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 MARCH 31, 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 incorporation (I.R.S. Employer
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 May 6, 1996, the Registrant had 6,537,720 shares of its common stock
issued and outstanding.
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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
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
Exhibit Index 13
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
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ARTISTIC GREETINGS INCORPORATED
BALANCE SHEETS
March 31, December 31,
1996 1995
IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA (Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 704 $ 529
Marketable securities:
Trading, at market (cost $2,383 in 1996
and $1,704 in 1995) 2,650 1,926
Available for sale, at market (cost $11
in 1996 and $651 in 1995) 17 653
Trade receivables - net 1,856 1,803
Income taxes receivable 900 900
Inventories 4,565 5,849
Prepaid advertising 3,795 6,116
Prepaid expenses and other 77 27
TOTAL CURRENT ASSETS 14,564 17,803
Deferred advertising 2,675 3,537
Property, plant and equipment, net 16,630 16,869
Cash surrender value of life insurance 322 308
Other assets 53 137
TOTAL ASSETS $ 34,244 $ 38,654
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to bank $ 3,294 $ -
Current portion of long-term debt 1,820 1,777
Accounts payable, trade 10,305 13,993
Accrued liabilities 1,342 991
Customer advances 674 237
TOTAL CURRENT LIABILITIES 17,435 16,998
Long-term debt 4,023 9,593
Other liabilities 459 483
TOTAL LIABILITIES 21,917 27,074
Common stock, subject to put option - 500,000 shares 2,109 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 11,028 11,028
Unrealized (losses) gains on marketable
securities held as available for sale,
net of tax effect (1) 1
Retained earnings (477) (1,149)
11,154 10,484
Less: Treasury stock, at cost (216,427 and
216,427 shares in 1996 and
1995, respectively) (936) (936)
TOTAL STOCKHOLDERS' EQUITY 10,218 9,548
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,244 $ 38,654
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
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ARTISTIC GREETINGS INCORPORATED
UNAUDITED STATEMENTS OF OPERATIONS
QUARTER ENDED
March 31, March 31,
IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA 1996 1995
<S> <C> <C>
Net sales $ 27,008 $ 21,488
Cost of sales 11,051 7,974
Gross profit 15,957 13,514
Selling, advertising, general and
administrative expenses 14,866 15,290
INCOME (LOSS) FROM OPERATIONS 1,091 (1,776)
Other income (expense):
Interest and dividend income 33 105
Net unrealized gains on trading securities 44 63
Net realized gains (losses) on marketable securities 39 (27)
Interest expense (306) (146)
Other (229) 215
INCOME (LOSS) BEFORE TAXES 672 (1,566)
Provision for (benefit from) income taxes 0 (537)
NET INCOME (LOSS) $ 672 $(1,029)
Net income (loss) per common and common equivalent share $ 0.10 $ (0.17)
Weighted average number of common and common equivalent
shares outstanding 6,539,083 5,881,725
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THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
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<TABLE>
<CAPTION>
ARTISTIC GREETINGS INCORPORATED
UNAUDITED STATEMENTS OF CASH FLOW
Quarter Ended
March 31, March 31,
IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA 1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 672 $ (1,029)
Adjustments to reconcile net income (loss)
to net cash provided by
(used in) operating activities:
Depreciation and amortization 640 493
Net unrealized gains on trading securities (44) (39)
Net realized gains on marketable securities (39) (27)
Purchase of trading securities (944) (188)
Proceeds from sale of trading securities 263 771
Amortization of interest credit from
New York State Urban
Development Corporation grant (25) --
Accretion of common stock subject to a put option 78 --
Increase in cash surrender value of life insurance (14) (24)
(Increase) decrease in assets:
Trade receivables (53) 134
Income taxes receivable -- (154)
Inventories 1,284 (592)
Prepaid advertising, prepaid expenses and other 2,355 1,833
Deferred advertising 862 1,123
Increase (decrease) in liabilities:
Checks-in-transit (41) (931)
Accounts payable, trade (3,540) (1,048)
Accrued liabilities 351 (667)
Customer advances 437 (66)
Deferred income taxes -- (250)
Federal and state taxes payable (108) --
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,134 (661)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (401) (1,145)
Purchase of marketable securities -- (819)
Proceeds from sale of marketable securities 675 178
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 274 (1,786)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of amounts received under lines of credit (7,633) (12,579)
Proceeds received under lines of credit 5,965 11,463
Proceeds from long-term borrowings -- 5,000
Proceeds from issuance of common stock,
treasury stock and
options exercised -- 2
Repayment of long-term debt (565) (69)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (2,233) 3,817
Net increase in cash and cash equivalents 175 1,370
Cash and cash equivalents at beginning of year 529 149
Cash and cash equivalents at end of year $ 704 $ 1,519
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest $ 225 $ 138
Income taxes, net of refunds received -- (136)
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
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ARTISTIC GREETINGS INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, 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 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
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 6,539,083 for the quarter ended March 31, 1996 and 5,881,725
for the quarter ended March 31, 1995.
NOTE 4. SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY.
During May 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. The common stock is
puttable to the Company, at the Seller's option, two years from the acquisition
date at $5 per share.
Fair value of assets acquired $ 1,875
Less: common stock issued 1,875
Cash paid $ --
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
(Dollars in thousands, except per share data)
Results of Operations:
NET SALES
In the first three months of 1996, the Company's net sales increased 25.7% to
$27,008 from $21,488 in the comparable period of 1995. This increase, despite
a reduction in advertising expenditures as further described below, resulted
primarily from improved response rates in both the Company's catalog and
advertising for its personalized name and address products, which consists of
labels, MiniPrinters{<reg-trade-mark>}, self-inking stamps and certain other
products generally sold through mass media channels ("personalized products").
Sales decreased in the personalized products category by 9.8%, from $12,366 in
the first three months of 1995 to $11,160 in the comparable period of 1996,
while catalog sales offset such decrease with a 53.2% increase to $2,837 in the
first three months of 1996 from $1,853 in the prior period. Check sales grew
95.2% from $5,910 in the first three months of 1995 to $11,538 in the
comparable period of 1996. This growth is attributable to the increase in the
Company's check-customer base, an increase in the Company's free standing
insert advertising circulation, the acquisition of customers in May of 1995 as
a result of the acquisition of assets of Valcheck Company (the "Valcheck
Acquisition"), and the increase in the Company's reorder rate as a proportion
of first-time customers.
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 first three months of 1996 increased 47.8% to
$5,976 from $4,044 in the comparable period of 1995, which is a 3.3% increase
as a percentage of sales from the prior period. Such increase as a percentage
of sales is primarily the result of the increase in subcontracting of a portion
of check personalization and fulfillment as well as the increase in check
production, with its relatively higher material content as a percent of sales.
Lower sales volume in certain personalized-product lines partially offset
volume-related increases in material costs for checks and catalog sales.
Finally, material costs increased 3.4% as a component of net sales between
years due to the subcontracting of a portion of check personalization and
fulfillment.
Direct labor was up 28.1% from $1,497 in the first three months of 1995 to
$1,918 in the comparable period of 1996, an increase of 0.1% as a component of
net sales during that period for two primary reasons. First, as discussed
above, check-printing volume increased substantially requiring an increase in
labor for check printing. The second factor for the increase in direct labor
was the integration of the Valcheck Acquisition and increases in check reorders
and catalog orders, resulting in higher telemarketing labor.
Manufacturing overhead increased 32.5% to $3,157 in the first three months of
1996 from $2,382 in the comparable period of 1995, however, such increase only
represents a .6% increase as a component of sales between periods. Employee
benefits expense increased substantially between periods as a result of both
overall higher employment levels and the conversion of long-term temporary
personnel to full-time status. Supplies expenses were higher in the first
three months of 1996 due to the volume growth. Increased telephone expense was
attributable to the previously mentioned higher telemarketing activity.
Finally, depreciation expense increased by 42.4% from $321 in the first three
months of 1995 to $457 in the comparable period of 1996, as a result of the
purchase of Artistic Plaza in the second quarter, the refurbishment of that
facility and the purchase of check-printing equipment to support volume
increases.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A)
The three largest components of SG&A expenses are advertising, postage and
labor.
Advertising expense decreased 8.3% to $10,439 in the first three months of 1996
from $11,383 in the comparable period of 1995, which represents a decrease of
14.3% as a component of sales. Although advertising for personalized products,
catalog and international categories decreased by 24.6% from the first three
months of 1995 due to downsizing efforts to improve profitability, such
decrease was offset by a 21.2% increase in advertising for checks, as the
Company took advantage of increased availability of circulation resulting from
an advertising agreement with Valassis Communications, Inc. that was entered
into in connection with the Valcheck Acquisition.
Postage and shipping expense in the first three months of 1996 increased 23.3%
to $2,432 from $1,972 in the comparable period of 1995, however, such decrease
only represents a .2% decrease as a component of sales. Such aggregate
increase in postage and shipping expense is attributable primarily to check
volume increases, which packages are generally heavier and cost more to ship
than other product lines. The reduction as a percentage of sales is
attributable to a more effective method of consolidating orders from different
production areas for shipment to the Company's customers, which primarily
resulted from the consolidation of the Company's manufacturing facilities
between the periods.
Other administrative expense increased in the first three months of 1996 by
3.9% to $1,996 from $1,921 in the comparable period of 1995, representing a
reduction of 1.6% as a component of sales. This reduction as a percentage of
sales is substantially the result of the decrease in salaries and wages, with
associated reductions in employee benefits costs. Several other factors offset
one another, including increases in expenses for consulting, legal and other
outside advisors to the Company to facilitate the business restructuring, which
in turn were offset by reductions in travel, office supplies, rental expense
and the elimination of international marketing expense.
OTHER EXPENSE (INCOME)
The Company incurred other expenses of $419 in the first three months of 1996,
a change of 306.4% from ($203) income in the comparable period of 1995.
Interest expense increased 56.2% to $228 in the first three months of 1996 from
$146 in the comparable period of 1995, which represents an increase of .2% as a
component of sales. The increase in interest expense was due to increased
borrowing to support the expansion of facilities and working capital for the
growth of the check business. 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 in the Valcheck
Acquisition.
TAX PROVISION
No tax provision was recorded in the first three months of 1996 as compared to
a tax benefit recorded in the prior period of $537, based on the Company's
expectation that it will recognize a tax benefit for its net operating loss
carryforward.
NET INCOME
For the reasons discussed above, the Company's net income in the first three
months of 1996 increased 165.3% to $672 or $0.10 per share, from a net loss in
the prior period of $1,029 or $0.17 per share.
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LIQUIDITY & CAPITAL RESOURCES
Cash and cash equivalents, combined with marketable securities, totaled $3,108
at December 31, 1995 and $3,371 at March 31, 1996. Total liabilities decreased
by $5,157 or 19.1% from $27,074 at December 31, 1995 to $21,917 at March 31,
1996. The decrease in long-term debt from $9,593 at December 31, 1995 to
$4,023 at March 31, 1996 was the result of the reclassification of notes
payable to bank of $3,294 to current at March 31, 1996 and repayment of long-
term debt. Notes payable to bank was reduced from $4,962 at December 31, 1995
to $3,294 at March 31, 1996. Accounts payable was reduced by 26.4% from
$13,993 at the end of 1995 to $10,305 at March 31, 1996. At March 31, 1996,
the Company had total borrowing capacity of $5,277 in its secured line of
credit with its bank of which total approximately $1,983 remained available for
borrowing as of such date. 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 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.
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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.
<PAGE>
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: May 15, 1996 By: /S/ROBERT E. JOHNSON
Robert E. Johnson
Senior Vice President Finance and
Chief Financial Officer
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EXHIBIT
NUMBER DESCRIPTION PAGES
11 Statement re: computation of See Note 3 to the Financial
per share earnings Statements contained in this
report
27 Financial Data Schedule Filed only with EDGAR filing,
per Regulation 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 MARCH 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000007610
<NAME> ARTISTIC GREETINGS INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1.00
<CASH> 704
<SECURITIES> 2,667
<RECEIVABLES> 1,856
<ALLOWANCES> 0
<INVENTORY> 4,565
<CURRENT-ASSETS> 14,564
<PP&E> 17,270
<DEPRECIATION> 640
<TOTAL-ASSETS> 34,244
<CURRENT-LIABILITIES> 17,435
<BONDS> 4,023
0
0
<COMMON> 604
<OTHER-SE> 11,154
<TOTAL-LIABILITY-AND-EQUITY> 34,244
<SALES> 27,008
<TOTAL-REVENUES> 27,008
<CGS> 11,051
<TOTAL-COSTS> 14,866
<OTHER-EXPENSES> (113)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (306)
<INCOME-PRETAX> 672
<INCOME-TAX> 0
<INCOME-CONTINUING> 672
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 672
<EPS-PRIMARY> 0.10
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</TABLE>