FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-7513
ARTISTIC GREETINGS INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 16-0909929
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE KOMER CENTER
ELMIRA, NEW YORK 14902
(607) 737-5235
(Address of principal executive offices, including telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 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.
[ X ] Yes [ ] No
Indicate the number of shares of Common Stock (par value $.10) outstanding as
of November 13, 1995: 6,537,720.
<PAGE>
PAGE NO.
Part I. Financial Information
Item 1.Financial Statements
Balance Sheets 3
Statements of Operations 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2.Management's Discussion and Analysis of
Results of Operations and Financial Condition 8
PART II.OTHER INFORMATION
Item 6.Exhibits and Reports on Form 8-K 11
Signatures 12
Exhibit Index 13
<TABLE>
ARTISTIC GREETINGS INCORPORATED
BALANCE SHEETS
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September 30, December 31,
1995 1994
IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA (Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash $ 226 $ 149
Investment securities - trading, net of allowance for unrealized
gains of $227 in 1995, losses of $8 in 1994 2,252 986
Investment securities - available for sale, net of allowance for
unrealized gains of $2 in 1995, and unrealized losses of $280 in 1994 1,009 6,208
Accounts receivable - net 1,859 1,556
Inventories:
Finished goods 1,596 1,482
Work-in-process 588 571
Raw materials and supplies 7,356 3,776
Prepaid advertising 8,472 3,421
Prepaid expenses 213 214
Income taxes receivable 1,068 914
TOTAL CURRENT ASSETS 24,639 19,277
Property, plant and equipment 25,459 18,302
Less accumulated depreciation (8,349) (6,634)
NET PROPERTY, PLANT AND EQUIPMENT 17,110 11,668
Cash surrender value - life insurance 294 242
Deferred advertising costs 7,280 6,717
Other assets 238 5
TOTAL OTHER ASSETS 7,812 6,964
TOTAL ASSETS $49,561 $37,909
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $6,187 $4,868
Bank overdraft 772 931
Accounts payable, trade 14,941 7,660
Accrued liabilities 1,286 1,232
Customer advances 850 183
Other payables 244 -
Current portion long term debt 1,246 296
Deferred income taxes 339 1,682
TOTAL CURRENT LIABILITIES 25,865 16,852
Long term debt 5,094 1,559
Deferred income taxes 190 190
Common stock subject to put option - 500,000 shares 1,927 -
TOTAL LIABILITIES ............................... 33,076 18,601
STOCKHOLDERS' EQUITY:
Common stock, par value $.10 per share; authorized 10,000,000 shares;
issued 6,538,002 shares in 1995; 6,036,820 shares in 1994 654 604
Additional paid in capital 10,978 11,031
Unrealized gains (losses) on investment securities held as available for
sale,
net of tax effect 2 (185)
Retained earnings 5,787 8,803
17,421 20,253
Less Treasury stock at cost; 215,748 shares in 1995 and 217,790 shares in
1994 (936) (945)
TOTAL STOCKHOLDERS' EQUITY 16,485 19,308
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $49,561 $37,909
</TABLE>
<TABLE>
ARTISTIC GREETINGS INCORPORATED
STATEMENTS OF OPERATIONS
Third Quarter Nine-Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
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IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE (Unaudited) (Unaudited) (Unaudited) (Unaudited)
DATA
Net sales $26,386 $21,178 $66,855 $62,508
Cost of sales 12,119 8,254 27,646 23,576
Gross profit 14,267 12,924 39,209 38,932
Selling, general and administrative expense 16,070 14,147 43,115 39,059
Other (income) expense 883 (368) 730 (136)
Total expense 16,953 13,779 43,845 38,923
Net (loss) income before income taxes (2,686) (855) (4,636) 9
Income taxes 936 188 1,620 0
Net (loss) income $(1,750) $(667) $(3,016) $ 9
Net (loss) income per share $ (.28) $ (.11) $ (.50) $ .00
Weighted average number of common and
common equivalent shares outstanding 6,346,595 5,867,402 6,054,405 5,934,235
</TABLE>
<TABLE>
ARTISTIC GREETINGS INCORPORATED
STATEMENTS OF CASH FLOWS
Nine-Month Period
Ended September 30,
1995 1994
IN THOUSANDS OF DOLLARS (Unaudited) (Unaudited)
OPERATING ACTIVITIES
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Net (loss) income $(3,016) $ 9
Adjustments to reconcile net (loss) to
net cash used for
operating activities:
Depreciation 1,717 1,246
Increase in cash surrender value (52) (41)
Proceeds from sale of trading securities 411 589
Purchase of trading securities (1,442) (1,592)
Net unrealized and realized gains on investments (235) (13)
Book provision for income taxes (1,509) -
Noncash accretion charged to interest expense 52 -
(Increase) decrease in assets
Receivables (303) (371)
Inventories (3,350) (1,536)
Prepaid advertising (5,051) (1,619)
Deferred advertising (563) (2,320)
Prepaid expenses 2 (134)
Income taxes receivable (154) -
Other assets (200) 114
Increase (decrease) in liabilities:
Bank overdraft (159) -
Accounts payable, trade 7,281 1,338
Accrued liabilities 54 (168)
Customer advances 667 (24)
Federal and state income taxes payable 415 (101)
Deferred income taxes (250) -
Other payables 244 -
NET CASH USED FOR OPERATING ACTIVITIES $(5,441) $(4,623)
INVESTING ACTIVITIES
Proceeds from sale of investment securities $3,135 $2,853
Sale (purchase) of investment securities 2,252 (2,030)
Net unrealized and realized (gains) losses - investments - 129
Purchase of property, plant and equipment, net (5,679) (2,704)
NET CASH USED FOR INVESTING ACTIVITIES $ (292) $(1,752)
FINANCING ACTIVITIES
Repayment of amounts received under lines of credit $(27,045) $(15,534)
Proceeds received under lines of credit 28,365 22,095
Proceeds received under equipment lines of credit - -
Proceeds from issuance of common stock and
options exercised 50 28
Proceeds from issuance of long-term debt 4,484 (225)
Payment of dividends - (436)
Sale (purchase) of treasury stock and
other transactions (44) 30
NET CASH PROVIDED BY FINANCING ACTIVITIES $5,810 $5,958
Net increase (decrease) in cash $ 77 $(417)
Cash at beginning of period 149 550
Cash at end of period 226 133
SUPPLEMENTAL DISCLOSURES
Cash paid (received) during the period for:
Interest $ 573 $ 170
Income taxes (131) 34
</TABLE>
NOTE 1. STATEMENT OF MANAGEMENT
The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements, prepared in accordance
with generally accepted accounting principles, have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. The
Company incorporated reclassifications of 1994 information to conform to the
current presentations of its financial statements included herein. It is
suggested that these condensed financial statements be read in conjunction with
the financial statements and the notes thereto included in the Company's 1994
report on Form 10-K.
In the opinion of management, the information contained herein reflects all
adjustments that are of a normal recurring nature and necessary to a fair
statement of the results of operations for the periods presented in the income
statement included herein. Due to reclassifications in the financial
statements after the prior year's third quarter 10-Q was filed, certain
percentages and amounts may have changed for comparative third quarter 1994
figures.
NOTE 2. FORM 10-K
Reference is made to the following footnotes included in the Company's 1994
report on Form 10-K:
1. Description of Operations and Significant Accounting Policies
2. Marketable Securities
3. Inventories
4. Property, Plant and Equipment
5. Accrued Liabilities
6. Income Taxes
7. Leases
8. Debt
9. Defined Contribution Savings Plan
10. Stock Options
11. Stockholders' Equity
12. Significant Business Relationships
13. Commitments and Contingencies
NOTE 3. NET INCOME PER SHARE
Net income or loss per common and common equivalent share is computed on
the basis of the weighted average of common and common equivalent shares
outstanding during the period. The average number of shares outstanding is
computed as follows:
For the Quarter Nine-Month Period
Ended September 30, Ended September 30,
1995 1994 1995 1994
Common shares 6,344,104 5,823,344 6,054,078 5,887,061
Common equivalent shares 2,491 44,058 327 47,174
Average number outstanding 6,346,595 5,867,402 6,054,405 5,934,235
Fully diluted income per share did not differ materially from the primary data.
NOTE 4. SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY.
During 1995, the Company acquired certain assets of Valcheck Company in
exchange for 500,000 shares of the Company's common stock. The common stock
was issued at a price of $3.75 per share, or $1,875,000. The common stock is
puttable to the Company, at the Seller's option, two years from the acquisition
date at $5 per share.
Nine-Month Period
Ended September 30,
1995 1994
Fair value of assets acquired $1,875 $ -
Less: common stock issued 1,875 -
Cash paid $ - $ -
NOTE 5. DEBT.
The renewal of the Company's $6,500 demand discretionary line of credit
agreement with a scheduled expiration of June 30, 1995, under which the Company
had $6,187 of indebtedness outstanding at September 30, 1995, is currently
being negotiated with the lender. In March 1995, the Company converted its
$3.5 million secured line of credit to a term loan payable in monthly
installments of $58,333, plus interest, at the bank's prime rate through April
1, 2000. Under the term promissory note, the Company is required to meet
certain financial and operational covenants. As of September 30, 1995, the
Company did not meet these requirements. The Company is seeking waiver of
these requirements from the bank. If such waiver is not obtained, the related
long-term portion of $2,450 would be reclassified to current indebtedness.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.
Note: All dollars are in thousands, except per share data, in the
following discussion
Results of Operations:
Net sales were $66,855 for the first nine months of 1995 compared with
$62,508 for the same period of 1994, an increase of $4,347 or 7%. In the
domestic direct mail/free standing insert category, sales for the first nine
months of 1995 decreased by $7,247 or 18.5% over the same period of 1994. 1995
catalog sales decreased by $1,579 or 22.7% less than 1994 catalog sales for
such nine-month period. International sales decreased to $1,314 from $2,033
for the same period last year. Net sales were $26,386 for the third quarter
1995 as compared with $21,179 for the third quarter 1994. This represented an
increase of $5,207 or 24.6%. Third quarter 1995 sales in the domestic co-op
and free standing insert markets decreased by $1,715 or 14.5% over third
quarter 1994 sales. Catalog sales for the third quarter of 1995 decreased by
$798 or by 24.7% from catalog sales for the third quarter of 1994.
International sales remained at $441, the same as this quarter a year ago. The
check printing operation contributed $12,473 in revenue this quarter as
compared to $4,837 for this quarter a year ago.
Net sales decreased during such periods in the domestic direct mail/free
standing insert category primarily as a result of a delay in certain mailings
during the third quarter and increased levels of competition reducing response
rates. Net sales decreased in the catalog business as a result of the
discontinuation of two of the Company's catalogs. Check sales increased 116%
for such nine-month period, partially as a result of the Company's acquisition
of the assets of Check-It-Out in May of 1995, to a total of $25,892 for the
nine-month period as compared to $12,012 at this time a year ago.
For the first nine months of 1995 as compared to 1994, material costs as a
percentage of sales increased to 20.9% from 19.1%. For the third quarter of
1995, material cost increased 5.1% as a percent of sales from 18.9% in 1994 to
24%. For the first nine months of 1995, direct labor costs have increased to
9.0% from 7.6% of sales for the first nine months of 1994. For the third
quarter of 1995, direct labor increased by 2.3% as a percent of sales from 8.2%
in 1994 to 10.5% of sales. For the nine months ended September 30, 1995,
manufacturing overhead increased by $734 or 10.7% of sales compared to the same
period in 1994. For the third quarter of 1995, manufacturing overhead
increased by $490 or 19.5% over the third quarter of last year. During these
same periods, sales volume increased 6.9% for the nine months and 24.5% for the
quarter. These cost increases, as a percentage of sales, are attributable
primarily to the effect of the consolidation of the Company's operations to a
new facility. In order to reduce inefficiencies in the check operation, the
Company transferred many of its highly skilled, long-time production workers
from established operations to the check production operation. However,
efficiencies in labor and overhead in the Company's label and catalog product
lines have decreased as a result of such transfer of workers to the check
operation.
Selling, general and administrative (SG&A) expenses were $16,070 or 60.9%
of sales for the third quarter of 1995 compared with $14,147 or 66.8% of sales
for the third quarter 1994. For the first nine months of 1995 and 1994, SG&A
expenses were $43,115 or 64.5% of sales, as compared with $39,058 or 62.5% of
sales, respectively. The three largest components of SG&A expenses are
advertising, postage and wages. For the nine months ended September 30, 1995,
advertising expense was $31,409 or 47% of sales as compared to $28,294 or 45.3%
of sales for the nine months in 1994. Advertising expense for the third
quarter of 1995 was $11,431 or 43.3% of sales, as compared with $10,574 or
49.9% of sales in 1994. Advertising response rates were generally in line with
expectations, however, the Company reduced its volume of circulation at the end
of the third quarter to reduce costs and accelerate the time at which the check
operation will become profitable. Mass media response rates were static over
the period. Catalog advertising costs in terms of dollars were less than the
prior quarter and the prior nine-month period. Catalog advertising costs as a
percentage of sales were 38.9% for the current quarter as compared to 28.6% for
the prior quarter and 38.9% for the current nine-month period as compared to
34.6% for the prior nine-month period. The overall reduction in advertising
costs for the current quarter was primarily the result of the discontinuation
of the Initials and Amy Allison catalogs. Check advertising response rates for
the first nine months of this year and in the third quarter were generally in
line with expectations. For the third quarter of 1995, total postage expense
amounted to $2,708 or 10.3% of sales, as compared with $1,601 or 7.6% of sales
in 1994. For the first nine months of 1995, postage expense amounted to $6,330
or 9.5% of sales, as compared with $4,775 or 7.6% of sales in 1994. This
increase in postage expense is directly attributable to the increase in U.S.
postal rates in 1995. Administrative costs totaled $1,931 or 7.3% of sales for
the third quarter of 1995, as compared to $1,972 or 9.3% of sales in 1994. For
the first nine months of 1995, administrative costs amounted to $5,376 or 8.0%
of sales as compared to $5,989 or 9.6% of sales in 1994.
Other income for the third quarter of 1995 was $883 or 3.3% of sales,
compared to $368 for the third quarter of 1994. For the first nine months of
1995, income taxes were ($1,621) as compared to $0 for the period in 1994.
Income taxes were lower during such period due to a $4,645 decrease in income
before taxes from the comparable period in 1994.
The net loss for the nine months ended September 30, 1995 was $3,016 or
$.50 per share, as compared to a net income of $9 or $.00 per share, for the
nine months ended September 30, 1994. For the quarter, the net loss was
$1,750, or $.28 per share, compared to a loss of $667 or $.11 per share for
1994's third quarter. The reduction in net income is due to a number of
factors, including the increase in operating costs across the Company's
operations, the increase in scrap rates in the check printing operation and the
increase in U.S. postal rates in 1995.
FINANCIAL CONDITION:
Cash used by operating activities totaled $5,441 for the nine-month period
ended September 30, 1995, as compared to $4,623 used by operating activities in
the nine-month period ended September 30, 1994. Inventories increased by
$3,712, catalog and promotional literature prepayments increased by
$5,051 and deferred advertising costs increased by $563. Increases in
inventories are attributable primarily to a build-up of the Company's base
check stock to ensure no out of stock conditions. With the acquisition of the
assets of Check-It-Out in May 1995, the number of check designs offered by the
Company nearly doubled, thus necessitating a comparable increase in inventory
levels to fulfill such orders.
As of September 30, 1995, net cash used in investing activities totaled
$292. During the first nine months of 1995, the Company purchased property,
plant and equipment totaling $7,159. In addition, the Company transferred
$2,000 from the investment portfolio into four managed trading accounts. Cash
provided by financing activities amounted to a net of $5,810.
As of September 30, 1995, the Company's cash and cash equivalents
were approximately $3,487 as compared to $7,343 at December 31, 1994. Net
cash used in operating activities during the first nine months of 1995
was $5,441 compared to net cash used in operating activities for the
prior period of $4,623. The primary factors influencing the reduction
in liquidity are increased levels of inventory in 1995 and the increase
in capital expenditures as reflected by the increase in property, plant
and equipment from $11,668 at December 31, 1994 to $17,110 at September
30, 1995, or an increase of 47%. Such increase in capital expenditures
was primarily related to the cost to complete the Company's new
manufacturing facility. Management expects the Company's operations to
be more efficient in 1996; however, if efforts at inventory control are
not as effective as anticipated or cost reductions in operations occur
more slowly than expected, such efficiencies may not be realized.
The Company is evaluating currently several methods of refinancing its
short term discretionary lines of credit with its banks of which $6,500 was
available and $4,636 was outstanding at October 31, 1995, compared to an
availability under such lines of credit at December 31, 1994 of $9,632, with
$4,868 outstanding. The reduction in availability is due primarily to the
expiration of an undrawn $3,000 line of credit on June 30, 1995, and the
drawdown under the Company's $6,500 and $1,500 lines of credit to fund the
increase in inventory and property, plant and equipment in connection with the
consolidation of the Company's operations in its new facility and the
acquisition of the assets of Check-It-Out. On November 9, 1995, the Company
received a grant of $500 and a low-interest loan secured by its new facility of
$400, each from the Urban Development Corporation of New York State.
Management believes such funding has partially relieved short-term liquidity
restrictions. Any long-term liquidity concerns are being addressed by
management with the development of a plan to obtain financing sufficient to
meet the short-term working capital needs of the Company and the conversion of
the Company's current short-term indebtedness to long-term obligations.
Management expects the Company to be able to meet its cash obligations required
by operations during the fourth quarter of 1995 and fiscal 1996, although there
can be no assurances that the aggregate level of the Company's cash and cash
equivalents will not decrease during this period. See Note 5 to the Notes to
Condensed Financial Statements contained herein for further information
regarding the reduction in the Company's liquidity.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits. See Exhibit Index.
b) Reports on Form 8-K. None.
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.
ARTISTIC GREETINGS INCORPORATED
Dated: November 14, 1995 By: /s/ Robert E. Johnson
Robert E. Johnson
Senior Vice President Finance
Chief Financial Officer
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION LOCATION
11 Statement re: computation of See Note 3 to the
per share earnings Financial Statements
contained in this
report
27 Financial Data Schedule Filed only with EDGAR
filing, per Reg. S-K,
Rule 601(c)(1)(v)
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR ITS QUARTER ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000007610
<NAME> ARTISTIC GREETINGS INCORPORATED
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 226
<SECURITIES> 3,261
<RECEIVABLES> 1,859
<ALLOWANCES> 0
<INVENTORY> 9,540
<CURRENT-ASSETS> 24,639
<PP&E> 25,459
<DEPRECIATION> 8,349
<TOTAL-ASSETS> 49,561
<CURRENT-LIABILITIES> 25,865
<BONDS> 5,094<F1>
<COMMON> 654
0
0
<OTHER-SE> 17,421
<TOTAL-LIABILITY-AND-EQUITY> 49,561
<SALES> 66,855
<TOTAL-REVENUES> 66,855
<CGS> 27,646
<TOTAL-COSTS> 43,115
<OTHER-EXPENSES> 730
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 573
<INCOME-PRETAX> (4,636)
<INCOME-TAX> 1,620
<INCOME-CONTINUING> (3,016)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,016)
<EPS-PRIMARY> (.50)
<EPS-DILUTED> (.50)
<FN>
<F1>Total long term debt
</FN>
</TABLE>
