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 QUARTER ENDED SEPTEMBER 30, 1996
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 Registrant's 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
As of November 1, 1996, the Registrant had 6,337,364 shares of its common stock
issued and outstanding.
<PAGE>
PAGE NO.
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets 3
Unaudited Statements of Operations 4
Unaudited Statements of Cash Flows 5
Unaudited Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
Exhibit Index 14
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARTISTIC GREETINGS INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA 1996 1995
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 896 $ 529
Marketable securities:
Trading at market (cost $2,418 in 1996 2,765 1,926
and $1,704 in 1995)
Available for sale at market 16 653
(cost $9 in 1996 and $651 in 1995)
Trade receivables - net 1,746 1,803
Income taxes receivable - 900
Inventories:
Finished goods 1,008 798
Work-in-process 847 492
Raw materials and supplies 1,168 4,559
Prepaid advertising 3,418 6,116
Prepaid expenses and other 124 27
TOTAL CURRENT ASSETS 11,988 17,803
Deferred advertising 3,802 3,537
Property, plant and equipment - net 12,994 16,869
Cash surrender value of life insurance 349 308
Other assets 140 137
TOTAL ASSETS $29,273 $38,654
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to bank $ - $ -
Current portion of long-term debt 261 1,777
Accounts payable - trade 10,384 13,993
Accrued liabilities 1,977 991
Customer advances 694 237
TOTAL CURRENT LIABILITIES 13,316 16,998
Long-term debt 1,998 9,593
Other liabilities 408 483
TOTAL LIABILITIES 15,722 27,074
Common stock subject to put option - 500,000 shares 2,265 2,032
STOCKHOLDERS' EQUITY:
Common stock, par value $.10:
Authorized: 10,000,000 shares
Issued: 6,037,720 shares in 1996;
6,037,720 shares in 1995 604 604
Additional paid-in capital 11,039 11,028
Unrealized (losses) gains on
marketable securities held as
available for sale,
net of tax effect (2) 1
Retained earnings 550 (1,149)
12,191 10,484
Less: Treasury stock at cost
(205,356 and 216,427 shares in 1996 and
1995, respectively) (905) (936)
TOTAL STOCKHOLDERS' EQUITY 11,286 9,548
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $29,273 $38,654
</TABLE>
THE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
ARTISTIC GREETINGS INCORPORATED
UNAUDITED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
QUARTER ENDED NINE-MONTHS ENDED
September 30, September 30,
IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales $23,643 $26,386 $72,901 $66,855
Cost of sales 9,750 12,119 29,732 27,646
Gross profit 13,893 14,267 43,169 39,209
Selling, advertising, general and administrative 12,835 16,070 40,236 43,115
expenses
INCOME (LOSS) FROM OPERATIONS 1,058 (1,803) 2,933 (3,906)
Other income (expense)
Interest and dividend income 11 0 26 10
Net unrealized gains on trading securities 48 88 100 236
Net realized (losses) gains on marketable (3) (14) 80 (112)
securities
Interest expense (194) (272) (662) (638)
Other (323) (685) (778) (226)
INCOME (LOSS) BEFORE TAXES 597 (2,686) 1,699 (4,636)
Provision for (benefit from) income taxes 0 (936) 0 (1,620)
NET INCOME (LOSS) $ 597 $(1,750) $ 1,699 $(3,016)
Net income (loss) per common and common
equivalent share $ 0.09 $ (0.28) $ 0.27 $ (0.50)
Weighted average number of common shares 6,329,551 6,346,595 6,325,174 6,054,405
outstanding
</TABLE>
THE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
ARTISTIC GREETINGS INCORPORATED
UNAUDITED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
September 30, September 30,
IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA 1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,699 $ (3,016)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,814 1,717
Net unrealized (losses) on trading securities (100) (235)
Net realized (losses) gains on marketable securities (80) 112
Purchase of trading securities (1,901) (1,554)
Proceeds from sale of trading securities 1,243 411
Amortization of interest credit from New York
State Urban Development Corporation grant (75) 0
Accretion of common stock subject to put option 234 52
Increase in cash surrender value of life insurance (41) (52)
(Decrease) increase in assets:
Trade receivables 57 (303)
Income taxes receivable 900 (154)
Inventories 2,825 (3,350)
Prepaid advertising, prepaid expenses and other 2,597 (5,249)
Deferred advertising (265) (563)
Increase (decrease) in liabilities:
Checks-in-transit 468 (159)
Accounts payable - trade (4,078) 7,525
Accrued liabilities 986 54
Customer advances 457 667
Deferred income taxes 0 (1,759)
Federal and state taxes payable 0 415
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 6,740 (5,441)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of property, plant and equipment 2,061 (5,679)
Proceeds from sale of marketable securities 633 5,387
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,694 (292)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of amounts received under lines of credit (20,804) (27,045)
Proceeds received under lines of credit 16,245 28,365
Proceeds from long-term borrowings - 4,484
Proceeds from issuance of common stock,
treasury stock and options exercised 42 6
Repayment of long-term debt (4,551) -
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (9,068) 5,810
Net increase (decrease) in cash and cash equivalents 366 77
Cash and cash equivalents at beginning of period 529 149
Cash and cash equivalents at end of period $ 895 $ 226
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $ 517 $ 573
Income taxes, net of refunds received (818) (131)
</TABLE>
THE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
(NOTE: Dollars in thousands, except per share data.)
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 1995 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 1995
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 provide a
fair statement of the results of operations for the periods presented in the
statements of operations included herein.
NOTE 2. FORM 10-K
Reference is made to the following footnotes included in the Company's 1995
report on Form 10-K:
1. Summary of 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. Related Party Transactions
13. Commitments and Contingencies
14. Supplemental Disclosure of Noncash Investing and Financing Activity
15. New Accounting Standards
<PAGE>
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 weighted average number of shares
outstanding was 6,329,551 for the quarter ended September 30, 1996 and
6,346,595 for the quarter ended September 30, 1995.
The weighted average number of shares outstanding was 6,325,174 for the
nine-month period ended September 30, 1996 and 6,054,405 for the nine-month
period ended September 30, 1995.
NOTE 4. SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY.
On May 30, 1995 (the "Acquisition Date"), the Company acquired certain
assets of the Valcheck Company (the "Seller") 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 for an aggregate of $1,875. The common stock is puttable to the
Company, at the Seller's option, on the second anniversary of the Acquisition
Date at $5 per share.
Fair value of assets acquired $ 1,875
Less: common stock issued 1,875
Cash paid $ -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
(NOTE: Dollars in thousands, except per share data.)
Results of Operations:
SALES
Third quarter sales of $23,643 were $2,743 lower than the $26,386 revenues for
the comparable 1995 period. This resulted primarily from a 17.3% decrease in
check sales from $12,473 in the third quarter of 1995 to $10,320 in 1996. The
third quarter of 1995 included relatively high shipments, to reduce an
unusually high backlog, which resulted from the acquisition of customers in May
of 1995 in connection with the acquisition of assets of the Valcheck Company
(the "Valcheck Acquisition"), combined with increased orders from high levels
of free standing insert ("FSI") advertising for new check customers.
Additionally, in the third quarter of 1996 a lower, more profitable level of
FSI advertising was utilized; the checks backlog was at a much lower level
representing responsive customer service; and overall check operations were
more efficient. For the third quarter of 1996, a decrease in revenues for
personalized name and address products (consisting of labels, MiniPrinters(,
self-inking stamps and certain other products generally sold through mass media
channels ("personalized products")) was approximately offset by increased
catalog sales. Personalized products sales of $8,395 in the third quarter of
1996 were 17.1% lower than sales of $10,128 in the third quarter of 1995
primarily due to advertising reductions which improved profitability but
lowered sales volume. Catalog sales of $3,819 in the third quarter of 1996
were 56.7% above the sales of $2,437 in the comparable period for 1995
primarily as a result of an increase in catalog mailings to certain selected
customers.
<PAGE>
For the nine months ended September 30, 1996, sales of $72,901 were 9.0% higher
than the $66,855 revenues reported for the comparable 1995 period. Check sales
through September 30, 1996 were $32,501, representing a 25.5% increase from the
$25,892 reported for the comparable period in 1995. Revenues for personalized
products decreased 13.8% for the nine months of 1995 from $32,008 to $27,581 in
1996. Catalog shipments were 71.0% higher at $9,175 through September 30, 1996
as compared to $5,366 in 1995. Check sales increased for the nine month period
due to higher activity in the first six months, including the full effect of
the Valcheck acquisition and higher FSI advertising in 1996 as compared to the
first half of 1995, partially offset by the lower third quarter check revenue
discussed above. The factors for year-to-year changes in revenue for
personalized products and catalogs for the nine-month period are the same as
outlined above for the third quarter.
COST OF SALES
The major components of cost of goods sold are materials, which consist
primarily of paper and gift items; direct labor; and manufacturing overhead.
The cost of materials in the third quarter of 1996 decreased 19.9% to $5,075
from $6,334 in the third quarter of 1995, which reflects a 2.5% decrease as a
percentage of sales from the prior period. The decrease as a percentage of
sales is primarily the result of stabilizing production for all product lines,
resulting in significantly lower scrap and orders returned for exchange as
compared to third quarter 1995.
The cost of materials for the first nine months of 1996 increased 11.0% to
$15,539 from $13,995 in the first three quarters of 1995, which reflects a .4%
increase as a percentage of sales from year to year. The increase as a
percentage of sales is primarily due to the Company's transition to
subcontracting a higher portion of check personalization and fulfillment for
all of 1996, as compared to initiating this subcontracting in the third quarter
of 1995, as well as an overall increase in check production with its relatively
higher material content as a percent of sales.
Direct labor was down 36.6% from $2,779 in the third quarter of 1995 to $1,762
in the comparable period of 1996. This represents a decrease of 3.1% as a
component of sales during that period. The reduction is due to substantial
improvements in order processing and production efficiencies resulting from
stabilized operations, as compared to the unusually high, inefficient volume
levels of third quarter 1995. In addition, an increased proportion of
subcontracted check production contributed to the reduced labor.
Direct labor was down 10.6% from $6,046 in the first nine months of 1995 to
$5,405 in the first nine months of 1996. This represents a decrease of 1.6% as
a component of sales during that period. The reduction is due to significant
improvements in labor efficiency resulting from stabilized production, in
addition to a shift toward subcontracting of check personalization and
fulfillment. These factors were partially offset by an increase in labor for
telephone orders reflecting an increased mix of catalog orders and checks
reorders via telephone.
Manufacturing overhead decreased 3.1% to $2,913 in the third quarter of 1996
from $3,006 in the comparable period of 1995. This decrease represents a .9%
increase as a component of sales between periods. Expenses were reduced
primarily due to the lower labor costs discussed above, while the increase as a
percentage of sales is attributable to lower revenue, also discussed above.
Manufacturing overhead increased 15.6% to $8,788 in the first nine months of
1996 from $7,605 in the comparable period of 1995. This increase represents a
0.7% increase as a component of sales between periods. Telephone expense
increased due to a higher proportion of telephone orders for catalogs and
increasing check reorders. Employee benefits increased between periods as a
result of both overall higher employment levels and the conversion of long-term
temporary personnel to full-time status. Finally, depreciation expense
increased as a result of the purchase and refurbishment of the Company's new
manufacturing facility, Artistic Plaza, in addition to the purchase of check-
printing equipment late in the second quarter of 1995 to support volume
increases.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A)
The largest components of SG&A expenses are advertising and postage.
Advertising expense decreased 23.5% to $8,751 in the third quarter of 1996 from
$11,431 in the comparable period of 1995, which represents a decrease of 6.3%
as a component of sales. Advertising for personalized products was reduced by
22.6% as ineffective programs were reduced or eliminated. Catalog advertising
was up 72.7% as profitable growth in circulation levels was achieved. Checks
advertising was down 46.8% due to lower, more focused, and more profitable
levels of FSI circulation, as well as a $1,000 reduction from 1995 to 1996 in
the annual payment for right of first refusal for advertising placement under
the Company's advertising agreement with Valassis Communications, Inc.
Advertising expense decreased 11.1% to $27,936 in the first three quarters of
1996 from $31,409 in the comparable period of 1995, which represents a decrease
of 8.7% as a component of sales. These changes through September 30, 1996,
compared to the period through September 30, 1995, are the result of the same
factors as outlined above for the third quarter for personalized products and
catalogs. For the nine months, personalized products advertising decreased
26.1%, while catalog advertising increased 68.5%. Checks advertising for the
nine months was down 1.7% for 1996 as compared to 1995, mostly due to lower FSI
circulation levels in the third quarter, as previously discussed, partially
offset by the effect of amortizing the advertising placement payments, also
mentioned above.
Postage and shipping expense in the third quarter of 1996 decreased 22.2% to
$2,108 from $2,708 in the comparable period of 1995, representing a 1.3%
decrease as a component of sales. Such aggregate decrease in postage and
shipping expense, and as a percentage of sales, is attributable primarily to
lower check volume and operational stability and efficiency, relative to third
quarter 1995, as discussed above.
Postage and shipping expense for the first nine months of 1996 increased 3.1%
to $6,526 from $6,330 in the comparable period of 1995. This increase
represents a reduction as a percentage of sales from 9.5% in 1995 to 9.0% in
1996, resulting from significantly lower product exchanges as mentioned above.
Other administrative expense increased in the third quarter of 1996 by 2.3% to
$1,976 from $1,931 in the comparable period of 1995, representing an increase
of 1.0% as a component of sales. This increase as a percentage of sales is
substantially the result of both lower revenues and higher legal and investment
banking advisory fees related primarily to the Harland Transaction (as defined
and further described in Item 6).
Other administrative expense increased in the first nine months of 1996 by 7.4%
to $5,774 from $5,376 in the comparable period of 1995, representing a
reduction of 0.1% as a component of sales. This reduction as a percentage of
sales is substantially the result of the increase in revenues. The increase in
expenses is primarily due to higher legal costs, personnel-related expense and
amortization of transaction costs related to the Valcheck Acquisition.
OTHER EXPENSE (INCOME)
The Company incurred other expenses of $461 in the third quarter of 1996, a
reduction from the $883 in expense for the comparable period of 1995.
Bonus/profit sharing accruals increased based on income from operations.
Interest expense decreased 28.7% to $194 in the third quarter of 1996 from $272
in the comparable period of 1995. The decrease in interest expense was due to
a reduction of borrowing originally incurred to support the expansion of
facilities and working capital for the growth of the check business, as well as
the repayment of equipment loans as a result of the Harland Transaction.
Additionally, the Company incurred significant costs in the third quarter of
1995 related to consolidating production operations into Artistic Plaza.
The Company incurred other expenses of $1,234 in the first nine months of 1996,
an increase of 69.0% from $730 in the comparable period of 1995. The primary
reasons for this change are increases in bonus/profit sharing accruals based on
income from operations, a decrease in interest expense resulting from reduced
borrowing, and the effect of costs in 1995 related to consolidating production
operations into Artistic Plaza. Additionally, in June 1995 the Company began
to accrete a monthly expense to account for the increase of the value of the
common stock subject to a put option granted to Valcheck (the "Valcheck put
option") in the Valcheck Acquisition.
TAX PROVISION
No tax provision was reflected for the third quarter of 1996 as compared to a
tax benefit recorded in the comparable prior period of $936, based on the
Company's expectation that it will be able to utilize its available net
operating loss carryforward to offset against taxable income. No tax provision
was reflected for the first nine months of 1996 as compared to a tax benefit
recorded in the comparable prior period of $1,620, based on the previously
noted factor.
<PAGE>
NET INCOME
For the reasons discussed above, the Company's net income in the third quarter
of 1996 increased 134.1% to $597 or $.09 per share, from a net loss in the
prior period of $1,750 or $.28 per share. The Company's net income in the
first three quarters of 1996 increased 156.3% to $1,699 or $.27 per share, from
a net loss in the prior period of $3,016 or $.50 per share.
LIQUIDITY & CAPITAL RESOURCES
Cash and cash equivalents, combined with marketable securities, totaled $3,108
at December 31, 1995 and $3,677 at September 30, 1996. Total current
liabilities decreased by $3,682 or 21.7% from $16,998 at December 31, 1995 to
$13,316 at September 30, 1996. The decrease in long-term debt from $9,593 at
December 31, 1995 to $1,998 at September 30, 1996 was the result of the paydown
of the revolving line of credit from operational cash flow and repayment of
long-term debt in connection with the Harland Transaction. Notes payable to
bank was reduced from $4,962 at December 31, 1995 to $403 at September 30,
1996. Accounts payable was reduced by 34.5% from $12,446 at the end of 1995 to
$8,155 at September 30, 1996. At September 30, 1996, the Company had total
borrowing capacity of $6,029 in its secured line of credit with its bank of
which $5,626 remained available for borrowing as of such date.
The $1,998 long-term debt at September 30, 1996 includes $456 for a mortgage
loan, the terms of which included repayment in full on or before September 1,
1996. The Company obtained an extension until December 1, 1996 for this
repayment, then obtained a letter of intent from the lender, Marine Midland
Bank, to extend the maturity to October 1997. This mortgage loan was paid
in full on November 12, 1996. In addition, of the $1,998 of long-term
debt as of September 30, 1996, $165 was the remaining balance of a $200
equipment term loan. This amount was paid in full on November 8, 1996.
Even though September 30, 1996 working capital was negative $1,328, the Company
believes that it has sufficient resources from its present cash and cash
equivalent position, cash flow from operations and its line of credit to meet
its current obligations. The negative working capital position results
primarily from the Company's successful reduction of inventory, including just-
in-time techniques and subcontracting its check production, and raw paper stock
for advertising programs classified in prepaid advertising, combined with
maintaining traditional terms for accounts payable. The Company also believes
that its cash and cash equivalent position, combined with operating revenues
and its existing credit line, will be sufficient to finance its internal growth
and capital expenditures needs and meet its obligations under its credit
facility during the next twelve months.
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
At a meeting of the Company's Board of Directors on August 15, 1996,
the members of the Board of Directors unanimously appointed Joseph A.
Calabro, former Senior Vice President of Manufacturing of the Company to
serve as Chief Executive Officer and President of the Company.
Mr. Calabro serves the Company in such capacity under
an employment agreement dated as of August 15, 1996, a copy of which is
filed herewith as Exhibit 10. The former Chief Executive Officer and
President of the Company, Stuart Komer, continues to serve the Company in
the capacity of an executive as Chairman of the Board under a
continuation of his employment contract.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits. See Exhibit Index.
b) Reports on Form 8-K. On September 20, 1996, the Company filed a
report on Form 8-K to report under the heading of "Item 5. Other Events" the
completion of a transaction with the John H. Harland Company ("Harland"), which
was completed on August 29, 1996 (the "Harland Transaction"). The Harland
Transaction consisted of two parts: (i) the cash purchase by Harland of the
Company's check-production assets for their book value of approximately $3.48
million (the "Asset Purchase") and (ii) the subcontracting of 100% of the
Company's check production to Harland at a fixed cost per box. The Company
used the proceeds received from the Asset Purchase to repay two equipment term
loans that had been used to fund the purchase of the assets sold.
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, 1996 By: /s/Robert E. Johnson
Robert E. Johnson
Senior Vice President Finance and
Chief Financial Officer
<PAGE>
EXHIBIT
NUMBER DESCRIPTION LOCATION
10 Employment Agreement between Filed herewith
the Company and Joseph A. Calabro,
dated August 15, 1996
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 Regulation
S-K, Rule 601(c)(1)(v)
Exhibit 10
EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") dated as of August
15, 1996 by and between Joseph A. Calabro, residing at 919 Upland Drive,
Elmira, New York 14905 (the "Executive") and Artistic Greetings Incorporated,
a Delaware corporation with a business address of One Komer Center, P.O. Box
1999, Elmira, New York 14902 (the "Company").
I. WHEREAS, the Executive served as the Senior Vice President of
Manufacturing of the Company under an employment agreement dated January 1,
1996 since such date (the "Prior Employment Agreement");
II. WHEREAS, the Company desires to memorialize the retention of
the full-time services of the Executive hereby and cancel the Prior Employment
Agreement, and the Executive is willing to cancel such agreement and to accept
full-time employment for a period of three (3) years subsequent to the date of
execution of this Agreement (the "Execution Date");
III. WHEREAS, the Company is seeking to address the following
issues in connection with the Executive's employment with, and services to,
the Company:
1. The Company's desire to compensate the Executive at a level
sufficient to induce the Executive to continue his efforts toward the
advancement of the Company's business; and
2. The Company's desire to provide for and fund a non-competition
agreement with the Executive to ensure the protection of its investment in the
advancement of its business under the management of the Executive.
IV. WHEREAS, the Company desires and agrees, in consideration of
the objectives described above, to employ the Executive on the terms and
conditions set forth herein; and
V. WHEREAS, the Executive is desirous and willing to accept
employment with the Company on the terms and conditions expressed herein.
NOW, THEREFORE, the Executive and the Company hereby enter into this
Agreement on the terms and conditions hereinafter set forth (certain
capitalized terms used herein shall be defined in Section 9 hereof).
1. EMPLOYMENT AND DUTIES. The Executive shall serve as the Chief
Executive Officer and President of the Company (the "Duties"). The Executive
shall devote his customary working time to the business of the Company and
shall perform the Duties in a diligent, effective and loyal manner.
2. COMPENSATION. The Executive shall be compensated by the
Company (the "Compensation") for the services to be rendered by him pursuant
to this Agreement in the following manner:
a. A base salary of Two Hundred Thousand Dollars ($200,000) per
calendar year (the "Yearly Salary"), which shall be (i) paid each week
beginning on the Execution Date; and (ii) reviewed by the Company on an
annual basis with increases of such Yearly Salary granted to the
Executive in the sole discretion of the Company based upon, among other
things, the Executive's performance of his Duties during the prior
period.
b. A percentage of (i) 100% of a Share Unit (as hereinafter
defined) calculated from January 1, 1996 to August 31, 1996 and (ii) 150%
of a Share Unit calculated from September 1, 1996 and thereafter. A
Share Unit is equal to the sum of 1/4 % of the Net Operating Income (as
hereinafter defined) of the prior year (if Net Operating Income is
negative, such number equals zero) plus 1 1/2 % of the increase in Net
Operating Income of the current year over the prior year (a "Share
Unit"). Net Operating Income is equal to Net Income before (i) interest
and investment income (expense), (ii) taxes, (iii) bonuses and (iv)
extraordinary items. The amount of the Executive's percentage Share Unit
shall be reviewed by the Company on an annual basis with increases of
such Share Unit granted to the Executive in the sole discretion of the
Company based upon, among other things, the Executive's performance of
his Duties during the prior period. Bonuses shall be paid no later than
March 15th of the following year. Should the Executive be Terminated for
Cause, no bonus for the year in which the Termination occurs will be due
or payable.
3. BENEFITS. During the Term of this Agreement, and thereafter as
may be specifically provided herein, the Executive shall be entitled to
receive the following benefits (collectively, the "Benefits"):
a. Four (4) weeks of paid vacation per calendar year, or such
greater period as may be approved from time to time by the Board of
Directors of the Company;
b. Health insurance (Company pays 75% and Executive pays 25% of
the plan options selected);
c. Long-term disability insurance (Company pays 100%);
d. Life insurance equal to one year's base earnings; and
e. Contribution (profit) sharing as a full participant in the
Company's 401K Profit Sharing Plan under the conditions outlined in the
Company's plan manual entitled "Savings Plan;" and
f. Reimbursement for all expenses incurred by the Executive for
dues and/or membership fees incurred by the Executive for any local
social or health club.
4. OTHER COMPENSATION. Upon the Execution date the Executive
shall be entitled to the following other compensation (the "Other
Compensation"): The issuance of options to purchase 25,000 shares of the
Company's common stock (each a "Stock Option"). The Board has
established the value of each Stock Option at $3.93, which is the closing
price of the Company's common stock traded on the NASDAQ-NMS on August
14, 1996.
5. TERM. This Agreement shall be effective for a period of three
years from the Execution Date (the "Term").
6. TERMINATION OF EMPLOYMENT. "Termination" shall mean termination
of the Executive's employment with the Company prior to the end of the Term,
as of a date specified in a Termination Notice delivered by either:
a. (i) The Company, for any reason other than the Executive's
death, disability or for Cause or (ii) the Executive for Good Reason, in
either event, the Company shall (A) make Payment (any amount due under
this Section 6 is referred to as a "Payment") to the Executive, within
thirty (30) days of such Termination, of an amount equal to the product
of (x) one-twelfth of Yearly Salary and (y) the greater of (I) the
remaining number of calendar months of the Term of this Agreement or (II)
eighteen months; (B) cause any outstanding Stock Options held by the
Executive to automatically vest as of the date of the Termination Notice;
and (C) make Payment to the Executive, within thirty (30) days of such
Termination, an amount equal to the Executive's pro rata share of the
Executive's bonus (as determined in accordance with Section 2(b) hereof)
up through the last day of the calendar month immediately prior to the
date of the Termination Notice.
b. (i) The Executive in resignation at any time without Good
Reason or (ii) the Company for Cause, and in either event, the Company
shall continue to pay to the Executive the Compensation and Benefits
provided for under this Agreement only until the effective date of such
Termination;
c. The Executive as a result of disability prior to the
expiration of the Term of this Agreement, in which event, the Executive
shall receive the Compensation and Benefits for the remainder of the Term
of this agreement; and
d. The Executive in the event of an Acquisition of Control and if
Executive is not retained pursuant to an employment agreement under
Section 9(d)(i), the Company shall pay to the Executive the Compensation
and Benefits, within thirty (30) days of such Acquisition of Control in a
lump-sum amount equal to the amount due therefore, including such
Benefits as are described in sections 6(a)(ii)(B) and 6(a)(ii)(C).
In the Event of the Executive's death prior to the expiration of
the Term of this Agreement, the Company shall make a lump-sum payment to the
Executive's estate within thirty (30) days of such death in the amount of the
present value (applicable present value interest factor shall be the Federal
Rate described in Section 1274 of the Internal Revenue Code, hereinafter
referred to as the "Code") of the Compensation and Benefits for the remainder
of the Term of this Agreement.
Any calculation of an amount of Compensation and Benefits to be
paid under this Section 6 shall be made using a rate of Compensation and
Benefits that was applicable immediately prior to the death of the Executive
or prior to the date of any Termination Notice hereunder.
7. LIMITATION ON CERTAIN PAYMENTS. Notwithstanding anything to
the contrary contained herein, if any of the Payments provided for in this
Agreement, together with any other payments of Compensation which the
Executive receives from the Company, would constitute a "Parachute Payment"
(as defined in Section 280G(b)(2) of the Code), the Payments pursuant to this
Agreement shall be reduced to the largest amounts as will result in no portion
of such Payments being subject to the excise tax imposed in Section 4999 of
the Code; provided however, that the Executive and the Company shall mutually
agree to the amount of such Payments as otherwise would be paid but for the
foregoing limitation of this Section 6, in equal installments such that the
present value (applicable present value discount rate shall be in accordance
with Section 280G(d)(4) of the Code) of such installments will result in no
portion of such Payments to be treated as Parachute Payments under the Code.
The first such installment shall be payable when such amount would otherwise
have been payable; provided further, however, that the Executive and the
Company shall mutually agree to the allocation of any reductions required by
this Section 7.
8. COVENANT NOT TO COMPETE. The Executive hereby covenants and
agrees that, during the period of five (5) years from the Execution Date (the
duration of such Noncompete Period being subject to the penultimate paragraph
of this Section 8 (the "Noncompete Period")), the Executive will not:
a. For himself or on behalf of any other person, firm,
partnership or corporation, call upon any customer of the Company for the
purpose of soliciting or providing to such customer any products or
services which are the same as or similar to those provided to customers
by the Company. For purposes of this Agreement, "customers of the
Company" shall include, but not be limited to, all customers acquired by
the Company, or contacted or solicited by the Executive during his
employment with the Company;
b. For himself or on behalf of any other person, firm,
partnership or corporation, directly or indirectly seek to persuade any
director, officer or employee of the Company to discontinue that
individual's status or employment with the Company in order to become
employed in any activity similar to or competitive with the business of
the Company, nor will the Executive solicit or retain any such person for
such purpose; and
c. Directly or indirectly, alone or as an employee, independent
contractor of any type, partner, officer, director, creditor, substantial
(i.e., 5% or greater) stockholder or holder of any option or right to
become a substantial stockholder in any entity or organization, engage
within the United States of America in any business pertaining to the
sale, distribution, manufacture, marketing, production or provision of
products or services similar to or in competition with any products or
services produced, designed, manufactured, sold, distributed or rendered,
as the case may be, by the Company.
The parties agree that the Compensation provided for in Section 2
hereof, shall constitute fair and adequate consideration not only for the
Executive's services to be performed during the Term, but also for his
agreement under this Section 8 for the duration of the Noncompete Period.
The provisions of this Section 8 shall survive any Termination. If
any of the restrictions on competitive activities contained in this Section 8
shall for any reason be held by a court of competent jurisdiction to be
excessively broad as to duration, geographical scope, activity or subject,
such restrictions hall be construed so as to thereafter be limited or reduced
to be enforceable to the extent compatible with applicable law as it shall
then exist; it being understood that by the execution of this Agreement the
parties hereto regard such restrictions as reasonable and compatible with
their respective rights and expectations.
9. CERTAIN DEFINITIONS. The following terms shall have the
following respective meanings when utilized in this Agreement:
a. "Acquisition of Control" shall mean:
(i) upon the sale or other disposition to a person, entity or
"group" as defined in Section 13(d)(3) of the Securities Exchange Act of
1934, as amended (other than the Executive or a group which includes the
Executive), of shares of the Company having 45% or more of the total
number of votes that may be cast for the election of Directors of the
Company; and
(ii) stockholder approval of a transaction for the
acquisition of the Company, or substantially all of its assets, by
another entity or through a merger reorganization, consolidation or other
business combination to which the Company is a party.
b. "Cause" shall mean any action by the Executive which is
reasonably believed by the Company to constitute: (i) fraud; (ii)
embezzlement or misappropriation; (iii) felony; (iv) moral turpitude; or
(v) willful or bad faith conduct materially injurious to the Company,
other than as a result of the Executive's death or disability.
c. "Disability" shall mean any physical or mental incapacity,
illness or injury that renders the Executive unable to provide full-time
services to the Company as contemplated by this Agreement for more than
three consecutive calendar months.
d. "Good Reason" shall mean:
(i) an Acquisition of Control of the Company and if an
employment agreement, reasonably satisfactory to the Executive, for the
continuation of the employment of the Executive is not executed;
(ii) any action by the Company which reduces or limits the
Executive's authority to act as Chief Executive Officer; and
(iii) The Company's failure to perform in a timely manner its
material obligations under this Agreement, a reduction in the amount of
the Executive's base Compensation or Benefits or the breach by the
Company of any other provision of this Agreement.
e. "Termination Notice" shall mean a written notice which:
(i) may be given by either the Company or the Executive for
any of the reasons set forth in Section 6 hereof;
(ii) sets forth the specific provision of this Agreement
relied upon by the Company for the Termination the Executive's employment
or by the Executive to resign from such employment;
(iii) sets forth in reasonable detail the facts and
circumstances claimed to provide the basis for the Termination of the
Executive's employment; and
(iv) sets forth a Termination Date (which shall not be less
than 30 days or more than 60 days following the delivery of a Termination
Notice).
10. NOTICES. Any notice required or desired to be given hereunder
relating to this Agreement shall be effective if in writing and delivered
personally or by certified mail, postage prepaid, return receipt requested to
a party at the address for such party previously set forth in this Agreement
or to such other address as a party may specify by written notice to the other
party similarly given.
11. BENEFIT. This Agreement and the rights and obligations contained
herein shall be binding upon and inure to the benefit of the Company, its
successors and assigns, and upon the Executive, his legal representatives,
heirs and distributees.
12. WAIVER. The waiver of any party of a breach of any provision of
this Agreement shall not operate as or be construed as a waiver of any
subsequent breach.
13. ENTIRE AGREEMENT. This Agreement contains the entire
agreement between the parties and may not be altered or amended except by an
instrument in writing signed by all parties hereto. The Prior Employment
Agreement is hereby cancelled, and is expressly and mutually revoked by the
parties, it having no further force or effect. In the event of any conflict
between this Agreement and the terms of any of the Company's employment
policies, manuals, or other statements regarding employment generally, now
existing or hereafter promulgated, the terms of this Agreement shall control.
14. PARTIAL INVALIDITY. The invalidity or enforceability of any
particular provision of this Agreement shall not affect the other provisions
hereof and this Agreement shall be construed in all respects as if such
invalid or unenforceable provision were omitted.
15. APPLICABLE LAW. This Agreement shall be construed and enforced
in accordance with the laws of the State of New York.
16. HEADINGS. The headings contained in this Agreement are inserted
for convenience only and do not constitute a part of this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the Execution Date.
ARTISTIC GREETINGS INCORPORATED
By: /s/ Stuart Komer
Name: Stuart Komer
Title: Chairman of the Board of Directors
By: /s/ Joseph A. Calabro
Name: Joseph A. Calabro
Title: Chief Executive Officer and President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR ARTISTIC GREETINGS INCORPORATED FOR ITS QUARTER ENDED SEPTEMBER 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000007610
<NAME> ARTISTIC GREETINGS INCORPORATED
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 896
<SECURITIES> 2,781
<RECEIVABLES> 1,798
<ALLOWANCES> 52
<INVENTORY> 3,023
<CURRENT-ASSETS> 11,988
<PP&E> 14,857
<DEPRECIATION> 1,863
<TOTAL-ASSETS> 29,273
<CURRENT-LIABILITIES> 13,316
<BONDS> 1,998<F1>
0
0
<COMMON> 604
<OTHER-SE> 10,682
<TOTAL-LIABILITY-AND-EQUITY> 29,273
<SALES> 72,901
<TOTAL-REVENUES> 72,901
<CGS> 29,732
<TOTAL-COSTS> 69,968
<OTHER-EXPENSES> 572
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<FN>
<F1>Long-term debt.
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</TABLE>
