| ARISTOTLE CORP ITEM 1A RISK FACTORS FORWARD-LOOKING STATEMENTS The Company believes that this Annual Report on Form 10-K may contain forward-looking statements within the meaning of the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995 |
| Forward looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, expectations, predictions, and assumptions and other statements which are other than statements of historical facts |
| These forward-looking statements are based on management’s current expectations and are subject to, and are qualified by, risks and uncertainties that could cause actual results or business conditions to differ materially from those projected or suggested in such forward-looking statements |
| The Company cautions investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors including, but not limited to, the risk factors set forth below |
| As a result, the Company’s future development efforts involve a high degree of risk |
| For further information, please see the Company’s filings with the Securities and Exchange Commission (“SEC”), including its Forms 10-K, 10-Q and 8-K RISK FACTORS If the Company’s competitors are successful in developing, manufacturing and selling competitive products, the Company’s operating results could suffer |
| The Company operates in highly competitive and fragmented markets |
| Businesses that compete with the Company are likely to continue expansion of their product offerings that may erode the Company’s gross margins |
| The broad range of product lines offered by the Company is unique to the market as few competitors offer the depth of subject matter in their product mix |
| However, each of the Company’s catalogs competes against a unique list of businesses that specialize in limited numbers of curriculum subjects or markets |
| Some competitors may be able to commit greater resources to product development, invest greater amounts on capital equipment and marketing plans, or offer more aggressive discounts for its products or services |
| In fragmented markets, competitors may further merge and consolidate, increasing market competition |
| Any of these competitive pressures could have a negative effect on the Company’s ope rating results |
| 7 If the Company is unable, for technical, legal, financial or other reasons, to adapt in a timely manner in response to changing market conditions or customer requirements, the Company’s business, prospects, financial condition and results of operations would be materially adversely affected |
| The Company’s success depends on its ability to enhance existing products and services, develop new products, services and technologies that address the increasingly sophisticated and varied needs of customers and its ability to respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis |
| If the Company is unable, for technical, legal, financial or other reasons, to adapt in a timely manner in response to changing market conditions or customer requirements, the Company’s business, prospects, financial condition and results of operations could be negatively affected |
| The Company is dependent upon the levels of student enrollment in elementary and secondary schools and expenditures per student |
| The Company’s ability to grow the business depends in part on the levels of student enrollment in elementary and secondary schools and expenditures per student |
| The level of student enrollment in elementary and secondary schools is largely a function of demographics |
| Expenditures per student are a function of prevailing political and social attitudes toward education, as well as government budgets |
| Any significant and sustained decline in the size of the levels of student enrollment and/or expenditures per student could have an adverse effect on the Company’s business, prospects, financial condition and results of operations |
| If the Company fails to retain key personnel and hire, train and retain qualified employees, the Company may not be able to compete effectively, which could result in reduced sales |
| The performance of the Company is substantially dependent on the services and performance of its senior management and other key personnel |
| The loss of the services of, and the failure to promptly replace, any of the Company’s executive officers or other key personnel, as well as the Company’s inability to attract and retain qualified personnel, could have a negative effect on the business, prospects, financial condition and results of operations of the Company |
| Competition for qualified personnel is intense, and there can be no assurance that the Company will be able to successfully attract, integrate or retain sufficiently qualified personnel |
| The Company expects its results of operations to fluctuate from quarter to quarter and the price of its Common Stock and Series I Preferred Stock could fall if quarterly results are lower than the expectations of the market |
| The Company’s results of operations have fluctuated in the past, and the Company’s results of operations may vary from quarter to quarter in the future |
| If quarterly results fall below market expectations, the price of the Company’s Common Stock and/or Series I Preferred Stock could fall |
| A number of factors, many of which are outside of the Company’s control, may cause variations in its results of operations including: § fluctuations in the demand for educational, health, medical technology and agricultural products; § seasonality of sales typically experienced by educational supply retailers with peak levels of sales occurring in the second and third quarters of the calendar year primarily due to increased educational shipments coinciding with the Fall start of new school years; and § fluctuations in sales and marketing expenses and technology infrastructure costs |
| A substantial portion of the Company’s operating expenses are and will be related to sales and marketing, product development, technology and infrastructure, which expenses cannot be adjusted quickly and are therefore relatively fixed in the short term |
| The Company’s operating expense levels are based in significant part on its expectations of future sales on a quarterly basis |
| As a result, if sales for a particular quarter are below expectations, the Company may not be able to reduce operating expenses proportionately for that quarter; this sales shortfall would have a negative effect on the Company’s operating results and cash flow for that quarter, which would likely have a negative impact on the price of the Company’s Common Stock and/or Series I Preferred Stock |
| The Company’s stock price may fluctuate based on factors beyond its control |
| Market prices for securities of companies comparable to the Company are highly volatile |
| The market for the Company’s Common Stock and Series I Preferred Stock has from time to time experienced significant price and volume fluctuations that are unrelated to the Company’s operating performance |
| 8 Geneve beneficially owns approximately 90prca of the aggregate voting power of the Company |
| Geneve currently owns approximately 90prca of the aggregate voting power of the Company |
| Accordingly, in many circumstances, stockholders of the Company other than Geneve have no ability to determine the outcome of corporate actions requiring stockholder approval, including the election of directors and certain amendments to the Company’s amended and restated certificate of incorporation |
| Concentration of common share ownership and limited number of shares outstanding could prevent an active market for the Company’s Common Stock and Series I Preferred Stock |
| Although the Company’s Common Stock and Series I Preferred Stock are publicly traded on the NASDAQ Capital Market, the concentration of common share ownership amongst Geneve and the Company’s management and directors and the small number of its outstanding Common Stock and Series I Preferred Stock that is publicly traded could prevent an active market for the Company’s Common Stock and Series I Preferred Stock |
| If there is not an active market for the Common Stock and Series I Preferred Stock, it may be difficult to sell shares of Common Stock and Series I Preferred Stock, which could lower the price of the shares |
| The Company may not pay dividends on the Series I preferred stock |
| Each share of Series I Preferred Stock accrues cumulative dividends at the rate of 11prca per share, based on the dlra6dtta00 stated value of the Series I Preferred Stock, and it is the current intent of the Company’s board of directors to declare such dividends |
| However, the payment of this dividend will be subject to the discretion of the board of directors of the Company, which has no obligation to declare or pay the dividend |
| While no dividends may be paid with respect to the Company’s Common Stock or Series J Preferred Stock until dividends are paid with respect to the Series I Preferred Stock, there can be no assurance that any cash dividend payments will be made to holders of Series I Preferred Stock |
| Conversion of the Series I Preferred Stock to Common Stock may not compensate for non-payment of dividends or lack of liquidity |
| Although each share of Series I Preferred Stock and any accrued but unpaid dividends may be converted into shares of the Company’s Common Stock during the 90-day period beginning on June 17, 2007, the market price of the Company’s Common Stock when the Series I Preferred Stock becomes convertible may not be sufficient for such conversion to adequately compensate for the Company’s failure to pay accrued dividends on its Series I Preferred Stock |
| Moreover, there can be no assurance that the market for the Company’s Common Stock at the time of conversion will have sufficient trading volume so as to provide liquidity for holders of Series I Preferred Stock |
| Certain factors may affect the Company’s ability to fully utilize its Federal net operating tax loss carryforwards |
| The Company believes that its Federal net operating tax loss carryforwards will be available to offset future taxable income through 2006, and that the Company’s stockholders will continue to benefit from the Company’s Federal net operating tax loss carryforwards |
| The realizability of the Federal net operating tax loss carryforwards is dependent upon the Company’s generation of sufficient levels of future taxable income and the ability to retain its Federal net operating tax loss carryforward position |
| However, events may limit the use of all or a portion of these Federal net operating tax loss carryforwards, thus potentially resulting in a higher tax liability for the Company in the future |
| The Company may not be able to obtain financing and additional capital to fund its business strategy on acceptable terms |
| From time to time the Company accesses the capital markets to obtain financing |
| Although the Company believes that it can continue to access the capital markets in the future on acceptable terms and conditions, the Company’s flexibility could be limited by the Company’s operating results and financial position, including such factors as current levels of outstanding debt and working capital |
| In addition, many of the factors that affect our ability to access the capital markets, such as the current state of the economy, are outside of the Company’s control |
| There can be no assurances that the Company will continue to have access to the capital markets on acceptable terms |
| 9 The Company views its existing dlra45dtta0 million Revolving Credit Facility as a source of available liquidity |
| This facility contains various covenants with which the Company must be in compliance in order to borrow funds |
| If the Company wishes to borrow under this facility in the future, there can be no assurance that the Company will be in compliance with these covenants |
| By its terms, the Revolving Credit Facility expires in October 2008 |
| The Company anticipates renewing the facility on terms at least as favorable as the existing facility, but there can be no assurances of renewal or the terms on which the Company renews |
| The Company may expand its business through acquisitions |
| The Company reviews many acquisition candidates and, in addition to acquisitions which the Company has already made, the Company is continually evaluating new acquisition opportunities |
| Factors which may affect our ability to grow successfully through acquisitions include: § ability of the Company on a timely basis to find, prudently negotiate and consummate additional acquisitions; § difficulties and expenses in connection with integrating the acquired companies and achieving the expected benefits; § diversion of management’s attention from current operations; § the possibility that the Company may be adversely affected by risk factors facing the acquired companies; § acquisitions could be dilutive to earnings, or in the event of acquisitions made through the issuance of the Company’s Common Stock to the stockholders of the acquired company, dilutive to the percentage ownership of our existing capital stock; § potential losses resulting from undiscovered liabilities of acquired companies not covered by the indemnification we may obtain from the seller; and § loss of key employees of the acquired companies |
| The Company may be required to expend significant resources to comply with Section 404 of the Sarbanes-Oxley Act and may not be able to comply on a timely basis, if at all |
| The Company is not an accelerated filer as defined under relevant SEC regulations, and therefore is not required to comply with Section 404 of the Sarbanes-Oxley Act until its 2007 Annual Report, which will be filed by the Company in 2008 |
| Complying with Section 404 of the Sarbanes-Oxley Act may require the Company to expend significant resources, which could increase selling and administrative expenses and divert management time and attention from sales-generating activities |