCOME $ 6,974 $ 1,854 ======== ======== PER SHARE AMOUNTS: Basic Earnings Per Share Before the Effect of a Change in Accounting Principle $ .54 $ .37 ======== ======== Effect of a Change in Accounting Principle $ .00 $ (.22) -------- -------- Basic Earnings Per Share $ .54 $ .15 ======== ======== Diluted Earnings Per Share Before the Effect of a Change in Accounting Principle $ .52 $ .37 ======== ======== Effect of a Change in Accounting Principle $ .00 $ (.22) -------- -------- Diluted Earnings Per Share $ .52 $ .15 ======== ======== Dividends $ .20 $ .20 ======== ======== BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 13,025 12,541 Plus incremental shares from assumed conversion of stock options and contingently returnable shares 360 167 -------- -------- DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 13,385 12,708 ======== ========
See Notes to Condensed Consolidated Financial Statements NEW ENGLAND BUSINESS SERVICE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
Three Months Ended Sept. 28, Sept. 29, 2002 2001 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 6,974 $ 1,854 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 5,017 4,633 Amortization 1,784 2,247 (Gain)/Loss on disposal of asset (2) 4 Gain on sale of long-term investment (6,322) - Change in accounting principle - 2,792 Provision for losses on accounts receivable 1,507 1,175 Deferred Grants (2) - Employee benefit charges 214 1,318 Changes in assets and liabilities: Accounts receivable (1,186) (1,891) Inventories and prepaid expenses (6,982) (5,016) Accounts payable (11) 456 Income taxes payable 2,100 1,489 Accrued expenses (2,039) (968) -------- -------- Net cash provided by operating activities 1,052 8,093 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (4,124) (3,835) Purchase of long-term investment (5,421) (17,652) Proceeds from sale of long-term investment 42,264 - Proceeds from sale of equipment 11 - -------- -------- Net cash provided by/(used in) investing activities 32,730 (21,487) CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of debt (52,734) (6,359) Proceeds from borrowings, net of issuance costs 22,498 20,261 Proceeds from issuance of common stock 6 762 Dividends paid (2,609) (2,506) -------- -------- Net cash provided by/(used in) financing activities (32,839) 12,158 EFFECT OF EXCHANGE RATE CHANGES ON CASH (271) (98) -------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS 672 (1,334) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,112 7,154 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,784 $ 5,820 ======== ========
See Notes to Condensed Consolidated Financial Statements NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) 1. Basis of Presentation/Accounting Policies - -------------------------------------------- The condensed consolidated financial statements contained in this report are unaudited but reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results of the interim periods reflected. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to applicable rules and regulations of the Securities and Exchange Commission. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto, and the Independent Auditors' Report in the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 2002. Reference is made to the accounting policies of the Company described in the notes to the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 2002. The Company has consistently followed those policies in preparing this report. The results from operations for the interim periods reported herein are not necessarily indicative of results to be expected for the full year. Certain reclassifications have been made to the comparative periods so as to be in conformity with the current quarter presentations. 2. Restructuring and Impairment of Assets - ---------------------------------------- During fiscal year 2001, the Company undertook two distinct restructuring actions. The first resulted in a restructuring charge of $3,500 in fiscal year 2001 and an additional charge of $1,023 in fiscal year 2002 to provide for costs primarily associated with the Company's decision to more closely align its direct marketing and direct sales activities. As part of the restructuring program, the McBee US headquarters was relocated from Parsippany, New Jersey to the existing RapidForms facility in Thorofare, New Jersey. In addition, the McBee manufacturing plant in Damascus, Virginia was closed and a portion of leased warehousing space occupied by Chiswick in Sudbury, Massachusetts was vacated. In Canada, the McBee sales and marketing organizations were combined with NEBS Direct Marketing and are operating under the NEBS name. Approximately 140 employees were affected by the restructuring either through elimination of their positions or relocation. The second restructuring action resulted in the Company recording an additional restructuring charge in fiscal year 2001 of $3,645 and a credit of $(323) in fiscal year 2002 to provide for costs associated with the Company's decision to eliminate excess capacity by closing a manufacturing facility in Ogden, Utah and a leased distribution facility in Sudbury, Massachusetts, along with other actions to reduce the workforce in various locations. Approximately 175 employees were affected by this restructuring, either through elimination of their positions or relocation. The following is a table of the charges incurred and the cash paid in fiscal 2003 pursuant to these actions: First Restructuring Second Restructuring Employee Facility termination Facility closure costs benefit costs closure costs Total Three Months Ended ------------- ------------- ------------- --------- Sept. 28, 2002 Balance June 29, 2002 $1,038 $ 166 $451 $1,655 Payments for the period (87) (48) (423) (558) ------ ------ ------ ------ Balance Sept. 28, 2002 $ 951 $ 118 $ 28 $1,097 ====== ======= ====== ====== The activities related to all restructuring actions identified above are anticipated to be completed by the Company during fiscal year 2003 with the exception of lease payments, which may extend beyond this time frame.
3. Inventories - -------------- Inventories are carried at the lower of first-in, first-out cost or market. Inventories at September 28, 2002 and June 29, 2002 consisted of:
Sept.28, June 29, 2002 2002 ------- ------- Raw Material $ 1,669 $ 1,709 Work in Process 72 124 Finished Goods 33,691 32,262 ------ ------- Total $35,432 $34,095 ======= =======
4. Long-Term Investment - ----------------------- In July 2002, the Company invested $5,421 in the common stock of Advantage Payroll Services, Inc. ("Advantage") through the exercise of warrants. This investment was in addition to the Company's holdings at June 29, 2002. In September 2002, Advantage merged with Paychex, Inc. At closing, the Company received the first payment of proceeds from the merger transaction of $42,264 and the Company recognized a $6,322 gain on the sale of its long-term investment. Subject to certain potential post-closing adjustments, the Company expects to receive up to another $5,100 in proceeds during the fiscal year, which would result in an additional gain. In addition to paying down floating rate debt, the Company used the proceeds to terminate two interest rate swap agreements with a notional amount of $50,000 with two commercial banks. These interest rate swaps were no longer needed to hedge the reduced level of the Company's floating rate debt. The Company was required to make a termination payment equivalent to its fair value of $3,211. This amount, which was reclassed from other comprehensive income to other expense, represents a loss on settlement of interest rate swaps to terminate the agreements. 5. Goodwill and Other Intangible Assets - ------------------------------------------ In the first quarter of fiscal 2002 SFAS No. 142 "Goodwill and Other Intangible Assets" was adopted. SFAS No. 142 eliminates the current requirement to amortize goodwill and indefinite-lived intangible assets, addresses the amortization of intangible assets with a defined life and addresses the impairment testing and recognition for goodwill and intangible assets. In applying SFAS No. 142, the Company completed the transitional intangible asset impairment test by determining the carrying amount of its various reporting units and comparing that with their fair value, determined by using a multiple of earnings before interest, taxes, depreciation and amortization. As a result, the Company recognized an impairment charge to write off goodwill in the amount of $2,792 relating to its European business within its International business segment. The impairment loss is recognized in the condensed consolidated statements of income under the caption "Effect of a Change in Accounting Principle". The Company completed the fiscal 2002 annual intangible asset impairment test for all reporting units as of April 27, 2002. The Company determined there was no impairment as of the measurement date. Intangible assets consist of the following:
June 29, Sept. 28, 2002 2002 ---------- --------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization ------------- ------------ -------------- ------------ Intangible assets with defined lives: Customer lists $46,327 $36,562 $46,327 $38,006 Covenant not to compete 1,183 1,183 1,183 1,183 Debt issue costs 2,729 1,209 2,731 1,374 Long-term contracts 5,300 663 5,300 746 Bank referral agreements 7,400 1,511 7,400 1,603 Intangible assets with indefinite lives: Tradenames 32,800 2,727 32,800 2,727 -------- -------- -------- -------- Total intangible assets $95,739 $43,855 $95,741 $45,639 ======== ======== ======== ========
Changes in the carrying amount of goodwill (net) for the three months ended September 28, 2002, by segment are as follows: June 29, Sept. 28, 2002 Adjustments 2002 -------- ------------ ---------- Direct Marketing-US $24,237 - $24,237 Direct Sales-US 7,501 - 7,501 Apparel 9,624 - 9,624 Packaging and Display Products 23,246 - 23,246 International 3,356 $ (153) 3,203 -------- -------- -------- Total $67,964 $ (153) $67,811 ======== ======== ======== The adjustment of $153 in the International segment is the effect of the change in foreign currency translation rates. Amortization of intangible assets for the three months ended September 28, 2002 was $1,784. Estimated amortization of intangible assets for fiscal years 2003, 2004, 2005, 2006 and 2007, without consideration of any other increases or decreases in the balance of the assets, is $7,134, $5,434, $759, $752 and $749, respectively.
6. Comprehensive Income and Accumulated Other Comprehensive Income - ------------------------------------------------------------------- Other Comprehensive Income consists of foreign currency translation adjustments, pension adjustments, unrealized gains and losses on investments and changes in the fair market value of cash flow hedges. The Company's comprehensive income is set forth below:
Three Months Ended Sept. 28, Sept. 29, 2002 2001 ----------- --------- Net Income $ 6,974 $ 1,854 Changes in: Unrealized losses on investments, net of tax 159 (41) Foreign currency translation adjustments, net (766) (558) Unrealized gains/(losses) on derivatives held for hedging purposes, net of tax 2,076 (2,057) ------- ------- Comprehensive income/(loss) $ 8,443 $ (802) ======= =======
The Company's accumulated other comprehensive income is set forth below: Balance Balance Sept. 28, June 29, 2002 2002 --------- ---------- Unrealized losses on investments, net of tax $ (133) $ (292) Foreign currency translation adjustments, net (4,384) (3,618) Pension adjustments, net of tax (305) (305) Unrealized gains/(losses) on derivatives held for hedging purposes, net of tax (1,120) (3,196) -------- ------- Total $(5,942) $(7,411) ======== =======
7. Financial Information by Business Segment - -------------------------------------------- The Company has identified five reportable segments. The first segment is "Direct Marketing-US" and represents those business operations that sell primarily printed products such as checks and business forms to small businesses through direct marketing in the United States. The second segment, "Direct Sales-US", also sells primarily checks and business forms to small businesses; however, they sell through a direct sales force to the customer in the United States and, to a lesser extent, through distributors. The third segment, "Apparel", utilizes independent sales representatives to market its specialty apparel products and to solicit orders from customers in the promotional products/advertising specialty industry. "Packaging and Display Products", the fourth segment, primarily resells packaging and shipping supplies and retail signage marketed through a combination of direct marketing and direct selling efforts. The fifth segment, "International", sells primarily printed products such as checks and business forms to small businesses in Europe and Canada through direct marketing, distributors or by directly selling to the customer. The Company evaluates segment performance and allocates resources based on a profit from operations measure. This measure is similar to income from operations as reported on the condensed consolidated statement of income in that it excludes interest and other income and expense. This measure, however, also excludes certain items that are reported within income from operations. These include management incentive compensation, amortization, integration charges, restructuring charges, impairment charges investment gains and corporate expenses. The chief operating decision-maker, in assessing segment results, does not consider these items. In order to reconcile the segment numbers to the Company's income before income taxes, adjustments representing the items listed above totaling $6,162 and $8,794 for the three months ended September 28, 2002 and September 29, 2001, respectively, need to be made to the reported segment results. Net sales and profit from operations for each of the Company's business segments are set forth below:
Packaging and Direct Direct Display Marketing-US Sales-US Apparel Products International Total ----------- ----------- ----------- ----------- ------------- ------ Three months ended Sept. 28, 2002 Net sales $63,886 $26,546 $ 9,758 $19,629 $ 9,032 $128,851 Profit from operations 14,967 2,356 (708) 419 450 17,484 Less adjustments listed above 6,162 Income before income taxes $ 11,322
Three months ended Sept. 29, 2001 Net sales $66,789 $25,720 $11,846 $19,525 $ 9,635 $133,515 Profit from operations 14,138 1,403 11 306 478 16,336 Less adjustments listed above 8,794 Income before income taxes $ 7,542
8. New Accounting Pronouncements - ------------------------------- In July 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long- lived assets. This Statement supercedes SFAS No. 121 on the same topic and the accounting and certain reporting provisions of APB Opinion 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as defined in that Opinion). This Statement also amends Accounting Research Bulletin ("ARB") 51, "Consolidated Financial Statements," to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The Company adopted this Statement in the first quarter of fiscal 2003. The implementation of this Statement did not impact the Company's consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS 146 addresses the financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Consensus No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". The Company will adopt this Statement in fiscal 2003. Management believes that the impact of this Statement on its consolidated financial statements will not be material. 9. Contingencies - ----------------- On June 30, 2000, a complaint entitled "Perry Ellis International, Inc. v. PremiumWear Inc.", was filed. The Company was subsequently named a co- defendant. The amended complaint relates to a Right of First Refusal Agreement dated as of May 22, 1996 (the "RFR Agreement") between the plaintiff and PremiumWear, Inc., and to the Company's acquisition of all the outstanding shares of PremiumWear in July 2000. In the amended complaint, the plaintiff alleges breach of the RFR Agreement and breach of an implied covenant of good faith and fair dealing against PremiumWear as a result of PremiumWear's alleged failure to notify the plaintiff of certain discussions between PremiumWear and the Company preceding the Company's agreement to purchase all of the outstanding shares of PremiumWear. The amended complaint also alleges that the Company tortiously interfered with the plaintiff's rights under the RFR Agreement by allegedly inducing PremiumWear to breach its obligations to the plaintiff under the RFR Agreement. The plaintiff is seeking damages in an unspecified amount, attorneys' fees, interest and costs. The Company believes the allegations in the amended complaint are without merit and intends to defend the lawsuit vigorously. On July 24, 2002, a class action lawsuit entitled "OLDAPG, Inc. v. New England Business Service, Inc." was filed in the Court of Common Pleas of the Ninth Judicial Circuit in and for Charleston County, South Carolina. The named plaintiff in the lawsuit seeks to represent a class consisting of all persons who allegedly received facsimiles containing unsolicited advertising from the Company in violation of the Telephone Consumer Protection Act of 1991 (the "TCPA"). The plaintiff is seeking statutory damages in the amount of $500.00 per individual violation, which amount can be trebled to $1,500.00 for each violation found to have been "willful and knowing". The plaintiff is also seeking injunctive relief with respect to further violations of the TCPA and attorneys' fees and costs. The Company believes that it has valid defenses to the claims asserted in the complaint and intends to defend the lawsuit vigorously. Item 2. Management's Discussion and Analysis of Financial Condition - ------------------------------------------------------------------- and Results of Operations - --------------------------------- Overview - -------- New England Business Service, Inc. (the "Company") was founded in 1952, incorporated in Massachusetts in 1955 and reincorporated in Delaware in 1986. The Company designs, produces and distributes business forms, checks, envelopes, labels, greeting cards, signs, stationery and related printed products and distributes packaging, shipping and warehouse supplies, software, work and promotional apparel and other business products through direct mail, direct sales, telesales, dealers and the Internet to small businesses throughout the United States, Canada, the United Kingdom and France. The Company also markets and sells payroll services provided by a payroll services company on a private label basis to small businesses in the United States as well as designs, embroiders and sells specialty apparel products through distributors and independent sales representatives to the promotional/advertising specialty industry, primarily in the United States. The Company has identified five reportable segments. The first segment is "Direct Marketing-US" and represents those business operations that sell primarily printed products such as checks and business forms to small businesses through direct marketing in the United States. The second segment, "Direct Sales-US," also sells primarily checks and business forms to small businesses; however, they sell through a direct sales force to the customer in the United States and, to a lesser extent, through distributors. The third segment, "Apparel", utilizes independent sales representatives to market its specialty apparel products and to solicit orders from customers in the promotional products/advertising specialty industry. "Packaging and Display Products", the fourth segment, primarily resells packaging and shipping supplies and retail signage marketed through a combination of direct marketing and direct selling efforts. The fifth segment, "International", sells primarily printed products such as checks and business forms to small businesses in Europe and Canada through direct marketing, distributors or by directly selling to the customer. Any sentence followed by an asterisk (*) in this section constitutes a forward-looking statement which reflects the Company's current expectations. There can be no assurance the Company's actual performance will not differ materially from those projected in such forward-looking statements due to the important factors described in the section to this Management's Discussion and Analysis of Financial Condition and Results of Operations titled "Certain Factors That May Affect Future Results." Results of Operations - --------------------- Net sales decreased $4.6 million or 3.5% to $128.9 million in the first quarter of fiscal year 2003 from $133.5 million in last year's first quarter. The sales change included decreases of approximately $2.9 million in the Direct Marketing-US segment and $2.0 million in the Apparel segment and are attributable to the economic slowdown and reduction in discretionary business spending by corporate customers, respectively. A decrease of $.6 million in the International segment was principally due to the timing of shipments. These decreases were offset by an increase of $.8 million and $.1 million in sales of the Company's Direct Sales-US segment which is benefiting from direct marketing strategies and Packaging and Display Segments which is benefiting from an economic stabilization of the manufacturing market, respectively. For the first quarter of fiscal year 2003, cost of sales declined to 42.1% of sales from 43.5% in last year's comparable period. The Company benefited from favorable channel and product mix which includes a lower percentage of Apparel sales, this segment has higher cost of sales as a percentage of sales. In addition, manufacturing efficiencies, partly as a result of past integration activities, offset the impact of the decrease in sales on cost of sales. Cost of sales as a percent of sales is expected to increase slightly for the remainder of the fiscal year.* Selling and advertising expense decreased to 34.2% of sales in the first quarter of fiscal year 2003 as compared to 34.8% of sales in last year's comparable quarter. The decrease was mainly due to reduced direct mail spending from more efficient mailing strategies. In addition, cost management and lower amortization expense favorably impacted selling and advertising expense for the current period. Selling and advertising expense as a percentage of sales is expected to be slightly lower for the remainder of the fiscal year.* General and administrative expense increased to 15.0% of sales in the first quarter of fiscal year 2003 from 13.5% of sales in last year's comparable quarter due to higher incentive compensation, legal costs and realized losses on deferred compensation investments in the first quarter in fiscal year 2003 as compared to last year's comparable quarter. General and administrative expense as a percent of sales is expected to be slightly lower for the remainder of the fiscal year.* During fiscal year 2001, the Company undertook two separate restructuring actions. The first resulted in a restructuring charge of $3.5 million in fiscal year 2001 and an additional charge of $1.0 million in fiscal year 2002 to provide for costs primarily associated with the Company's decision to more closely align its direct marketing and direct sales activities. As part of the restructuring program, the McBee US headquarters was relocated from Parsippany, New Jersey to the existing RapidForms facility in Thorofare, New Jersey. In addition, the McBee manufacturing plant in Damascus, Virginia was closed and a portion of leased warehousing space occupied by Chiswick in Sudbury, Massachusetts was vacated. In Canada, the McBee sales and marketing organizations were combined with NEBS Direct Marketing and are operating under the NEBS name. Approximately 140 employees were affected by the restructuring either through elimination of their positions or relocation. The second restructuring action resulted in the Company recording an additional restructuring charge in fiscal year 2001 of $3.6 million and a credit of $.3 million in fiscal year 2002 to provide for costs associated with the Company's decision to eliminate excess capacity by closing a manufacturing facility in Ogden, Utah and a leased distribution facility in Sudbury, Massachusetts, along with other actions to reduce the workforce in various locations. Approximately 175 employees were affected by the restructuring, either through elimination of their positions or relocation. The following is a table of the charges incurred and the cash paid in fiscal 2003 pursuant to these actions (in thousands of dollars): First Restructuring Second Restructuring Employee Facility termination Facility
closure costs benefit costs closure costs Total Three Months Ended ------------- ------------- ------------- -------- Sept. 28, 2002 Balance June 29, 2002 $1,038 $ 166 $ 451 $1,655 Payments for the period (87) (48) (423) (558) ------ ------- ------ ------ Balance Sept. 28, 2002 $ 951 $ 118 $ 28 $1,097 ======= ======= ====== ====== The activities related to all restructuring actions identified above are anticipated to be completed by the Company during fiscal year 2003 with the exception of lease payments, which may extend beyond this time frame.
Interest expense was 2.4% of sales in the first quarter of fiscal year 2003 as compared to 2.5% of sales in the prior year's comparable period. An overall decrease in the average balance of debt outstanding was offset by an increase in the average interest rate in the first quarter of fiscal year 2003 as compared to the same period last year. The provision for income taxes as a percentage of pre-tax income was 38.4% for the first quarter of fiscal years 2003 and 2002. Critical Accounting Policies The Company's discussion and analysis of its financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. On an on-going basis, the Company evaluates its estimates and judgments, including those related to revenue recognition, bad debts, inventories, intangible assets, and income taxes. Estimates and judgments are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant estimates and judgments used in preparation of its consolidated financial statements. Revenue is recognized on product sales at the point in time when persuasive evidence of an arrangement exists, the price is fixed and final, delivery has occurred and there is reasonable assurance of collection of the sales proceeds. The Company generally obtains purchase authorizations from its customers for a specified amount of product at a specified price and considers delivery to have occurred at the point of shipment. While the Company does provide its customers with a right of return, revenue is not deferred. Rather, a reserve for sales returns is provided based on significant historical experience. Asset valuation includes assessing the recorded value of certain assets, including accounts receivable, inventories, property, plant and equipment, investments, capitalized software, goodwill, deferred mail costs and intangible and other assets. Asset valuation is governed by various accounting principles, including Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment of Disposal of Long-Lived Assets, SFAS No. 142 "Goodwill and Other Intangible Assets" and Accounting Research Bulletin No. 43, among others. Management uses a variety of factors to assess valuation, depending on the asset. For example, accounts receivable are evaluated based upon an aging schedule. The recoverability of inventories is based upon the types and levels of inventory held. Property, plant and equipment, capitalized software and intangible and other assets are evaluated utilizing various factors, including the expected period the asset will be utilized, forecasted cash flows, the cost of capital and customer demand. Investments are evaluated for impairment based upon market conditions and the viability of the investment. Changes in judgments on any of these factors could impact the value of the asset. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each jurisdiction in which we operate that imposes a tax on income. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance, we must include an expense within the tax provision in the consolidated statements of income. In the event that actual results differ from these estimates, our provision for income taxes could be materially impacted. New Accounting Pronouncements In July 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supercedes SFAS No. 121 on the same topic and the accounting and certain reporting provisions of APB Opinion 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as defined in that Opinion). This Statement also amends Accounting Research Bulletin ("ARB") 51, "Consolidated Financial Statements," to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The Company adopted this Statement in the first quarter of fiscal 2003. The implementation of this Statement did not impact the Company's consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS 146 addresses the financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues ask Force Consensus No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". The Company will adopt this Statement in fiscal 2003. Management believes that the impact of this Statement on its consolidated financial statements will not be material. Liquidity and Capital Resources - ------------------------------- Cash provided by operating activities for the three months ended September 28, 2002 was $ 1.1 million and represented a decrease of $7.0 million from the $8.1 million provided in the comparable period last year. This decrease in cash provided by operating activities was due to the impact of the after tax cost of terminating interest rate swaps during the quarter and income taxes related to the gain on the sale of equity interests in Advantage Payroll Services, Inc., as well as the benefit from a higher inventory reduction in last year's first quarter than this year. Working capital at September 28, 2002 totaled $65.9 million, including $6.8 million of cash and short-term investments. At June 29, 2002, working capital was $56.5 million, including cash and short term investments of $6.1 million. The increase in working capital is primarily the result of higher mail and product inventory due to the anticipated sales of seasonal products in the Company's second quarter. Capital expenditures for the three months ended September 28, 2002 were $4.1 million versus $3.8 million expended during last year's comparable period. Capital expenditures in the first three months of fiscal year 2003 included improvements in our information system's infrastructure and investments to enhance manufacturing capability. The Company anticipates that total capital outlays will approximate $16.0 million in fiscal year 2003, which will include additional planned improvements in our information system's capabilities and investments to enhance manufacturing capability.* In July 2002, the Company invested $5.4 million in the common stock of Advantage Payroll Services, Inc. ("Advantage") through the exercise of warrants. This investment was in addition to the Company's holdings at June 29, 2002. In September 2002, Advantage merged with Paychex, Inc. At closing, the Company received the first payment of proceeds from the merger transaction of $42.3 million and the Company recognized a $6.3 million gain on the sale of its long-term investment. Subject to certain potential post- closing adjustments, the Company expects to receive up to another $5.1 million in proceeds during the fiscal year, which would result in an additional gain. In addition to paying down floating rate debt, the Company used the proceeds to terminate two interest rate swap agreements with a notional amount of $50.0 million with two commercial banks. These interest rate swaps were no longer needed to hedge the reduced level of the Company's floating rate debt. The Company was required to make a termination payment equivalent to its fair value of $3.2 million. This amount, which was reclassed from other comprehensive income to other expense, represents a loss on settlement of interest rate swaps to terminate the agreements. There were no repurchases of the Company's common stock during fiscal years 2003 and 2002. In addition to its present cash and short-term investment balances, the Company has consistently generated sufficient cash internally to fund its needs for working capital, dividends and capital expenditures. The Company currently has a committed, unsecured, revolving credit agreement for $200 million. The credit agreement contains various restrictive covenants which, among other things, require the Company to maintain certain minimum levels of consolidated net worth and specific consolidated debt and fixed charge ratios. The Company is in compliance with these covenants. At September 28, 2002, the Company had $68.0 million outstanding under this arrangement. In November 2001, the Company entered into a $50 million Note Purchase Agreement with The Prudential Insurance Company of America. Under this agreement, the Company will borrow at the Eurodollar rate plus a spread for one year, after which the interest rate will be fixed at a rate of 7.23%. This agreement contains various restrictive covenants, which, among other things, require the Company to maintain certain minimum levels of consolidated net worth and specific consolidated debt and fixed charge ratios. The Company is in compliance with these covenants. At September 28, 2002, the Company had $50 million outstanding under this arrangement. In order to effectively fix the interest rate on a portion of the debt outstanding under the revolving credit agreement, the Company has entered into four interest rate swap agreements with three of the banks party to the credit agreement. These swap agreements contain notional principal amounts and other terms (including rate of interest paid and received and maturity date) determined with respect to the Company's forecasts of future cash flows and borrowing requirements. During the first quarter fiscal year 2002, the Company terminated two interest rate swaps at a pretax cost of $3.2 million. At September 28, 2002 the notional principal amount outstanding under the interest rate swap agreements totaled $95.0 million. In the first quarter of fiscal years 2003 and 2002, there were no amounts transferred from other comprehensive income to earnings related to the Company's swaps as the ineffective portion of the swaps was insignificant. The Company anticipates that its current cash on hand, cash flow from operations and additional availability under the revolving credit agreement will be sufficient to meet the Company's liquidity requirements for its operations and capital expenditures during fiscal year 2003.* However, the Company may pursue additional acquisitions from time to time, such as the acquisitions mentioned in the Overview section of Management's Discussion and Analysis, which would likely be funded through the use of available cash, issuance of stock, obtaining of additional credit, or any combination thereof.* Certain Factors That May Affect Future Results - ------------------------------------------------------------------ References in this section to "we", "us" and "our" refer to New England Business Service, Inc. We may make forward-looking statements in this report and in other documents filed with the SEC, in press releases, and in discussions with analysts, investors and others. These statements include: - descriptions of our operational and strategic plans, - expectations about our future sales and profits, - views of conditions and trends in our markets, and - other statements that include words like "expects", "estimates", "anticipates", "believes" and "intends", and which describe opinions about future events. You should not rely on these forward-looking statements as though they were guarantees. These statements are based on our expectations at the time the statements are made, and we are not required to revise or update these statements based on future developments. Known and unknown risks may cause our actual results, performance or achievements to be materially different from those expressed or implied by these statements. A majority of our sales and profits come from selling standardized business forms, checks and related products by mail order, telesales and direct sales to a target market consisting mainly of small businesses. We believe that the critical success factors to compete in this market include competitive pricing, breadth of product offering, product quality and the ability to attract and retain a large number of individual customers. These critical success factors are also applicable to the success of our packaging, shipping and warehouse supplies markets as well. Known material risks that may affect those critical success factors are described below. A majority of the sales in our apparel business come from selling knit and woven sport shirts under labels licensed from third parties to the promotional products/advertising specialty industry. We believe that the critical success factors to compete in this market include product quality, timely fulfillment of customer orders and brand awareness. Known material risks that may affect those success factors are also described below. Our printed product lines face increased competition from various sources, such as office supply superstores. Increased competition may require us to reduce prices or offer other incentives in order to attract new customers and retain existing customers, which could reduce our profits. Low-price, high-volume office supply chain stores offer standardized business forms, checks and related products to small businesses. Because of their size, these superstores have the buying power to offer many of these products at competitive prices. These superstores also offer the convenience of "one-stop shopping" for a broad array of office supplies that we do not offer. In addition, national superstore competitors have greater financial strength to reduce prices or increase promotional discounts in order to seek or retain market share. If any of these new competitors seek to gain or retain market share through price reductions or increased discounting, we may be forced to reduce our prices or match the discounts in order to stay competitive, which could reduce our profits. Technological improvements may reduce our competitive advantage over our smaller competitors, which could reduce our profits. Historically, our relatively greater financial strength and size have enabled us to offer a broader array of products, particularly those having a complex construction, at lower prices than the small local and regional dealers, distributors and printers who constitute our primary competition. Improvements in the cost and quality of printing technology are enabling these smaller competitors to gain access to products of complex design and functionality at competitive costs. Increased competition from local and regional competitors could force us to reduce our prices in order to attract and retain customers, which could reduce our profits. Because our sales growth is dependent on our ability to continually attract new customers in our target small business market, economic events that adversely affect the small business economy may reduce our sales and profits. Average annual sales per customer of our core products have remained relatively stable over time. As a result, we rely, in part, on continually attracting new customers for these products. Our sales and profits have been adversely affected by economic-related contractions in the small business economy. We expect that our sales and profits will continue to be affected by changes in the levels of small business formations and failures and from other economic events that affect the small business economy generally. Because our sales growth is dependent on our ability to continually attract new customers in our target small business market, changes in the direct marketing industry that reduce our competitive advantage in contacting prospective customers may reduce our sales and profits. Growth in the total number of our direct mail customers depends on continued access to high-quality lists of newly-formed small businesses. In the past, our ability to compile proprietary prospect lists was a distinct competitive advantage. However, the external list compilation industry has become more sophisticated and comprehensive lists of new small business formations are now commercially available to our competitors. In addition, the Internet has the potential to eliminate our advantage of scale in direct marketing by providing all competitors, regardless of current size, with access to prospective customers. We currently rely on the speed of our delivery of promotional materials to prospective customers to gain advantage over competitors. We are also expanding our Internet product offerings and capabilities and seeking to increase our visibility on the Internet. Notwithstanding these efforts, a deterioration in our competitive advantage in contacting prospective customers could reduce our sales and profits. In addition, the enactment of privacy laws could constrain our ability to obtain prospect lists or to telemarket to prospective customers. Declining response rates to the Company's catalogs and other direct mail promotional materials could reduce our sales and profits. Our direct mail-based businesses have recently experienced declines in the response rates to our catalogs and other direct mail promotional materials from both existing customers and prospects. We believe that these declines are attributable to a number of factors, including current economic conditions, the overall increase in direct mail solicitations received by our target customers generally, and the gradual obsolescence of our standardized forms products. To the extent that we cannot compensate for reduced response rates through increases in average order value or improve response rates through new product introductions and improved direct mail contact strategies, our sales and profits may be adversely affected. Increases in the cost of paper and in postal rates adversely impact our costs, which we may be unable to offset by reducing costs in other areas or by raising prices. The cost of paper to produce our products, catalogs and advertising materials makes up a significant portion of our total costs. Also, we rely on the U.S. Postal Service to deliver most of our promotional materials. Prices for the various types of paper that we use have been volatile, and we expect them to continue to be so. Third class postal rates have generally increased over the past ten years, at times significantly. We are not sure that we will always be able to reduce costs in other areas or to increase prices for our products sufficiently to offset increases in paper costs and postal rates. If we are unable to offset these cost and expense increases, our profits will be adversely affected. Disruption in the services provided by certain of our critical vendors may adversely affect our operating performance and profits. We use a limited number of vendors to provide key services to our business. Examples of this are as follows: - we use MCI WorldCom and Qwest Communications International to provide a majority of the toll-free telephone lines for our direct marketing business, - we use United Parcel Service to deliver most of the products that we ship to customers, - we rely on the postal services of the countries in which we do business to deliver our catalogs and other advertising material to customers. In the past, we have been adversely affected by disruption of some of these services due to labor actions, system failures, adverse weather conditions and other natural disasters. If there are future interruptions in service from one or more of these vendors, we believe that there could be a significant disruption to our business due to our inability to readily find alternative service providers at comparable rates. Sales of our standardized forms products face technological obsolescence and changing customer preferences, which could reduce our sales and profits. Our standardized business forms, checks and related products provide our customers with financial and business records to manage their businesses. Continual technological improvements have provided our target customers in several market segments with alternative means to enact and record business transactions. For example, the price and performance capabilities of personal computers and related printers now provide a cost-competitive means to print low-quality versions of our business forms on plain paper. In addition, electronic transaction systems and off-the-shelf business software applications have been designed to automate several of the functions performed by our business form products. In response to the gradual obsolescence of our standardized forms business, we continue to develop our capability to provide custom and full- color products. However, we have less of a cost advantage with these products than with standardized forms, due to improvements in the cost and quality of printing technology available to our smaller local and regional competitors. We are also seeking to introduce new products and services that are less susceptible to technological obsolescence. We may develop new products internally, procure them from third party vendors, or obtain them through the acquisition of a new business. We generally realize lower gross margins on outsourced products than on products that we manufacture ourselves. The risks associated with the acquisition of new businesses are described below. If new printing capabilities and new product introductions do not continue to offset the obsolescence of our standardized business forms products, there is a risk that the number of new customers we attract and existing customers we retain may diminish, which could reduce our sales and profits. Decreases in sales of our historically high margin standardized business forms products due to obsolescence could also reduce our gross margins. This reduction could in turn adversely impact our profits unless we are able to offset the reduction through the introduction of new high margin products and services or realize cost savings in other areas. We source our apparel products from offshore third party manufacturers. Difficulty in securing reliable sources for these products could adversely affect our ability to maintain inventory levels that are adequate to satisfy customer demand. We purchase a majority of our apparel products from "full package" manufacturers outside the United States. In most cases, these same manufacturers supply other apparel companies, many of which are significantly larger than our apparel business and are able, when necessary, to secure preferential treatment from the manufacturers. The availability of product from these manufacturers can also be adversely affected by social, political and economic conditions in their respective regions. Any significant disruption in our relationships with our current manufacturers could adversely affect our apparel business to the extent we cannot readily find alternative sources of supply at comparable levels of price and quality. Inaccurate forecasting of the demand for specific apparel styles and sizes could reduce our sales and profits. We believe that success in our apparel business depends in part on our ability to immediately ship ordered products, either directly or through our distributors. Given the relatively long lead time in procuring inventory, we must estimate demand for specific styles and sizes well in advance of receiving firm orders from customers in order to ensure the timely availability of these products. Inaccurate forecasting of demand for specific styles and sizes can result in either lost sales due to product unavailability, or reduced margins from liquidating overstocked items. Failure of our apparel licensors to adequately promote our licensed brands and protect those brands from infringement could reduce our sales and profits. We believe that brand awareness is an important factor to the end-user of our apparel products, and in that regard we market and sell a majority of our apparel products under nationally-recognized brands licensed from third parties. In each case, the licensor is primarily responsible for promoting its brand and protecting its brand from infringement. The failure of one or more of our licensors to adequately promote or defend their brands could diminish the perceived value of those brands to our customers, which could lead to reduced sales and profits. Reductions in the number of apparel lines carried by wholesalers in the promotional products/advertising specialty industry may adversely impact our sales and profits. Until recently, a significant portion of the sales in our apparel business have been to a relatively small number of wholesalers serving the promotional products/advertising specialty market. Sales to these wholesalers have been recently decreasing, and have been partially offset by increases in direct sales to our advertising specialty dealers. We believe that the wholesale apparel business serving this market is undergoing fundamental change, with wholesalers increasingly carrying only private label lines and branded lines on an exclusive basis. We believe that these changes, together with current economic conditions, are likely to result in an accelerated decrease in our sales to wholesalers. To the extent that increases in our direct sales to advertising specialty dealers, together with increases in our apparel sales to other markets, cannot keep pace with the erosion in our sales to wholesalers, sales and profits could be adversely impacted. Our growth strategy depends, in part, on the acquisition of complementary businesses that address our target small business market. The acquisition of complementary businesses that address our target small business market has been important to our growth strategy. We intend to continue this acquisition activity in the future. The success of this activity depends on the following: - our ability to identify suitable businesses and to negotiate agreements on acceptable terms, - our ability to obtain financing through additional borrowings, by issuing additional shares of common stock, or through internally generated cash flow, and - our ability to achieve anticipated savings and growth and avoid disruption to our existing businesses. In evaluating a potential acquisition, we conduct a business, financial and legal review of the target. This review is intended to support our assumptions with respect to the projected future performance of the target and to identify the benefits and risks associated with those assumptions. We cannot be certain that our review will identify all potential risks associated with the purchase, integration or operation of acquired businesses. Unanticipated risks may adversely affect the benefits that we expect to obtain from any given acquisition. Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------ The Company is exposed to a number of market risks, primarily the effects of changes in foreign currency exchange rates and interest rates. Investments in and loans and advances to foreign subsidiaries and branches, and their resultant operations, denominated in foreign currencies, create exposures to changes in exchange rates. The Company's utilization of its revolving line of credit (which carries a variable interest rate) creates an exposure to changes in interest rates. The effect, however, of changes in exchange rates and interest rates on the Company's earnings generally has been small relative to other factors that also affect earnings, such as business unit sales and operating margins. For more information on these market risks and financial exposures, see the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended June 29, 2002. The Company does not hold or issue financial instruments for trading, profit or speculative purposes. In order to effectively convert the interest rate on a portion of the Company's debt from a Eurodollar-based floating rate to a fixed rate, the Company has entered into interest rate swap agreements with major commercial banks. Although the Company is exposed to credit and market risk in the event of future nonperformance by any of the banks, management has no reason to believe that such an event will occur. Upon reviewing its derivatives and other foreign currency and interest rate instruments, based on historical foreign currency rate movements and the fair value of market-rate sensitive instruments at year-end, the Company does not believe that changes in foreign currency or interest rates will have a material impact on its near-term earnings, fair values or cash flows. Item 4. Controls and Procedures - ----------------------------------- Within the 90-day period prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a- 14(c)promulgated under the Securities Exchange Act of 1934). Based upon that evaluation, the principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective. There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date that the Company carried out its evaluation referenced in the preceding paragraph. PART II - OTHER INFORMATION - --------------------------- Item 1. LEGAL PROCEEDINGS - -------------------------- On June 30, 2000, a lawsuit entitled "Perry Ellis International, Inc. v. PremiumWear, Inc.", was filed in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida. The case has been removed to federal court and is currently pending in the United States District Court for the Southern District of Florida. On April 11, 2001, the court granted the plaintiff's motion to amend its complaint to add the Company as a co- defendant. The amended complaint relates to a Right of First Refusal Agreement dated as of May 22, 1996 (the "RFR Agreement") between the plaintiff and PremiumWear, Inc., and to the Company's acquisition of all the outstanding shares of PremiumWear in July 2000. In the amended complaint, the plaintiff alleges breach of the RFR Agreement and breach of an implied covenant of good faith and fair dealing against PremiumWear as a result of PremiumWear's alleged failure to notify the plaintiff of certain discussions between PremiumWear and the Company preceding the Company's agreement to purchase all of the outstanding shares of PremiumWear. The amended complaint also alleges that the Company tortiously interfered with the plaintiff's rights under the RFR Agreement by allegedly inducing PremiumWear to breach its obligations to the plaintiff under the RFR Agreement. The plaintiff is seeking damages in an unspecified amount, attorneys' fees, interest and costs. The Company believes the allegations in the amended complaint are without merit and intends to defend the lawsuit vigorously. On July 24, 2002, a class action lawsuit entitled "OLDAPG, Inc. v. New England Business Service, Inc." was filed in the Court of Common Pleas of the Ninth Judicial Circuit in and for Charleston County, South Carolina. The named plaintiff in the lawsuit seeks to represent a class consisting of all persons who allegedly received facsimiles containing unsolicited advertising from the Company in violation of the Telephone Consumer Protection Act of 1991 (the "TCPA"). The plaintiff is seeking statutory damages in the amount of $500.00 per individual violation, which amount can be trebled to $1,500.00 for each violation found to have been "willful and knowing". The plaintiff is also seeking injunctive relief with respect to further violations of the TCPA and attorneys' fees and costs. The Company believes that it has valid defenses to the claims asserted in the complaint and intends to defend the lawsuit vigorously. From time to time the Company is involved in other disputes and/or litigation encountered in the ordinary course of its business. The Company does not believe that the ultimate impact of the resolution of such other outstanding matters will have a material effect on the Company's business, operating results or financial condition. Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - -------------------------------------------------- Not applicable Item 3. DEFAULTS UPON SENIOR SECURITIES - ---------------------------------------- Not applicable. Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS - ---------------------------------------------------------- Not applicable. Item 5. OTHER INFORMATION - -------------------------- In accordance with Section 10A (i)(2) of the Securities and Exchange Act of 1934, as amended by Section 202 of the Sarbanes-Oxley Act of 2002 ("the Act"), we are required to disclose the non-audit services approved by our Audit Committee to be performed by Deloitte & Touche LLP, our independent auditor. Non-audit services are defined in the Act as services other than those provided in connection with an audit or a review of the financial statements of a company. The Audit Committee of the Board of Directors of New England Business Service, Inc. has approved the performance of certain employee benefit plan audits, statutory audits and tax-related services by our auditor, Deloitte & Touche LLP. Item 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- a. Exhibits Exhibit No. Description ---------- ----------- 10.1* NEBS 2002 Equity Incentive Plan. 15 Awareness Letter of Independent Accountants. 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (Chief Executive Officer). 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (Chief Financial Officer). 99.3 Independent Accountants' Review Report. * Identifies a management contract or compensatory plan or arrangement in which an executive officer or director of the Company participates. b. Reports on Form 8-K. On July 16, 2002, the Company filed a Current Report on Form 8-K announcing that the Company exercised a common stock purchase warrant in part and purchased 427,909 shares of Advantage's common stock for an aggregate purchase price of $5,421,607.03 on July 2, 2002. On September 19, 2002, the Company filed a Current Report on Form 8-K announcing that it had issued a press release on September 18, 2002 relating to the pending disposition of its investment in Advantage Payroll Services, Inc. On September 24, 2002, the Company filed a Current Report on Form 8-K announcing that it had issued a press release on September 23, 2002 relating to the closing of its sale of equity interests in Advantage Payroll Services, Inc. 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) November 12, 2002 /s/Daniel M. Junius - ----------------- -------------------- Date Daniel M. Junius Executive Vice President-Chief Financial Officer (Principal Financial Officer) Certifications I, Robert J. Murray, certify that: 1. I have reviewed this quarterly report on Form 10-Q of New England Business Service, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report it being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 12, 2002 /s/Robert J. Murray - ----------------- -------------------- Robert J. Murray Chairman and Chief Executive Officer (Principal Executive Officer) I, Daniel M. Junius, certify that: 1. I have reviewed this quarterly report on Form 10-Q of New England Business Service, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report it being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 12, 2002 /s/Daniel M. Junius - ----------------- -------------------- Date Daniel M. Junius Executive Vice President-Chief Financial Officer (Principal Financial Officer) EX-10 3 exh10_1.txt NEW ENGLAND BUSINESS SERVICE, INC. EXH 10 NEW ENGLAND BUSINESS SERVICE, INC. NEBS 2002 EQUITY INCENTIVE PLAN PREAMBLE The NEBS 2002 Equity Incentive Plan, as set forth herein, amends and restates the NEBS 1997 Key Employee and Eligible Director Stock Option and Stock Appreciation Rights Plan, as amended (the "1997 Stock Option Plan"). The Plan is intended to permit New England Business Service, Inc., a Delaware corporation ("NEBS" or the "Company"), to provide additional forms of equity-based incentives in order to attract and retain highly motivated employees and non-employee directors, and to provide them with opportunities to acquire a proprietary interest in the Company. SECTION 1. ESTABLISHMENT, OBJECTIVES AND DURATION 1.1 Establishment of the Plan. The Company hereby amends and restates the 1997 Stock Option Plan and renames it the NEBS 2002 Equity Incentive Plan, as set forth herein. Subject to approval by the Company's stockholders, the Plan shall become effective as of October 25, 2002 (the "Effective Date") and shall remain in effect as provided below in Section 1.3. 1.2 Purpose of the Plan. The purpose of the Plan is to benefit the Company and its subsidiaries by enabling the Company to offer to certain present and future Employees and Outside Directors stock based incentives and other equity interests in the Company, thereby giving them a stake in the growth and prosperity of the Company and encouraging the continuance of their services with the Company or its Subsidiaries. 1.3 Duration of the Plan. The Plan shall commence on the Effective Date and shall remain in effect, subject to the right of the Board of Directors to amend or terminate the Plan at any time pursuant to Section 13 hereof, until all Shares subject to it shall have been purchased or acquired according to the Plan's provisions. However, in no event may an Award (as defined below in Section 2.2) be granted under the Plan on or after October 25, 2012. SECTION 2. DEFINITIONS Whenever used in the Plan with the initial letter of the word capitalized, the following terms shall have the following respective meanings: 2.1 "Administrator" means the committee appointed by the Board to administer the Plan, as described below in Section 3. 2.2 "Award" means, individually or collectively, a grant under the Plan of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights or Restricted Stock. 2.3 "Award Agreement" means a written agreement between the Company and a Participant that sets forth the terms and provisions applicable to an Award or Awards granted to the Participant under the Plan. The existence of an applicable Award Agreement is a condition to the grant of all Awards hereunder. 2.4 "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. 2.5 "Board" means the Board of Directors of the Company. 2.6 "Cause" means, as determined by the Administrator in its sole discretion, termination of the Participant's employment with the Company or any Subsidiary because of: (a) any significant, deliberate misuse or misappropriation by the Participant of money or property of the Company or any Subsidiary; (b) any flagrant act of dishonesty or disloyalty by the Participant that is injurious to the Company or any Subsidiary or their respective reputations, monetarily or otherwise; (c) any wrongful or negligent act of the Participant which materially adversely affects the business of the Company and its Subsidiaries taken as a whole; (d) any material violation of the Company's written policies, standards and guidelines and, if such violation is susceptible to cure, the Participant has failed to substantially cure such violation within twenty (20) days after written notice thereof is delivered to the Participant; or (e) such other act or omission as determined in the Administrator's sole discretion; provided, however, that in lieu of the foregoing, where there is a written employment, change in control or similar agreement in effect between the Participant and the Company or a Subsidiary that defines "cause" (or words of similar import), and a termination for "cause" would give rise to the denial or forfeiture of any benefit under such agreement at that time, such termination of employment shall be deemed to be for "Cause" for purposes of the Plan. 2.7 "Change in Control" of the Company means the occurrence of one or more of the following events: (a) Any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing thirty five percent (35%) or more of either the then outstanding Shares or the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in Section 2.7(c)(i); (b) The following individuals cease for any reason to constitute a majority of the number of Directors then serving: individuals who, on the date of the applicable Award Agreement, constitute the Board and any new Director (other than a Director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of Directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the Directors then in office who either were Directors on the date of the applicable Award Agreement or whose appointment, election or nomination for election was previously so approved or recommended; (c) There is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least sixty percent (60%) of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its affiliates (as defined in Rule 12b-2 under the Exchange Act)) representing thirty five percent (35%) or more of the combined voting power of the Company's then outstanding securities; or (d) The stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least sixty percent (60%) of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. 2.8 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.9 "Company" means New England Business Service, Inc., a Delaware corporation, as well as any successor to such entity as provided in Section 15 herein. 2.10 "Director" means any individual who is a member of the Board. 2.11 "Director Option" means an Option granted to an Outside Director pursuant to Section 6.1(c) hereof. 2.12 "Effective Date" means October 25, 2002, the effective date of this amended and restated Plan. 2.13 "Employee" means any employee of the Company or any Subsidiary. 2.14 "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. 2.15 "Fair Market Value" means, as of any date of determination, unless otherwise required by any applicable provision of the Code or any regulations issued thereunder, and unless the Administrator determines otherwise, (a) the closing sales price for the Shares on the New York Stock Exchange, if applicable, or if not, the average of the last bid and asked prices of the Shares on any securities exchange on which the Shares are then publicly traded, on or before 4:00 p.m. eastern time (as reported by Bloomberg, L.P.) of the most recent trading day preceding such date of determination; (b) if the Shares are not then traded on the New York Stock Exchange or other exchange or no trade of Shares has occurred on such exchange within the preceding seven (7) days, the mean between the closing "Bid" and the closing "Ask" prices, if any, as reported in the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), or the National Daily Quotation Service or similar listing service, for the date of determination, or if none, on the most recent trading day for which such quotations are reported within the preceding seven (7) days; or (c) if the Fair Market Value cannot be determined under the preceding clauses, the value of the Shares determined in good faith (as defined in the regulations promulgated pursuant to Section 422 of the Code) by the Administrator. 2.16 "Incentive Stock Option" or "ISO" means an option to purchase Shares that is intended to meet the requirements of Code Section 422, as described in Section 6 herein. 2.17 "Insider" means an individual who is, on the relevant date, an officer, Director or more than ten percent (10%) Beneficial Owner of any class of the Company's equity securities that is registered pursuant to Section 12 of the Exchange Act, all as defined for purposes of Section 16 of the Exchange Act. 2.18 "Named Executive Officer" means a Participant who is one of the group of covered employees as defined in the regulations promulgated under Code Section 162(m), or any successor statute. 2.19 "Nonqualified Stock Option" or "NQSO" means an option to purchase Shares granted under Section 6 herein and which is not intended to meet the requirements of Code Section 422. 2.20 "Option" means an Incentive Stock Option or a Nonqualified Stock Option, as described in Section 6 herein. 2.21 "Option Price" means the per share purchase price of a Share purchased pursuant to an Option. 2.22 "Outside Director" means a Director who is not an Employee. 2.23 "Participant" means an Employee, prospective Employee or Outside Director who has outstanding an Award granted under the Plan. 2.24 "Performance-Based Exception" means the exception for performance-based compensation from the tax deductibility limitations of Code Section 162(m). 2.25 "Period of Restriction" or "Restricted Period" means the period during which the transfer of Shares of Restricted Stock is limited in some way, and the Shares are subject to a substantial risk of forfeiture, as provided in Section 8 herein. 2.26 "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (a) the Company or any of its subsidiaries, (b) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its affiliates, (c) an underwriter temporarily holding securities pursuant to an offering of such securities and (d) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. 2.27 "Plan" means the NEBS 2002 Equity Incentive Plan, an amendment and restatement of the Company's 1997 Stock Option Plan, as set forth herein. 2.28 "Restricted Stock" means an Award granted to a Participant pursuant to Section 8 herein. 2.29 "Retirement" means an Employee's termination of employment with the Company and its Subsidiaries, for any reason other than Cause, on or after the date the Employee has either (a) attained age fifty-five (55) and earned five or more years of service, as determined by the Administrator, or (b) attained age sixty-two (62). 2.30 "Share" or "Shares" means shares of common stock of the Company, par value $1.00. 2.31 "Stock Appreciation Right" or "SAR" means an Award granted pursuant to Section 7 in connection with a related Option, the exercise of which shall require forfeiture of the right to purchase a Share under the related Option (and when a Share is purchased under the Option, the related SAR is similarly forfeited). 2.32 "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation) in the unbroken chain owns stock possessing at least a majority of the total combined voting power of all classes of stock in one of the other corporations in such chain. SECTION 3. ADMINISTRATION 3.1 Plan Administrator. The Administrator of the Plan shall be the Organization and Compensation Committee of the Board, or any other committee appointed by the Board. The Organization and Compensation Committee or other committee appointed to administer the Plan shall consist of not less than two (2) Outside Directors of the Company who are "Non-Employee Directors" as such term is used in Rule 16b-3 under the Exchange Act. The Board may, from time to time, remove members from, or add members to, the Organization and Compensation Committee or such other committee. Any vacancies on the Organization and Compensation Committee or such other committee shall be filled by members of the Board. If and to the extent that no committee exists that has the authority to administer the Plan, the Board shall administer the Plan. Acts of a majority of the Administrator at which a quorum is present, or acts reduced to or approved in writing by unanimous consent of the members of the Administrator, shall be valid acts of the Administrator. 3.2 Authority of the Administrator. Except as limited by law or by the Certificate of Incorporation or Bylaws of the Company, and in addition to any other powers or authorities set forth herein, the Administrator shall have full power and authority, consistent with the terms of the Plan, to (a) select the Employees who shall participate in the Plan; (b) determine the sizes and types of Awards to Employees or prospective Employees; (c) determine the terms and conditions of Awards and Award Agreements in a manner consistent with the Plan; (d) construe and interpret the Plan and any agreements or instruments entered into under the Plan; (e) establish, amend, or waive rules and regulations for the Plan's administration; (f) determine whether interruption of service or change in status of an Employee or Outside Director results in a termination of employment or service under the Plan; and (g) subject to the provisions of Section 13 herein, amend the terms and conditions of any outstanding Award to the extent such terms and conditions are within the sole discretion of the Administrator as provided in the Plan. Further, the Administrator shall make all other determinations which may be necessary or advisable for the administration of the Plan. The Administrator's determinations under the Plan, including without limitation, determinations as to persons eligible to receive an Award, the amount or type of any Award and the terms of any Award Agreement, are not required to be consistent, and may vary among similarly-situated Participants, as the Administrator deems appropriate and in the interests of the Company. As permitted by law, the Administrator may delegate any authority, discretion, power or responsibility granted or assigned to it herein. 3.3 Decisions Binding. All determinations and decisions made by the Administrator pursuant to the provisions of the Plan and all related orders and resolutions of the Board shall be final, conclusive and binding on all persons, including the Company, its stockholders, Employees, Participants, and their estates and beneficiaries. SECTION 4. SHARES SUBJECT TO THE PLAN AND MAXIMUM AWARDS 4.1 Shares Available for Awards. (a) The Shares available for Awards may be either authorized and unissued Shares or Shares held in or acquired for the treasury of the Company. Subject to adjustment as provided in Section 4.3, the aggregate number of Shares that may be issued or used for reference purposes under the Plan or with respect to which Awards may be granted shall not exceed the sum of (i) one million (1,000,000) Shares; and (ii) any authorized Shares available for issue under the 1997 Stock Option Plan as of the Effective Date; and (iii) any Shares that become available under this Plan, including with respect to Awards outstanding under the 1997 Plan as of the Effective Date, as a result of cancellation, termination, expiration, forfeiture, or lapse of an Award or other application of paragraph (b) below. In no event, however, shall the aggregate number of Shares of Restricted Stock that become freely transferable by Participants after the expiration or lapse of all applicable Periods of Restriction exceed 250,000 Shares, subject to adjustment as provided in Section 4.3. (b) Upon: (i) payout of an SAR Award in the form of cash; (ii) cancellation, termination, expiration, forfeiture, or lapse for any reason (with the exception of the termination of an SAR upon exercise of the related Options, or the termination of a related Option upon exercise of the corresponding SAR) of any Award; or (iii) payment of an Option Price and/or payment of any taxes arising upon exercise of an Option or payout of any Award with previously acquired Shares or by withholding Shares which otherwise would be acquired on exercise or issued upon such payout; the number of Shares surrendered or underlying any such Award that were not issued as a result of any of the foregoing actions shall again be available for the purposes of Awards under the Plan. In addition, in the case of any Award granted in substitution for an award of a company or business acquired by the Company or a Subsidiary, Shares issued or issuable in connection with such substitute Award shall not be counted against the number of Shares reserved under the Plan, but shall be available under the Plan by virtue of the Company's assumption of the plan or arrangement of the acquired company or business. 4.2 Individual Participant Limitations. Subject to adjustment as provided in Section 4.3 herein, the maximum aggregate number of Shares (including Options, SARs and Restricted Stock) that may be granted in any one fiscal year to a Participant shall be one hundred thousand (100,000). 4.3 Adjustments in Authorized Shares. In the event of any change in corporate capitalization, such as a stock split, reverse-split, stock dividend, combination, reclassification or similar recapitalization not involving the payment of consideration, or in the event of a corporate transaction, such as any merger, consolidation, separation, spin-off, reorganization (whether or not such reorganization comes within the definition of such term in Code Section 368) or any partial or complete liquidation of the Company, an adjustment shall be made in the number and class of Shares available for Awards, the number and class of and/or price of Shares (and/or other securities or other property) subject to outstanding Awards granted under the Plan, and the number of Shares set forth in Sections 4.1 and 4.2, as may be determined to be appropriate and equitable by the Administrator, in its sole discretion, to prevent dilution or enlargement of rights; provided, however, that the number of Shares subject to any Award shall always be a whole number. Notwithstanding the foregoing, in connection with any transaction of the type specified Section 2.7(c), the Administrator may, in its discretion, (a) cancel any or all outstanding Options under the Plan in consideration for payment to the holders thereof an amount equal to the portion of the consideration that would have been payable to the Participant pursuant to such transaction if their Options had been fully vested and exercised immediately prior to such transaction, less the aggregate Option Price that would have been payable by the Participant therefor, or (b) if the amount that would have been payable to the Participant pursuant to such transaction if their Options had been fully vested and exercised immediately prior thereto would be equal to or less than the aggregate Option Price that would have been payable therefor, cancel any or all such Options for no consideration or payment of any kind. Payment of any amount payable pursuant to the preceding sentence may be made in cash or, in the event that the consideration to be received in such transaction includes securities or other property, in cash and/or such securities or other property in the Administrator's discretion. SECTION 5. ELIGIBILITY AND PARTICIPATION 5.1 Eligibility. Persons eligible to participate in the Plan include all Employees (including officers), persons who have been offered employment by the Company or a Subsidiary (provided that such prospective Employee may not receive any payment or exercise any right relating to an Award until such person has commenced employment with the Company or Subsidiary), and Outside Directors of the Company, as determined by the Administrator, including Employees who reside in countries other than the United States of America. 5.2 Participation. Subject to the provisions of the Plan, the Administrator shall determine and designate, from time to time, the Employees and prospective Employees of the Company and any Subsidiary to whom Awards shall be granted, the terms of such Awards, and the number of Shares subject to such Award. Option Awards to Outside Directors shall be made in such amounts, and shall be subject to such terms and conditions, as are set forth in the Plan. SECTION 6. STOCK OPTIONS 6.1 Grant of Options and Award Agreement. (a) Option Grant. Subject to the terms and provisions of the Plan, Options may be granted to one or more Employees and, subject to Section 5.1, prospective Employees in such number, upon such terms and provisions, and at any time and from time to time, as determined by the Administrator in its sole discretion. Subject to Section 4 and paragraph (c) below, the Administrator may grant either Nonqualified Stock Options or Incentive Stock Options, and shall have complete discretion in determining the number of Options of each type granted to each Participant; provided, however, that ISOs may not be granted to a person who is not an Employee. Each Option grant shall be evidenced by a resolution of the Administrator approving the Option grant. (b) Award Agreement. The Company and each Participant to whom an Option is granted shall execute an Award Agreement, effective as of the date of grant, which shall specify the Option Price, the term of the Option, the number of Shares subject to the Option, and such other provisions as the Administrator shall determine consistent with the terms and provisions of the Plan. The Award Agreement shall also specify whether the Option is intended to be an ISO within the meaning of Code Section 422. If such Option is not designated as an ISO, such Option shall be deemed a NQSO. (c) Outside Directors. Each Outside Director who is such on the tenth (10th) day following the date on which each Annual Meeting of the Stockholders of the Company is held during the term of the Plan shall, on such tenth (10th) day, automatically be granted a Nonqualified Stock Option to purchase three thousand (3,000) Shares; provided, however, that the first such grant to each Outside Director following his or her initial election to the Board shall be a Nonqualified Stock Option to purchase five thousand (5,000) Shares. 6.2 Option Price. The Administrator shall designate the Option Price for each Share subject to an Option under the Plan, provided that the Option Price shall not be less than one hundred percent (100%) of the Fair Market Value of Shares on the date the Option is granted. The Option Price may not be subsequently changed by the Administrator except pursuant to Section 4.3 hereof. With respect to a Participant who owns, directly or indirectly, more than ten percent (10%) of the total combined voting power of all classes of the stock of the Company or any Subsidiary, the Option Price of Shares subject to an ISO shall be at least one hundred and ten percent (110%) of the Fair Market Value of such Shares on the date of grant. Notwithstanding the foregoing, the Option Price for an Option issued to an Outside Director shall equal one hundred percent (100%) of the Fair Market Value of Shares on the date the Option is granted. 6.3 Term of Options. Each Option granted to an Employee shall expire on the day immediately preceding the tenth (10th) anniversary of the date of grant, or such earlier day as the Administrator shall determine at the time of grant. Notwithstanding the foregoing, with respect to ISOs, in the case of a Participant who owns, directly or indirectly, more than ten percent (10%) of the total combined voting power of all classes of the stock of the Company or any Subsidiary, no such ISO shall be exercisable later than the day immediately preceding the fifth (5th) anniversary of the date of grant. Notwithstanding the foregoing, each Director Option shall expire on the day immediately preceding the tenth (10th) anniversary of the date of grant. 6.4 Exercise of Options. Options granted under this Section 6 shall be exercisable at such times, and be subject to such restrictions and conditions, as the Administrator shall in each instance approve, which need not be the same for each grant or for each Participant, and shall be set forth in the applicable Award Agreement, except that each Director Option shall vest and become fully exercisable on the first anniversary of the date of grant. Notwithstanding the preceding sentence, the Fair Market Value of Shares for which ISOs are exercisable for the first time by any Participant during any calendar year may not exceed one hundred thousand dollars ($100,000). Any ISOs that become exercisable in excess of such amount shall be deemed to be NQSOs to the extent of such excess. The Administrator may provide that an Option (other than a Director Option) shall become exercisable in installments, in which case the Shares constituting each installment may be purchased in whole or in part at any time after such installment becomes exercisable and before the Option expires or terminates as described in Sections 6.3 and 6.6, subject to such minimum exercise requirements as may be designated by the Administrator. 6.5 Payment. Options granted under this Section 6 shall be exercised by the delivery of a written notice of exercise to the Company, setting forth the number of Shares with respect to which the Option is to be exercised and accompanied by full payment for the Shares. The Option Price upon exercise of any Option shall be payable to the Company in full under one or more of the following methods, to the extent permitted by the Administrator: (a) in cash or its equivalent; (b) by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total Option Price; (c) by directing the withholding of Shares that otherwise would be acquired on exercise having an aggregate Fair Market Value at the time of exercise equal to the total Option Price; (d) by tendering other Awards payable under the Plan; or (e) by a combination of (a), (b), (c) and/or (d). The Administrator also may allow cashless exercise as permitted under Federal Reserve Board's Regulation T, subject to applicable securities law restrictions, or by any other means that the Administrator determines to be consistent with the Plan's purpose and applicable law. As soon as practicable after receipt of a written notification of exercise and full payment, the Company shall deliver to the Participant, in the Participant's name, Share certificates in an appropriate amount based upon the number of Shares purchased under the Option(s). In connection with the exercise of Options granted under the Plan, the Company may make such loans to the Participant as the Administrator, in its sole discretion, may determine. Such loans shall be subject to such terms and conditions as the Administration shall determine. In no event may any such loan be for an amount in excess of the Fair Market Value, at the date of exercise, of the Shares covered by the Option, or portion thereof exercised by the Participant. Any loan made pursuant to this Section 6.5 shall comply with Regulation U issued by the Board of Governors of the Federal Reserve System pursuant to the Exchange Act. 6.6 Termination of Employment or Service as an Outside Director. The Administrator, in its sole discretion, shall set forth in the applicable Award Agreement the extent to which a Participant shall have the right to exercise the Option or Options following termination of his or her employment with the Company and/or its Subsidiaries or his or her service as a Director. Except as provided below in paragraph (f), such provisions need not be uniform among all Options issued pursuant to the Plan, and may reflect distinctions based on the reasons for such termination, including, but not limited to, termination for Cause or reasons relating to the breach or threatened breach of restrictive covenants. Subject to Section 12, unless the applicable Employee Award Agreement provides otherwise, the following rules shall apply: (a) Retirement. Subject to paragraph (e) below, if the Participant's employment with the Company and any Subsidiary terminates by reason of Retirement, each Option held by the Participant may thereafter be exercised, but only to the extent it was exercisable immediately prior to the Participant's Retirement, until the earlier of (A) the remainder of the term of the Option, or (B) two (2) years after the date of such termination of employment. Notwithstanding the foregoing, if an Option issued as an ISO is exercised more than three months after the Participant ceases to be an employee of the Company or a Subsidiary for purposes of Code Section 422(a)(2) (or more than one year in the case of the Participant's death or disability), such Option shall be treated as a Nonqualified Stock Option for purposes of the Plan. Except as set forth above, all Options held by the Participant shall expire and all rights to purchase Shares thereunder shall terminate immediately upon termination of the Participant's employment with the Company and any Subsidiary by reason of Retirement. (b) Death. Subject to paragraph (e) below, if the Participant's employment with the Company and any Subsidiary, or service as a Director, terminates by reason of death, each Option held by the Participant may thereafter be exercised by his or her legal representative, but only to the extent it was exercisable immediately prior to the Participant's death, until the earlier of (A) the remainder of the term of the Option, or (B) twelve months after the date of such termination of employment or cessation of service. Except as set forth above, all Options held by the Participant shall expire and all rights to purchase Shares thereunder shall terminate immediately upon termination of the Participant's employment with the Company and any Subsidiary or cessation of service as a Director by reason of the Participant's death. (c) Termination for Cause. If the Participant's employment with the Company and/or any Subsidiary terminates for Cause, all Options shall expire immediately and all rights to purchase Shares (whether vested or nonvested) under the Option shall cease; provided, however, that this paragraph (c) shall not apply to termination of a Participant's employment on or within six (6) months after a Change in Control. (d) Other Termination. Subject to paragraph (e) below, if the Participant's employment with the Company and any Subsidiary terminates for any reason other than death, Retirement or Cause, each Option held by the Participant may thereafter be exercised, but only to the extent it was exercisable immediately prior to such termination, until the earlier of (A) the remainder of the term of the Option, or (B) thirty (30) days from the date of termination. Except as set forth above, all Options held by the Participant shall expire and all rights to purchase Shares thereunder shall terminate immediately upon termination of the Participant's employment with the Company and any Subsidiary for any reason other than death, Retirement or Cause. (e) Determinations Regarding Termination. Except as otherwise provided in the applicable Award Agreement, a Participant will not be deemed to have incurred a termination of employment hereunder solely as a result of a temporary absence from employment because of illness, vacation, approved leaves of absence, and transfers of employment among the Company and its Subsidiaries, or changing his or her covered status from Employee to Outside Director or from Outside Director to Employee. If so provided in the applicable Award Agreement, an Employee shall not be deemed to have incurred a termination of employment hereunder during a period of severance, to the extent that salary payments continue to the Employee during such period. In such event, the Employee's termination of employment shall be deemed to occur at the conclusion of such period of severance. Notwithstanding the foregoing, if an Option issued as an ISO is exercised more than three months after the Participant ceases to be an employee of the Company or a Subsidiary for purposes of Code Section 422(a)(2) (or more than one year in the case of the Participant's death or disability), such Option shall be treated as a Nonqualified Stock Option for purposes of the Plan. Except as otherwise provided in the applicable Award Agreement, an Employee of a Subsidiary shall be deemed to have incurred a termination of employment hereunder if his or her employer ceases to be a Subsidiary (as defined in the Plan) for any reason. The preceding sentence shall not apply to the extent that the Participant continues to be an Employee of the Company or another entity that continues to be a Subsidiary hereunder or continues to be an Outside Director. (f) Director Options. If a Participant ceases to serve as a Director for any reason other than death, each Director Options held by such Participant may thereafter be exercised, but only to the extent it was exercisable immediately prior to such cessation of service, until the earlier of (A) the remainder of the term of the Option, or (B) two (2) years after the date of such cessation of service. Except as set forth above, all Director Options held by the Participant shall expire and all rights to purchase Shares thereunder shall terminate immediately upon cessation of the Participant's service as a Director for any reason other than death. 6.7 Restrictions on Share Transferability. The Administrator may impose such restrictions on any Shares acquired pursuant to the exercise of an Option granted under this Section 6 as it may deem advisable, including, without limitation, restrictions under applicable Federal securities laws, under the requirements of any stock exchange or market upon which the Shares are then listed and/or traded, and under any blue sky or state securities laws applicable to the Shares. 6.8 Prior Option Grants. The adoption of this amended and restated Plan shall not amend or modify the terms and conditions of any written agreement covering an Option granted to a Participant under the 1997 Stock Option Plan prior to the Effective Date to the extent that any such amendment or modification could result in adverse accounting treatment of such Option by the Company or cause any Incentive Stock Option to cease to meet the requirements of Code Section 422. SECTION 7. STOCK APPRECIATION RIGHTS 7.1 Grant of SARs and Award Agreement. (a) SAR Grant. Subject to the terms and conditions of the Plan, SARs may be granted to one or more Employees and, subject to Section 5.1, prospective Employees at any time and from time to time as shall be determined by the Administrator. The Administrator shall have complete discretion in determining the number of SARs granted to each Participant (subject to Section 4 herein) and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such SARs. The grant price of SARs shall equal the Option Price of the related Option and shall not subsequently be changed by the Administrator, except pursuant to Section 4.3 hereof. (b) Award Agreement. The Company and each Participant to whom an SAR is granted shall execute an Award Agreement that shall specify the grant price, the term of the SAR, and such other provisions as the Administrator shall determine consistent with the terms and provisions of the Plan. 7.2 Term of SARs. The term of a SAR granted under the Plan shall be determined by the Administrator, in its sole discretion, but shall not exceed ten (10) years from the date of grant. 7.3 Exercise of SARs. SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option. A SAR may be exercised only with respect to the Shares for which its related Option is then exercisable. Notwithstanding any other provision of the Plan to the contrary, with respect to an SAR granted in connection with an ISO: (a) the SAR will expire no later than the expiration of the underlying ISO; (b) the value of the payout with respect to the SAR may be for no more than one hundred percent (100%) of the difference between the Option Price of the underlying ISO and the Fair Market Value of the Shares subject to the underlying ISO at the time the SAR is exercised; and (c) the SAR may be exercised only when the Fair Market Value of the Shares subject to the ISO exceeds the Option Price of the ISO. 7.4 Payment of SAR Amount. Upon exercise of a SAR, a Participant shall be entitled to receive payment from the Company an amount determined by multiplying: (a) The excess of the Fair Market Value of a Share on the date of exercise over the grant price; by (b) The number of Shares with respect to which the SAR is exercised. At the sole discretion of the Administrator, the payment upon SAR exercise may be in cash, in Shares of equivalent Fair Market Value, or in some combination thereof. 7.5 Termination of Employment. The Administrator, in its sole discretion, shall set forth in the applicable Award Agreement the extent to which a Participant shall have the right to exercise the SAR or SARs following termination of his or her employment with the Company and/or its Subsidiaries. Such provisions need not be uniform among all SARs issued pursuant to the Plan, and may reflect distinctions based on the reasons for such termination, including, but not limited to, termination for Cause or reasons relating to the breach or threatened breach of restrictive covenants. Subject to Section 12, unless the Award Agreement provides otherwise, rules corresponding to the provision in Section 6.6(a) through (e) shall apply. SECTION 8. RESTRICTED STOCK 8.1 Grant of Restricted Stock and Award Agreement. (a) Grant of Restricted Stock. Subject to the terms and provisions of the Plan, the Administrator, at any time and from time to time, may grant Shares of Restricted Stock to Employees and, subject to Section 5.1, prospective Employees in such amounts as the Administrator shall determine. (b) Award Agreement. The Company and each Participant to whom an award of Restricted Stock is granted shall execute an Award Agreement that shall specify the Period or Periods of Restriction, the number of Shares of Restricted Stock granted, and such other provisions as the Administrator shall determine consistent with the terms and provisions of the Plan. 8.2 Other Restrictions. Subject to Section 8.6 herein, the Administrator may impose such conditions and/or restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable, including without limitation, a requirement that Participants pay a stipulated purchase price for each Share of Restricted Stock, restrictions based upon the achievement of specific performance goals (Company-wide, Subsidiary-wide, divisional, and/or individual), time-based restrictions on vesting, which may or may not be following the attainment of the performance goals, sales or other restrictions under applicable shareholder agreements or similar agreements, and/or restrictions under applicable Federal or state securities laws. Subject to Section 12 herein, (a) Awards of Restricted Stock conditioned solely upon time-based restrictions on vesting shall not vest in full prior to the third anniversary of the date of grant; provided that such Awards may vest in installments so long as not more than fifty percent (50%) of the Shares subject to such Award shall vest prior to the third anniversary of the date of grant; and (b) Awards of Restricted Stock conditioned upon the achievement of specific performance goals shall have a Period of Restriction of not less than one year from the date of grant. Notwithstanding the foregoing, the Administrator may provide for the acceleration of the date of lapse of the Period of Restriction applicable to any Shares of Restricted Stock, either in the Award Agreement or after an Award has been granted, only (a) in connection with the termination of a Participant's employment with the Company or a Subsidiary (i) by reason of such Participant's death, disability, or Retirement or (ii) otherwise by, or at the request of, the Company or such Subsidiary (other than for Cause), or (b) upon the occurrence of a Change in Control. The Company shall retain the certificates representing Shares of Restricted Stock in the Company's possession until such time as all conditions and/or restrictions applicable to such Shares have been satisfied. Except as otherwise provided in this Section 8 or in any Award Agreement, Shares of Restricted Stock shall become freely transferable by the Participant after expiration of the applicable Period of Restriction, except to the extent such Shares are forfeited under the terms of the applicable Award Agreement prior to the end of the Period of Restriction. 8.3 Voting Rights. Unless otherwise designated by the Administrator at the time of grant, Participants to whom Shares of Restricted Stock have been granted hereunder may exercise full voting rights with respect to those Shares during the Period of Restriction, except to the extent such Shares are forfeited under the terms of the applicable Award Agreement prior to the end of the Period of Restriction. 8.4 Dividends and Other Distributions. Unless otherwise designated by the Administrator at the time of grant, Participants holding Shares of Restricted Stock granted hereunder shall be credited with regular cash dividends or other distributions paid with respect to the underlying Shares while they are so held during the Period of Restriction, except to the extent such Shares are forfeited under the terms of the applicable Award Agreement prior to the end of the Period of Restriction. The Administrator may apply any terms or restrictions to dividends or other distributions in respect of Restricted Stock as it deems appropriate, including deferring the payment of such dividends or other distributions pending lapse of any applicable restrictions, or non-payment of such amounts during the Restricted Period. Without limiting the generality of the preceding sentence, if the grant or vesting of Shares of Restricted Stock granted to a Named Executive Officer is intended to comply with the requirements of the Performance- Based Exception, the Administrator may apply any restrictions it deems appropriate to the payment of dividends or other distributions declared with respect to such Shares of Restricted Stock, such that the dividends or other distributions and/or the Shares of Restricted Stock maintain eligibility for the Performance-Based Exception. If any dividend or other distribution constitutes a derivative security or an equity security pursuant to the rules under Section 16 of the Exchange Act, such dividend or distribution shall be subject to a vesting period equal to the remaining vesting period of the Shares of Restricted Stock with respect to which the dividend or distribution is paid. 8.5 Termination of Employment. The Administrator, in its sole discretion, shall set forth in the applicable Award Agreement the extent to which the Participant shall have the right to receive unvested Shares of Restricted Stock following termination of the Participant's employment with the Company and its Subsidiaries. Such provisions need not be uniform among all Shares of Restricted Stock issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of employment including, but not limited to, termination of employment for Cause, or reasons relating to the breach or threatened breach of restrictive covenants. Subject to Section 12, unless the applicable Award Agreement provides otherwise, no additional vesting of Restricted Stock shall occur following a Participant's termination of employment. In making determinations regarding termination of a Participant's employment hereunder, the rules set forth in Section 6.6(e) shall apply. 8.6 Performance Measures. Unless and until the Administrator proposes for stockholder vote, and stockholders approve, a change in the general performance measures set forth in this Section 8.6, the attainment of which may determine the degree of payout and/or vesting with respect to Awards to Named Executive Officers that are designed to qualify for the Performance-Based Exception, the performance goals to be used for purposes of such grants shall be established by the Administrator in writing and stated in terms of the attainment of specified levels of, or percentage changes in, any one or more of the following measurements: revenue; primary or fully- diluted earnings per Share; earnings before interest, taxes, depreciation, and/or amortization; pretax income; profit from operations; cash flow from operations; total cash flow; return on equity; return on capital; return on assets; net operating profits after taxes; economic value added; total stockholder return or return on sales; or any individual performance objective which is measured solely in terms of quantitative targets related to the Company or the Company's business; or any combination thereof. In addition, such performance goals may be based in whole or in part upon the performance of the Company, a Subsidiary, division and/or other operational unit under one or more of such measures. The degree of payout and/or vesting of such Awards designed to qualify for the Performance-Based Exception shall be determined based upon the written certification of the Administrator as to the extent to which the performance goals and any other material terms and conditions precedent to such payment and/or vesting have been satisfied. The Administrator shall have the sole discretion to adjust the determinations of the degree of attainment of the preestablished performance goals; provided, however, that the performance goals applicable to Awards which are designed to qualify for the Performance- Based Exception, and which are held by Named Executive Officers, may not be adjusted so as to increase the payment under the Award (the Administrator shall retain the sole discretion to adjust such performance goals upward, or to otherwise reduce the amount of the payment and/or vesting of the Award relative to the preestablished performance goals). If applicable tax and/or securities laws change to permit Administrator sole discretion to alter the governing performance measures without obtaining stockholder approval of such changes, the Administrator shall have sole discretion to make such changes without obtaining stockholder approval. In addition, if the Administrator determines that it is advisable to grant Awards which shall not qualify for the Performance-Based Exception, the Administrator may make such grants without satisfying the requirements of Code Section 162(m) and, thus, which use performance measures other than those specified above. SECTION 9. BENEFICIARY DESIGNATION/ASSIGNMENT 9.1 Designation of Beneficiary. Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of the Participant's death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Treasurer of the Company (or his or her designee) during the Participant's lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. 9.2 Limitations on Assignment. Except as otherwise provided in a Participant's Award Agreement, or as provided by the Administrator, no Award granted under this Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by laws of descent and distribution. Further, except as otherwise provided in a Participant's Award Agreement, all Option Awards and SARs granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant. Notwithstanding the foregoing, Director Options shall be transferable (subject to any terms and conditions imposed by the Administrator) by the optionee, either directly or in trust, to one or more "family members" (as defined in instruction A.1(a)(5) to Form S-8, or any successor thereto, under the Securities Act of 1933) of the Participant. The Administrator may also grant Employees NQSOs and SARs transferable (subject to any terms and conditions imposed by the Administrator) by the Participant, either directly or in trust, to one or more such "family members" of the Participant. Following any transfer permitted pursuant to this paragraph of which the Participant has notified the Administrator in writing, such Award or SAR may be exercised by the transferee(s), subject to all terms and conditions of the Award Agreement. SECTION 10. DEFERRALS The Administrator may require or permit a Participant to defer such Participant's receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant upon the exercise of any Option or SAR or by virtue of the lapse or waiver of restrictions with respect to Restricted Stock. If any such deferral election is required or permitted, the Administrator shall, in its sole discretion, establish rules and procedures for such payment deferrals. SECTION 11. RIGHTS AND OBLIGATIONS OF PARTIES 11.1 No Guarantee of Employment. Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or any Subsidiary. 11.2 Participation. No Employee shall have the right to be selected to receive an Award under the Plan, or, having been so selected, to be selected to receive a future Award. 11.3 Right of Setoff. The Company or any Subsidiary may, to the extent permitted by applicable law, deduct from and set off against any amounts the Company or Subsidiary may owe to the Participant from time to time, including amounts payable in connection with any Award, such amounts as may be owed by the Participant to the Company, although the Participant shall remain liable for any part of the Participant's payment obligation not satisfied through such deduction and setoff. By accepting any Award granted hereunder, the Participant agrees to any deduction or setoff under this Section 11.3. 11.4 Section 83(b) Election. No election under Section 83(b) of the Code (to include in gross income in the year of transfer the amounts specified in Code Section 83(b)) or under a similar provision of the laws of a jurisdiction outside the United States may be made, unless expressly permitted by the terms of the Award Agreement or by action of the Administrator in writing prior to the making of such election. In any case in which a Participant is permitted to make such an election in connection with an Award, the Participant shall notify the Company of such election within ten (10) days of filing notice of the election with the Internal Revenue Service or other governmental authority, in addition to any filing and notification required pursuant to regulations issued under Code Section 83(b) or other applicable provision. 11.5 Disqualifying Disposition Notification. If any Participant shall make any disposition of Shares delivered pursuant to the exercise of an Incentive Stock Option under the circumstances described in Code Section 421(b) (relating to certain disqualifying dispositions), such Participant shall notify the Company of such disposition within ten (10) days thereof. SECTION 12. CHANGE IN CONTROL Upon the occurrence of a Change in Control, unless the applicable Award Agreement provides otherwise, or unless otherwise specifically prohibited under applicable laws or by the rules and regulations of any governing governmental agencies or national securities exchanges applicable to the Company, (a) any and all then outstanding Options and SARs granted hereunder shall become automatically vested and exercisable as of the effective date of such Change in Control and (b) any Period(s) of Restriction and other restrictions imposed on then outstanding Restricted Stock shall lapse as of the effective date of such Change in Control. SECTION 13. AMENDMENT, MODIFICATION, AND TERMINATION 13.1 Amendment, Modification, and Termination of the Plan. The Board may amend, suspend or terminate the Plan or the Administrator's authority to grant Awards under the Plan without the consent of stockholders or Participants; provided, however, that any amendment to the Plan shall be submitted to the Company's stockholders for approval if stockholder approval is necessary for intended favorable treatment under, or compliance with, any federal or state law or regulation or the rules of any stock exchange or automated quotation system on which the Shares may then be listed or quoted within the time provided under such law, regulation or rule (and the Board may otherwise, in its sole discretion, determine to submit other amendments to the Plan to stockholders for approval); and provided further, that, without the consent of an affected Participant, no such Board action may materially and adversely affect the rights of such Participant under any outstanding Award. 13.2 Amendment or Substitution of Awards Under the Plan. The terms of any outstanding Award may be amended from time to time by the Administrator in its discretion in any manner that it deems appropriate (including, but not limited to, acceleration of the date of exercise of any Award or of the date of lapse of restrictions on Shares); provided, however, that except as provided in Section 4.3, no such amendment shall adversely affect in any material way any right of a Participant under the Award without such Participant's written consent, and provided further that the Administrator shall have no authority to waive or modify any Award term after the Award has been granted to the extent that the waived or modified term was mandatory under the Plan. The Administrator may, in its discretion, permit Participants to surrender outstanding Awards in order to exercise or realize rights under other outstanding Awards. Notwithstanding the foregoing, the Administrator shall not grant new Awards to Participants in exchange for the surrender of outstanding Awards, or otherwise require Participants to surrender outstanding Awards as a condition precedent to the grant of new Awards, unless (a) the Administrator proposes for stockholder vote, and stockholders approve, such surrender and new grant, or (b) the present value of the new Award at the date of grant (determined in good faith by the Administrator using the Black-Scholes option pricing model or other generally accepted valuation methodology) does not exceed the present value of the surrendered Award at the date of surrender (determined in good faith by the Administrator using the same methodology as that employed for the new Award). SECTION 14. WITHHOLDING 14.1 Tax Withholding. The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of the Plan. 14.2 Share Withholding. With respect to withholding required upon the exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock, or upon any other taxable event arising as a result of Awards granted hereunder, Participants may elect, subject to the approval of the Administrator in its sole discretion, and upon such terms and conditions as the Administrator shall determine, to satisfy the withholding requirement, in whole or in part, by having the Company withhold Shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which would be imposed on the transaction. All such elections shall be irrevocable, made in writing, signed by the Participant, and shall be subject to any restrictions or limitations that the Administrator, in its sole discretion, deems appropriate. SECTION 15. SUCCESSORS All obligations of the Company under the Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect merger, consolidation, purchase of all or substantially all of the business and/or assets of the Company or otherwise. SECTION 16. MISCELLANEOUS 16.1 Unfunded Plan. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant or obligation to deliver Shares pursuant to an Award, nothing contained in the Plan or any Award shall give any such Participant any rights that are greater than those of a general creditor of the Company; provided that the Administrator may authorize the creation of trusts and deposit therein cash, Shares, other Awards or other property, or make other arrangements to meet the Company's obligations under the Plan. Such trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Administrator otherwise determines with the consent of each affected Participant. 16.2 Forfeitures; Fractional Shares. Unless otherwise determined by the Administrator, in the event of a forfeiture of an Award with respect to which a Participant paid cash consideration, the Participant shall be repaid the amount of such cash consideration. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award. The Administrator shall determine whether cash, other Awards or other property shall be issued or paid in lieu of fractional Shares or whether such fractional Shares or any rights thereto shall be forfeited or otherwise eliminated. 16.3 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 16.4 Severability. If any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 16.5 Requirements of Law. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 16.6 Securities Law Compliance. With respect to Insiders, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provision of the Plan or action by the Administrator fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Administrator. 16.7 Governing Law. To the extent not preempted by Federal law, the Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Delaware. EX-15 4 exh15.txt NEW ENGLAND BUSINESS SERVICE, INC. EXH 15 November 12, 2002 New England Business Service, Inc. 500 Main Street Groton, Massachusetts 01471 We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of New England Business Service, Inc. and subsidiaries for the periods ended September 28, 2002 and September 29, 2001, as indicated in our report dated October 22, 2002; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included as Exhibit 99 in your Quarterly Report on Form 10-Q for the quarter ended September 28, 2002, is incorporated by reference in Registration Statement Nos. 33-38925, 33-56227, 333-44825, 333- 44819, 333-43028, 333-43804 and 333-83196 on Form S-8. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. /s/ Deloitte & Touche LLP Boston, Massachusetts EX-99 5 exh99_1.txt NEW ENGLAND BUSINESS SERVICE, INC. EXH 99 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of New England Business Service, Inc. (the "Company") for the period ended September 28, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert J. Murray, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 12, 2002 /s/ Robert J. Murray - --------------------------- Robert J. Murray Chairman and Chief Executive Officer EX-99 6 exh99_2.txt NEW ENGLAND BUSINESS SERVICE, INC. EXH 99 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of New England Business Service, Inc. (the "Company") for the quarter ended September 28, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel M. Junius, Executive Vice President, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 12, 2002 /s/ Daniel M. Junius - ---------------------------------------- Daniel M. Junius Executive Vice President, Chief Financial Officer and Treasurer EX-99 7 exh99_3.txt NEW ENGLAND BUSINESS SERVICE, INC. EXH 99 INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors and Stockholders of New England Business Service, Inc. Groton, Massachusetts We have reviewed the accompanying condensed consolidated balance sheet of New England Business Service, Inc. and subsidiaries (the "Company") as of September 28, 2002 and the related condensed consolidated statements of income and cash flows for the three- month periods ended September 28, 2002 and September 29, 2001. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of New England Business Service, Inc. and subsidiaries as of June 29, 2002, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated July 31, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 28, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /S/ Deloitte & Touche LLP October 22, 2002 Boston, Massachusetts -----END PRIVACY-ENHANCED MESSAGE-----