considers the use of alternative parcel delivery services besides the U.S. Postal Service, but has
determined that the U.S. Postal Service offers the best balance of cost and service level for the
bulk of its shipments. The other carriers also have a history of significant rate increases from
year to year.
The price of paper is dependent upon supply and demand in the marketplace. The Company's
paper cost per page decreased approximately 12% in fiscal 2002 as compared to fiscal 2001, and
is expected to be approximately 7% lower in fiscal year 2003 as compared to fiscal 2002.
The Company continually monitors the paper market and periodically meets with its paper
suppliers in order to react to changes in the paper supply market. In addition, the Company
entered into a collar hedge contract to provide price protection in the form of a floor and ceiling
in purchasing certain of its paper requirements. This agreement may no longer be operative due
to the bankruptcy filing of the counterparty, Enron North America Corporation ("Enron") (see
Item 7(A) -- "Quantitative and Qualitative Disclosure About Market Risk" for further discussion).
While the Company cannot estimate the magnitude of future paper and postage increases or
decreases, such changes may impact the Company's future earnings. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations").
Merchandise Overstocks
The Company sells its overstocks to its customers at reduced prices, primarily through its Sales
and Bargains catalogs, its outlet stores and through special offers made to customers placing
orders by telephone and on the Internet.
Seasonality
The Company's business is seasonal. Historically, approximately 65% - 75% of the Company's
revenues and substantially all of its net income has been realized during its third and fourth
fiscal quarters, which encompass the period September through February. Lower revenue and
net losses are typically incurred during its first and second fiscal quarters, comprising the period
March through August. The Company believes this is the general pattern associated with other
mail order and retail gift businesses. Further discussion of the effect of seasonality upon
revenues and income is contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Government Regulations
The Company complies with Federal, state and local laws affecting its business. In particular, the
Company is subject to Federal Trade Commission regulations governing the Company's
advertising and trade practices and Consumer Product Safety Commission regulations governing
the standards its products, particularly toys, must meet. While the Company believes it is
presently in compliance with such regulations, in the event of noncompliance, the Company
may be subject to cease and desist orders, injunctive proceedings, civil fines and other penalties.
To date, such governmental regulations have not had a material adverse effect on the Company.
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L I L L I A N V E R N O N
