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 quarterly period ended September 28, 1996.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-11427
NEW ENGLAND BUSINESS SERVICE, INC.
----------------------------------
(Exact name of the registrant as specified in its charter)
Delaware 04-2942374
-------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
500 Main Street
Groton, Massachusetts, 01471
----------------------------
(Address of principal executive offices)
(Zip Code)
(508) 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 October 25,
1996 was 13,015,603.
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands Except Share Data)
Sept. 28, June 29,
1996 1996
(unaudited)
--------- ---------
ASSETS
Current Assets
Cash and cash equivalents $ 5,696 $ 6,508
Short-term investments 3,675 10,868
Accounts receivable 30,723 30,636
Direct mail advertising and inventories 8,743 8,675
Prepaid expenses 7,091 5,176
Deferred income tax benefit 9,471 9,471
-------- ---------
Total current assets 65,399 71,334
Property and equipment - net 29,452 31,012
Property Held for Sale 631 631
Other Assets - net 530 565
-------- --------
TOTAL ASSETS $ 96,012 $103,542
======== ========
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (Continued)
(In Thousands Except Share Data)
Sept. 28, June 29,
1996 1996
(unaudited)
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 11,087 $ 8,575
Accrued expenses 21,254 18,698
-------- --------
Total current liabilities 32,341 27,273
Deferred Income Taxes 345 353
STOCKHOLDERS' EQUITY
Preferred stock
Common stock 14,010 14,005
Additional paid in capital 13,659 13,603
Cumulative foreign currency translation
adjustment ( 1,739) ( 1,761)
Retained earnings 47,985 50,069
-------- ---------
Total 73,915 75,916
Less: treasury stock ( 10,589) ( 0)
-------- ---------
Stockholders' Equity 63,326 75,916
-------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 96,012 $103,542
======== ========
See Notes to Consolidated Financial Statements
NEW ENGLAND BUSINESS SERVICE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(unaudited)
Three Months Ended
------------------------
Sept. 28, Sept. 30,
1996 1995
--------- ---------
NET SALES $ 60,702 $ 63,788
OPERATING EXPENSES:
Cost of sales 21,961 22,230
Selling and advertising 22,369 24,885
General and administrative 10,196 11,419
Exit costs 5,201 3,034
-------- --------
Total operating expenses 59,727 61,568
-------- --------
INCOME FROM OPERATIONS 975 2,220
OTHER INCOME/(EXPENSE):
Investment income 172 301
-------- --------
INCOME BEFORE INCOME TAXES 1,147 2,521
PROVISION FOR INCOME TAXES:
Federal 367 684
State 102 294
-------- --------
Total 469 978
-------- --------
NET INCOME BEFORE LOSS ON
EQUITY METHOD INVESTMENT 678 1,543
Loss on equity method investment, net of
income tax benefit of $653 in 1995 ( 0) ( 1,002)
-------- --------
NET INCOME $ 678 $ 541
======== ========
PER SHARE AMOUNTS:
Net Income $ . 05 $ .04
======== ========
Dividends $ .20 $ .20
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 13,828 15,052
======== ========
See Notes to Consolidated Financial Statements
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(unaudited)
Three Months Ended
------------------------
Sept. 28, Sept. 30,
1996 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 678 $ 541
Adjustments to reconcile net income to cash:
Depreciation and amortization 2,264 6,891
Deferred income taxes ( 9) ( 639)
Other non-cash items 5,605 4,589
Changes in assets and liabilities:
Accounts receivable ( 757) ( 2,343)
Inventories and prepaid expenses ( 2,090) (716)
Accounts payable 2,512 1,457
Accrued expenses ( 433) ( 2,414)
-------- --------
Net cash provided by operating activities 7,770 7,366
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ( 2,488) ( 2,402)
Purchase of investments ( 3,800) ( 14,612)
Proceeds from sale of investments 10,993 6,484
Other assets 0 ( 56)
-------- --------
Net cash provided by (used in) investing
activities 4,705 ( 10,586)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debt 0 14
Proceeds from issuing common stock 61 327
Issuance (purchase) of treasury stock ( 10,589) 269
Dividends paid ( 2,762) ( 2,974)
-------- --------
Net cash used in financing activities ( 13,290) ( 2,364)
-------- --------
EFFECT OF EXCHANGE RATE ON CASH 3 233
-------- --------
NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands)
(unaudited)
Three Months Ended
------------------------
Sept. 28, Sept. 30,
1996 1995
--------- ---------
NET DECREASE IN
CASH AND CASH EQUIVALENTS ( 812) ( 5,351)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 6,508 11,604
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,696 $ 6,253
========= ========
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Basis of Presentation
---------------------
The 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 statement of the results of the interim periods
reflected. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to applicable
rules and regulations of the Securities and Exchange Commission. The
results of operations for the interim period reported herein are not
necessarily indicative of results to be expected for the full year.
2. Accounting Policies
-------------------
The consolidated financial statements included herein should be read
in conjunction with the financial statements and notes thereto, and
the Report of Independent Public Accountants incorporated by reference
in the Company's Annual Report on Form 10-K for the fiscal year ended
June 29, 1996 from the Company's 1996 Annual Report to Shareholders.
Reference is made to the accounting policies of the Company described
in the notes to consolidated financial statements incorporated by
reference in the Company's Annual Report on Form 10-K for the fiscal
year ended June 29, 1996 from the Company's 1996 Annual Report to
Shareholders. The Company has consistently followed those policies
in preparing this report.
3. Inventories
-----------
Inventories are carried at the lower of first-in, first-out cost or
market. Inventories at September 28, 1996 and June 29, 1996 consisted
of:
Sept. 28, June 29,
1996 1996
(unaudited)
---------- ----------
Raw paper $ 470,000 $ 434,000
Business forms and related office products 8,273,000 8,241,000
----------- -----------
Total $ 8,743,000 $ 8,675,000
=========== ===========
4. Exit Costs
----------
During the first quarter of fiscal year 1997, the Company reached a
joint decision with Kinko's Corporation to pursue a new strategy for
its retail channel initiative. This decision resulted in a plan to
close the Company's 75 existing NEBS manned print desks in Kinko's
stores, its administrative offices in Phoenix and its stationery
plant in Scottsdale, Arizona. The accompanying consolidated
statements of income include a $5,201,000 pretax charge for exit costs
associated with this plan recognized in the first quarter ended
September 28, 1996. The charge for exit costs, net of a reduction in
profit sharing plan expense, had the effect of reducing first quarter
net income by $2,833,000 or $.21 per share.
The $5,201,000 pretax charge for exit costs consisted of anticipated
costs related to facility closures of $1,160,000, equipment write-offs
of $1,815,000 and termination benefits of $2,226,000. Approximately 230
employees will be terminated as a result of the restructuring plan.
5. Impairment of Long-Lived Assets
-------------------------------
As of June 29, 1996, the Company adopted SFAS No. 121, entitled
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The adoption of this standard did not have
a material effect on the accompanying consolidated financial statements.
MANAGEMENT DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities of $7.8 million in the first quarter
of fiscal year 1997 represented a slight increase from the $7.4 provided
in the first quarter of fiscal year 1996. A decline in non-cash expense
associated with exit cost charges and the software asset revaluation
was more than offset by a decrease in cash invested in working capital
during the period.
Working capital at September 28, 1996 amounted to $33.1 million, including
$9.4 million of cash and short-term investments. This compares to working
capital of $49.5 million and cash and short-term investment balances of $25.9
million at the same time last year. At the end of the fiscal year 1996,
working capital amounted to $44.1 million, including cash and short-term
investments of $17.4 million. The decrease in working capital from year-end
was due primarily to cash outflows of $10.9 million associated with the
repurchase of 694,000 shares of the Company's common stock during the
quarter, offset in part by increased accounts payable and accrued exit costs
balances.
Capital expenditures of $2.5 million for the three months ended September 28,
1996 were approximately equivalent to capital expenditures during last year's
first quarter. The Company had no significant commitments for capital projects
at quarter end. The Company anticipates that capital outlays will continue at
the first quarter pace throughout fiscal year 1997.* Planned capital outlays
for fiscal year 1997 are primarily related to a plan to upgrade the Company's
order entry, financial and related systems.
In addition to its present cash and investment balances, the Company has
consistently generated sufficient cash internally to fund its needs for
working capital, dividends and capital expenditures. However, should the
Company need additional funds, it has unsecured lines of credit with a major
bank for $20.0 million. At present, there are no outstanding balances against
this line.
Results of Operations
- ---------------------
Net sales decreased 4.8% to $60.7 million from $63.8 million in the first
quarter of fiscal 1996. This sales decrease was composed of approximately 3.5%
or $2.3 million attributable to the divestiture of One-Write Plus product line,
and 1.3% or $.8 million attributable to higher promotional discounting and the
timing of shipping of seasonal products at quarter-end.
Cost of sales increased to 36.2% of sales in the first quarter of fiscal 1997
from 34.9% in last year's first quarter. This increase was due primarily to a
decline in the sale of higher margin software products and increased investment
in stationery printing capacity.
Selling and advertising expenses decreased as a percentage of sales from 39.0%
in fiscal 1996 to 36.9% in fiscal 1997. The decrease was primarily associated
with reduced software marketing expense following the divestiture of One-Write
Plus and the effect of one-time costs recognized for the revaluation of
software-related assets in the first quarter of 1996. These cost savings were
offset, in part, by increased expenses related to the NEBS custom print desks
in Kinko's stores and an increase in direct mail advertising expense.
General and administrative expenses decreased as a percentage of sales from
17.9% in the first quarter of fiscal 1996 to 16.8% in the first quarter of
fiscal 1997 due to the effect of the one-time costs resulting from the
revaluation of certain software-related assets in the first quarter of 1996
offset by increased costs related to the Company's program to re-engineer its
financial and operational information systems.
During the first quarter of fiscal 1996, the Company recorded a $3.0 million
pre-tax charge, or $.12 per share, related to exit costs associated with a
plan to restructure operations including the closure of the Company's
Flagstaff , Arizona manufacturing facility. As of September 28, 1996 the
plan was substantially complete.
During the first quarter of fiscal year 1997, the Company recorded a $5.2
million pre-tax charge, or $.21 per share, related to exit costs associated with
a plan to close the Company's 75 NEBS manned print desks in Kinko's stores, its
adminitrative offices in Phoenix and its stationary plant in Scottsdale,
Arizona. The $5,201,000 pretax charge for exit costs consisted of facility
closure costs of $1,160,000, equipment write-offs of $1,815,000 and
postemployment benefits of $2,226,000 in conjunction with the termination of
approximately 230 employees. The Company also expects to incur an additional
$1.3 million of operating expense during the remainder of fiscal year 1997
associated with the plan to restructure operations.* The restructuring plan is
expected to be substantially completed during fiscal year 1997.*
Investment income decreased from $301,000 in the first quarter of fiscal 1996
to $172,000 in the first quarter of fiscal year 1997 due primarily to lower
investable balances.
The provision for income taxes as a percentage of pre-tax income increased from
fiscal 1996 to fiscal 1997 due to a decrease in the proportion of tax-free
investment income to income before taxes due to the lower investment balances
during the quarter.
In 1996 the Company's adoption of Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", was not significant to the financial
statements.
- - - - - - -
* This statement is a forward-looking statement reflecting the Company's current
expectations. There can be no assurance that the Company's actual results will
not differ materially from those projected in such forward-looking statements
due to the important factors described in Exhibit 99 to this Quarterly Report
on Form 10-Q.
PART II - OTHER INFORMATION
---------------------------
Item 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
a. The Annual Meeting of Stockholders was held on October 25,
1996.
b. Not applicable.
c. The stockholders fixed the number of Directors to be elected
at eight and elected the following as Directors:
For Against No Vote
--- ------- -------
Peter A. Brooke 12,179,030 14,038 1,387,440
Robert L. Gable 12,178,656 14,412 1,387,440
Benjamin H. Lacy 12,178,431 14,637 1,387,440
Herbert W. Moller 12,178,456 14,612 1,387,440
Robert J. Murray 12,179,030 14,038 1,387,440
Jay R. Rhoads, Jr. 12,179,030 14,038 1,387,440
Richard H. Rhoads 12,178,414 14,654 1,387,440
Brian E. Stern 12,178,456 14,612 1,387,440
To ratify the selection of Deloitte & Touche LLP as independent
auditors of the Company for the fiscal year ending June 28, 1997:
For Against Abstain No Vote
--- ------- ------- -------
12,170,067 8,484 14,517 1,387,440
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No. Description
----------- -----------
(11) Statement re computation of per share earnings.
(27) Article 5 Financial Data Schedule
(99) Safe Harbor for Forward Looking Statements
b. Reports on Form 8-K
On September 20, 1996 the Company filed a Form 8-K under Item 5
to report a cost reduction program and first quarter charge to
be taken by the Company.
On October 25, 1996 the Company filed a Form 8-K under Item 5
to report first quarter earnings.
SIGNATURES
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 thereunto duly authorized.
NEW ENGLAND BUSINESS SERVICE, INC.
----------------------------------
(Registrant)
November 12, 1996 /s/John F. Fairbanks
- ----------------- --------------------------
Date John F.Fairbanks
Principal Financial and
Accounting Officer
New England Business Service, Inc.
Statement Re Computation of Per Share Earnings
(In Thousands Except Per Share Data)
Exhibit 11
----------
Quarter Ended
September 28, 1996
------------------------------
Primary Fully Diluted
------- -------------
Shares
- ------
Weighted Average Shares
of Common Stock 13,755 13,755
Add:
Common Stock Equivalents
in the form of Stock Options 73 (1) 47 (1)
------- -------
Weighted Average Common Stock
and Common Stock Equivalents 13,828 13,802
======= =======
Earnings
- --------
Earnings per Consolidated
Statement of Income $ 678 $ 678
======= =======
Earnings per Share $ .05 $ .05
======= =======
(1) Amount considered immaterial for inclusion in earnings per share
calculation as defined in Accounting Principles Board Opinion No. 15.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF NEW ENGLAND BUSINESS SERVICE, INC. AND ITS
SUBSIDIARIES AS OF SEPTEMBER 28, 1996 AND THE RELATED STATEMENTS OF CONSOLIDATED
INCOME AND CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-END> SEP-28-1996
<CASH> 5,696
<SECURITIES> 3,675
<RECEIVABLES> 34,197
<ALLOWANCES> 3,474
<INVENTORY> 8,743
<CURRENT-ASSETS> 65,399
<PP&E> 102,381
<DEPRECIATION> 72,298
<TOTAL-ASSETS> 96,012
<CURRENT-LIABILITIES> 32,341
<BONDS> 0
<COMMON> 14,010
0
0
<OTHER-SE> 49,316
<TOTAL-LIABILITY-AND-EQUITY> 96,012
<SALES> 60,702
<TOTAL-REVENUES> 60,702
<CGS> 21,961
<TOTAL-COSTS> 37,766
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 674
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,147
<INCOME-TAX> 469
<INCOME-CONTINUING> 678
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 678
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
Exhibit 99. Additional Exhibits - Safe Harbor for Forward Looking Statements
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing, in reports filed under the
Securities Act of 1934, as amended, in press releases or in statements made
with the approval of an authorized executive officer. The words or phrases
"is expected," "will continue," "anticipates," "estimates," or similar
expressions in any of these communications are intended to identify
"forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934 and Section 27A of the Securities Act of
1933, as enacted by the Private Securities Litigation Reform Act of 1995.
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing the following
cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those projected in such
forward looking statements:
Increasing Competition; Pressure on Price and Margins.
The Company operates in a highly competitive marketplace, in which it competes
with a variety of mail order marketers, retailers, dealers, distributors and
local printers in the marketing of business forms, stationery and supplies to
small businesses. Over the course of the past decade, mail order providers of
business forms and stationery have experienced growth in excess manufacturing
capacity. In addition, the Company has faced increasing competition from
low-price, high-volume office supply chain stores. Improvements in the cost
and quality of printing technology have increasingly allowed dealers,
distributors and local printers to gain access to products of complex design
and functionality at competitive prices. The Company currently anticipates that
these trends will continue. No assurance may be given that competition will
not have an adverse effect on the Company's business. In addition, if any of
the Company's mail order competitors were to seek to gain or retain market
share by reducing prices or increasing promotional discounting, the Company
would be compelled to reduce its prices or match the discounts and thereby
reduce its gross margin and profitability.
Economic Cycles; Variability of Performance.
The Company's standardized forms and check business accounts for a large
majority of its sales and profitability. The forms and check industry is
highly competitive and generally characterized by mature products designed
within well-established industry standards. The Company relies, in part, on
net small business formations for growth in demand for its standardized form
and check products. As a result, the Company's growth rate is closely correlated
to the strength of its target small business market. The Company's revenue
trends and operating profitability have been materially adversely affected by
recession-related contractions in the small business economy in the past. The
Company will continue to experience quarterly and annual variations in net sales
and net income as a result of changes in the levels of small business formations
and failures.
Technological Change; Product Obsolescence and Risks to Competitive Advantage.
The Company's standardized business forms and related products are designed to
provide small businesses with the financial and business records required to
manage a business. Steady technological improvements have provided small
businesses in several market segments with alternative means to enact and record
business transactions. PC-based, point-of-sale, electronic form and electronic
transaction systems have been designed to automate several of the functions
performed by the Company's products. The price and performance characteristics
of personal laser and ink-jet printing equipment have improved markedly in the
recent past; thereby allowing small businesses a cost competitive means to print
low-quality versions of Company forms on plain paper. In addition, the Internet
has the potential to eliminate the Company's advantage of scale in direct
marketing by providing all competitors with equal access to customers who
purchase products over the Internet. In response, the Company has focused
resources on development and procurement of new products less susceptible to
technological obsolescence and has aggressively moved to develop a comprehensive
electronic catalog of products to be utilized in retail-based kiosks, PC-based
software and over the Internet. It should be noted that the Company's small
business customers have proven to be relatively slow adapters of new technology
which has minimized the adverse impact of these technological trends. However,
the Company may give no assurance that continued technological change will not
have a material adverse impact on the long-term prospects for the Company's
business.
Paper Costs and Postal Rates; Risks to Margins.
The cost of paper used to produce the Company's products, catalogs and
advertising materials constitutes, directly or indirectly, approximately 20%
of consolidated revenues. In addition, the Company is reliant on the U.S. Postal
Service for delivery of most of the Company's promotional materials. Coated
paper costs for promotional materials and postal rates for third class mail have
increased significantly over the past decade. In addition, certain segments of
the paper market have demonstrated considerable price volatility over the past
five years. The Company has been able to counteract the impact of postal and
paper cost increases with cost reduction programs and selected product price
increases. Due to increased competition in the small business forms, stationery
and supplies marketplace, no assurance may be given that the Company will be
able to increase product pricing to compensate for future paper or postal cost
increases. The inability to raise prices in response to paper or postal cost
increases could reduce the Company's operating profitability and net income.
Customer Preferences; Investment Requirements & Sales Risk.
The Company's core competency is the direct marketing, manufacturing and
distribution of standardized forms and related products to small businesses.
Newly-formed small business owners are increasingly demanding custom and
color-coordinated products to create an image in addition to enabling the
management of business transactions. The relative prices charged by local
printers, contract printers and dealers for providing these custom and
full-color printed products have been declining due to technological advances
in composition systems and printing equipment. As a direct result, the cost
advantage inherent to the Company's standardized forms and related printed
products has declined. The Company is responding with focused investment in
the infrastructure required to sell, compose, print and distribute custom and
full-color products. This effort will include installation of an integrated
and flexible information system architecture and the re-engineering of many of
the Company's basic business functions. In addition, the Company will continue
to invest in its dealer and technology-based channels that more readily support
the interactive marketing required to sell custom and full-color products.
However, the Company may give no assurance that the rate of decline in demand
for standardized forms and related printed products will not accelerate, that
the interactive marketing investments will prove successful, nor that the
information systems re-engineering effort will not result in operating
inefficiencies or unplanned expense. If any of such potential risks materialize,
the Company's future net sales and net income could be materially adversely
affected.
Response Rates and Customer Retention; Sales Risk.
Customer and prospect response rates to the Company's catalogs and promotional
materials have remained relatively stable over time. Continued stability in
prospect response and customer retention is primarily dependent on the continued
relevancy of the range of the Company's products to the small business
marketplace. New product introductions, to date, have generally offset declines
in response rates and retention attributable to product obsolescence. However,
the Company can make no assurances that its new product introductions will
continue to offset the rate of obsolescence of its standardized forms products
in the future. An increase in the rate of product obsolescence or a decline in
new product introductions could negatively impact response rates and customer
retention which, in turn, would have a materially adverse impact on the
Company's long-term financial performance.
Prospect Lists; Sales Risk.
The Company's direct mail business has been characterized by a consistent level
of average annual sales per customer. As such, net sales growth is dependent, in
part, on an increase in customers served by the Company. Growth in the total
number of direct mail customers served by the Company depends upon continued
access to high-quality lists of newly-formed small businesses. In the past, the
Company's ability to compile proprietary prospect lists was a distinct
competitive advantage. However, the external list compilation industry has grown
more sophisticated and currently markets comprehensive lists of newly-formed
businesses to the Company and its competitors. At present, the Company relies on
the speed of its delivery of promotional materials to prospective customers to
gain advantage over competitors. However, the Company can make no assurances
that its promotional material delivery advantage will be maintained over time. A
deterioration in the Company's delivery advantage could have a materially
adverse impact on the Company's business and financial performance.
Governmental Regulations; Sales Risk.
Future governmental legislation or regulation including, but not limited to,
the following potential regulatory actions have the potential to have a material
adverse impact on the Company's business prospects: 1) institution of privacy
laws could constrain the Company's ability to mail promotional materials or to
telemarket to small businesses; 2) modification to U.S. Postal Service
regulations with the effect of increasing postal rates or reducing postal
delivery efficiency could have an adverse impact on the Company's marketing
efforts; and 3)institution of a "general sales tax", "value added tax" or
similar national tax could reduce demand for the Company's products. Although
the Company has no current knowledge or belief that such adverse regulation, or
similar governmental regulation, is pending or imminent, it may make no
assurance that adverse governmental regulation will not have a material adverse
impact on the Company's business in the future.
Other Risks; Variability of Performance.
The Company has experienced in the past and will experience in the future
quarterly and annual variations in net sales and net income as a result of many
factors, including, but not limited to, the timing of catalog mailings, catalog
response rates, product mix, the timing and levels of selling, general and
administrative expenses, cost reduction programs, timing of holidays and
inclement weather. The Company's planned operating expenses are based on sales
forecasts. If net sales performance falls below expectations in any given
quarter or year, the Company's operating results could be materially adversely
affected.
