-----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, Qb5ESCdgxdLzWdRsWrTcd/ANPRkvr3aglOKViR/Ez5H7zlw04I44eq+hnRvVJZWh Vwetb0JWjtzsc7m732kD6Q== 0000205700-96-000005.txt : 19961113 0000205700-96-000005.hdr.sgml : 19961113 ACCESSION NUMBER: 0000205700-96-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960928 FILED AS OF DATE: 19961112 SROS: NYSE 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: 0627 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11427 FILM NUMBER: 96659853 BUSINESS ADDRESS: STREET 1: 500 MAIN ST CITY: GROTON STATE: MA ZIP: 01471 BUSINESS PHONE: 5084486111 10-Q 1 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 EX-11 2 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 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. EX-27 3
5 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. 1000 3-MOS JUN-28-1997 SEP-28-1996 5,696 3,675 34,197 3,474 8,743 65,399 102,381 72,298 96,012 32,341 0 14,010 0 0 49,316 96,012 60,702 60,702 21,961 37,766 0 674 0 1,147 469 678 0 0 0 678 .05 .05
EX-99 4 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. -----END PRIVACY-ENHANCED MESSAGE-----