Herold Marketing Associates, Inc. - Page 4




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          which Herold foresaw a strong demand, and (3) products that were             
          just beginning to be conceptualized that Herold felt would gain              
          strong market acceptance.  By implementing this strategy,                    
          petitioner, which had seen its revenue drop to less than $1                  
          million in 1985, achieved sales of over $36 million in 1992 and              
          nearly $44 million in 1993.  Around 1992, Herold changed the                 
          company's fundamental mode of doing business by ceasing to                   
          operate as a sales representative and concentrating on being a               
          distributor.  Herold recognized that this strategy involved                  
          greater risks, since petitioner would have to finance customer               
          receivables and carry inventories of the products it was selling.            
          He decided these risks would be outweighed by certain benefits.              
          In particular, Herold personally would be able to minimize                   
          unproductive time he had been spending at sales meetings for each            
          of the manufacturers whose product lines petitioner had been                 
          representing, and petitioner would gain greater leeway to develop            
          its own sales and business strategies.                                       
               Another significant event in 1992 was petitioner's loss of              
          its largest customer, Gateway Computers, which had accounted for             
          18 percent of petitioner's sales.  This occurred at a time when              
          the computer industry in general was in a minirecession. Despite             
          this setback and amid adverse conditions, petitioner achieved                
          sales growth of more than $12 million in 1992, a 50-percent                  
          increase over 1991, and further growth of nearly $7.7 million in             
          1993, a 21.25-percent increase over 1992.                                    



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