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, 1997
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) 733-5541
(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 5, 1997, the Registrant had 6,342,364 shares of its common stock
issued and outstanding.
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ARTISTIC GREETINGS INCORPORATED
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED MARCH 31, 1997
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 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
Exhibit Index 13
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARTISTIC GREETINGS INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA (Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 38 $ 99
Marketable securities:
Trading, at market (cost $2,726 in 1997
and $2,699 in 1996) 2,829 2,881
Available for sale, at market (cost $11
in 1997 and $11 in 1996) 19 19
Trade receivables - net 1,155 1,252
Inventories 2,574 2,270
Prepaid advertising 1,789 3,064
Prepaid expenses and other current assets 509 500
TOTAL CURRENT ASSETS 8,913 10,085
Deferred advertising 2,979 2,113
Property, plant and equipment, net 17,037 16,237
Cash surrender value of life insurance 447 433
Other assets 131 130
TOTAL ASSETS $29,507 $28,998
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 153 $ 153
Accounts payable, trade 9,531 9,847
Accrued liabilities 1,787 2,386
Customer advances 900 451
Income taxes payable 356 113
TOTAL CURRENT LIABILITIES 12,727 12,950
Long-term debt 998 1,034
Other liabilities 359 383
TOTAL LIABILITIES 14,084 14,367
Common stock, subject to put option - 500,000 shares 2,421 2,343
STOCKHOLDERS' EQUITY:
Common stock, par value $.10:
Authorized: 10,000,000 shares;
Issued: 6,037,720 shares in 1997;
6,037,720 shares in 1996 604 604
Additional paid-in capital 11,052 11,042
Unrealized (losses) gains on
marketable securities held as available for
sale, net of tax effect 1 1
Retained earnings 2,217 1,526
13,874 13,173
Less: Treasury stock, at cost (195,356 and
200,356 shares in 1997 and
1996, respectively) (872) (885)
TOTAL STOCKHOLDERS' EQUITY 13,002 12,288
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $29,507 $28,998
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS.
3
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ARTISTIC GREETINGS INCORPORATED
UNAUDITED STATEMENTS OF OPERATIONS
QUARTER ENDED
<TABLE>
<CAPTION>
March 31, March 31,
IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA 1997 1996
<S> <C> <C>
Net sales $ 24,218 $ 27,008
Cost of sales 9,512 11,051
Gross profit 14,706 15,957
Selling, advertising, general and administrative expenses 13,550 15,106
INCOME (LOSS) FROM OPERATIONS 1,156 851
Other income (expense)
Interest and dividend income 33 33
Net unrealized gains (losses) on trading securities (78) 44
Net realized gains (losses) on marketable securities 6 39
Interest expense (60) (306)
Other 22 11
INCOME (LOSS) BEFORE TAXES 1,079 672
Provision for (benefit from) income taxes 388 0
NET INCOME (LOSS) $ 691 $ 672
Net income (loss) per common and common equivalent share $ .11 $ .10
Weighted average number of common shares outstanding 6,353,531 6,539,083
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS.
4
<PAGE>
ARTISTIC GREETINGS INCORPORATED
UNAUDITED STATEMENTS OF CASH FLOW
QUARTER ENDED
<TABLE>
<CAPTION>
March 31, March 31,
IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 691 $ 672
Adjustments to reconcile net income (loss)
to net cash provided by
(used in) operating activities:
Depreciation and amortization 424 640
Allowance for doubtful accounts (75) (113)
Net unrealized losses (gains) on trading securities 78 (44)
Net realized losses (gains) on marketable securities
(equity) (6) (39)
Purchase of trading securities (384) (944)
Proceeds from sale of trading securities 362 263
Accretion of common stock subject to a put option 78 78
Decrease (increase) in cash surrender value of life
insurance (14) (14)
Decrease (increase) in assets:
Trade receivables 173 60
Inventories (304) 1,284
Prepaid advertising, prepaid expenses and other 1,265 2,355
Deferred advertising (867) 862
Increase (decrease) in liabilities:
Checks-in-transit 173 (41)
Accounts payable, trade (489) (3,540)
Accrued liabilities (598) 351
Customer advances 449 437
Income taxes payable 244 (108)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,200 2,159
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,223) (401)
Proceeds from sale of marketable securities _____ 675
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,223) 274
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowings from the lines of credit (1,732) (7,633)
Proceeds from the lines of credit 1,732 5,965
Proceeds from issuance of common stock, treasury stock
and options exercised 23 __
Payments to New York State Urban Development Corporation (25) (25)
Repayment of long-term debt (36) (565)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (38) (2,258)
Net increase (decrease) in cash and cash equivalents (61) 175
Cash and cash equivalents at beginning of year 99 529
Cash and cash equivalents at end of year $ 38 $ 704
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest $ (2) $ 225
Income taxes, net of refunds received $ 145 $ 0
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS.
5
<PAGE>
ARTISTIC GREETINGS INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(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.
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 1996
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
6
<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 6,353,531 for the quarter ended March 31, 1997 and 6,539,083
for the quarter ended March 31, 1996.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". The statement is
effective for fiscal years ending after December 15, 1997. When adopted,
restatement of prior years' earnings per share will be required.
The statement establishes revised standards for computing and presenting
earnings per share. Management does not expect the application to have a
material effect on the Company's financial statements.
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 $ _
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion contains forward-looking statements. For a discussion
of important factors that could cause actual results to differ materially from
such forward-looking statements, please carefully review the discussion of the
following Risk Factors: "Recent Losses; Potential Fluctuations in Operating
Results"; "Dependence on Effective Information Systems"; "Dependence on Key
Personnel"; "Potential Volatility of Stock Price"; and "Control by Present
Stockholders," included under the heading "Company Risk Factors" in Exhibit 99
to this Report, which Exhibit is incorporated by reference herein, as well as
the other information contained in this Report and in the Company's periodic
reports and other documents filed with the SEC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS:
NET SALES
In the first three months of 1997, the Company's net sales decreased 10.3% to
$24,218 from $27,008 in the comparable period of 1996. This decrease is
primarily due to intentional sales volume reductions in the personalized name
and address product category, which consists of labels, mini printers, self-
inking stamps and certain other products generally sold through mass media
channels (personalized products), by an aggregate of 18.9% from $11,160 in 1996
to $9,050 in 1997. These planned reductions resulted from discontinuing
marginally profitable products and advertising initiatives. In addition,
catalog sales decreased by 11.6% from $2,837 in 1996 to $2,508 in 1997 due to
slightly lower responses. Check sales decreased by 1.7% from $11,538 in 1996
to $11,338 in 1997 because of lower circulation and responses.
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 1997 increased .7% to $6,021
from $5,976 in the comparable period of 1996, which is a 2.7% increase as a
percentage of sales from the prior period. The increase is attributed to an
increase in the mix of material cost of checks related to outsourcing check
production, offset by lower sales volumes in personalized products and
catalogs.
Direct labor decreased 32.5% from $1,918 in the first three months of 1996 to
$1,295 in the comparable period of 1997, a decrease of 1.8% as a component of
net sales during that period for two primary reasons. First, check printing
was fully outsourced in October 1996 to John Harland Company allowing labor
savings for the check printing. The second factor for the decrease in direct
labor was improved efficiencies.
Manufacturing overhead decreased 30.5% to $2,195 in the first three months of
1997 from $3,157 in the comparable period of 1996; such decrease represents a
2.6% decrease as a component of sales between periods. Decreased telephone
expense was attributable to reduced exchanges and lower volume. Manufacturing
supplies expense was lower in the first three months of 1997 due to outsourcing
check production. Finally, depreciation expense decreased due to the sale of
check printing equipment in the third quarter 1996 as part of the outsourcing
of check manufacturing to John Harland Company.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A)
The three largest components of SG&A expenses are advertising, postage and
labor.
Advertising expense decreased 17.3% to $8,636 in the first three months of 1997
from $10,439 in the comparable period of 1996, which represents a decrease of
3.0% as a component of sales. Advertising for personalized products decreased
by 17.6% from the first three months of 1996 due to downsizing efforts to
improve profitability. Advertising for checks decreased by 25.5% from the
first three months of 1996 due to the purchase of less circulation in reaction
to lower response rates related to competitive pricing. Such decreases have
been partially offset by a 28.9% increase in circulation in the first quarter
for catalogs to pursue growth opportunities.
Postage and shipping expense in the first three months of 1997 decreased 7.9%
to $2,239 from $2,432 in the comparable period of 1996, however, the first
three months of 1997 represents a .3% increase as a component of sales. Such
aggregate decrease in postage and shipping expense is attributable primarily to
lower volume and lower exchanges. The increase as a percentage of sales is
attributable to an increase in checks postage and shipping for outsourcing
handling.
Other administrative expense increased in the first three months of 1997 by
16.8% to $2,330 from $1,996 in the comparable period of 1996, representing an
increase of 2.2% as a component of sales. This increase as a percentage of
sales is substantially the result of the increase in salaries and wages (with
associated increases in employee benefits costs) related to strengthening
senior management and initiating business development efforts. An additional
factor in the increase is related to professional fees associated with business
development efforts.
OTHER EXPENSE (INCOME)
The Company incurred other expenses of $422 in the first three months of 1997,
an increase of .7% from $419 in the comparable period of 1996. Interest
expense decreased to $60 in 1997 from $306 in 1996, which represents a decrease
of 2.2% as a component of net sales. The decrease in interest expense was due
to reductions in both long- and short-term borrowing as the Company applied its
cash flow from operations to debt reduction. This decrease is offset by
accruals for employee incentive compensation and contributions to the Company
profit-sharing plan due to higher income from operations.
TAX PROVISION
A tax provision of $388, reflecting an effective tax rate of 36%, was recorded
in the first three months of 1997 as compared to no tax provision recorded in
the first three months of 1996. A portion of a net operating loss carry
forward was utilized in the first quarter of 1996, but due to 1997 expected
profitability, a tax provision is required.
NET INCOME
For the reasons discussed above, the Company's net income in the first three
months of 1997 increased 2.8% to $691 or $0.11 per share, from the prior period
of $672 or $0.10 per share.
8
<PAGE>
LIQUIDITY & CAPITAL RESOURCES
Cash and cash equivalents, combined with marketable securities, totaled $2,999
at December 31, 1996 and $2,886 at March 31, 1997. Total liabilities decreased
by $283 or 2.0% from $14,367 at December 31, 1996 to $14,084 at March 31, 1997.
Long-term debt decreased from $1,034 at December 31, 1996 to $998 at March 31,
1997. Income tax payable increased from $113 at December 31, 1996 to $356 at
March 31, 1997. Accounts payable was reduced by 3.2% from $9,847 at the end of
1996 to $9,531 at March 31, 1997.
Although working capital at March 31, 1997 was ($3,814), management believes
that the Company 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 at March 31,
1997 was primarily the result of several factors which reflect successful
efforts to manage the operations of the Company. Cash and cash equivalents
reflect use of cash to pay off long-term debt in 1996, as well as funding a
major system implementation from cash from operations, and the inventory
balance reflects improved materials management and outsourcing 100% of check
production. As a result of check production outsourcing, the Company has no
inventory for its check business but records accounts payable for the cost of
the subcontracted check production.
At March 31, 1997, the Company had a $6.5 million revolving credit facility
with its bank (the "Revolver"), which is subject to a borrowing base formula
and certain other conditions. Based upon the borrowing base formula, at March
31, 1997, the Company had a total of $5,803 available for borrowing under the
Revolver of which zero was outstanding as of such date.
Per the Company's May 1995 agreement with Valcheck Company ("Valcheck"),
Valassis Communications, Inc. ("Valassis") has notified the Company of
Valcheck's intent to exercise its put option on the 500,000 shares it owns of
the Company's Common Stock. The Company intends to fund both this $2.5 million
payment and the $2.0 million annual payment under the Company's Advertising
Agreement with Valassis, both of which are due in June 1997, from the Revolver.
Management believes that the operating activities of the Company, together with
the line of credit available under the Revolver, will substantially support the
Company's cash requirements for the next twelve months and that sufficient
capital resources are available to the Company to provide adequate liquidity
overall.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
At a meeting of the Company's Board of Directors on May 1, 1997, the
members of the Board of Directors unanimously appointed Thomas C. Wyckoff,
former Senior Vice President Administration/ Corporate Development, General
Counsel and Assistant Secretary of the Company, to serve as Chief Operating
Officer and Executive Vice President of the Company. Mr. Wyckoff serves the
Company in such capacity under an employment agreement dated as of May 1, 1997,
a copy of which is filed herewith as Exhibit 10.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits. See Exhibit Index.
b) Reports on Form 8-K. None.
10
<PAGE>
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: May 15, 1997 By: /S/ ROBERT E. JOHNSON
Robert E. Johnson
Senior Vice President Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
11
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGES
10 Employment Agreement between the Company Filed Herewith
and Thomas C. Wyckoff, dated May 1, 1997
11 Statement re: computation of per share See Note 3 to the
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)
99 Risk Factors Filed Herewith
12
EXHIBIT 10
EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") dated as of
<PAGE>
May 1, 1997 by and between Thomas C. Wyckoff, residing at 111 Drive A,
Strathmont Park, 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 has served as the Senior Vice
President Administration/Corporate Development, General Counsel and
Assistant Secretary of the Company under an employment agreement dated
November 1, 1996 (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 Operating Officer and Executive Vice President of the Company, as well
as General Counsel and Assistant Secretary (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 One Hundred Forty-Six Thousand Dollars
($146,000) 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. 100% of a Share Unit (as hereinafter defined) calculated
from January 1, 1997 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. TERM. This Agreement shall be effective for a period of
three years from the
Execution Date (the "Term").
5. 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.
6. 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.
7. 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.
8. 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 in accordance with the Duties, 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).
9. 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.
10. 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.
11. 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.
12. 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 canceled, 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.
13. 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.
14. APPLICABLE LAW. This Agreement shall be construed and
enforced in accordance with the laws of the State of New York.
15. HEADINGS. The headings contained in this Agreement are
inserted for convenience only and do not constitute a part of this
Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the Execution Date.
ARTISTIC GREETINGS INCORPORATED
By: /S/JOSEPH A. CALABRO
Name: Joseph A. Calabro
Title: Chief Executive Officer
By: /S/THOMAS C. WYCKOFF
Name: Thomas C. Wyckoff
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR ITS QUARTER ENDED MARCH 31, 1997 AND IS QUALIFIED INN
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-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1.00
<CASH> 38
<SECURITIES> 2,848
<RECEIVABLES> 1,155
<ALLOWANCES> 0
<INVENTORY> 2,574
<CURRENT-ASSETS> 8,913
<PP&E> 27,832
<DEPRECIATION> 10,795
<TOTAL-ASSETS> 29,507
<CURRENT-LIABILITIES> 12,727
<BONDS> 998
0
0
<COMMON> 604
<OTHER-SE> 12,398
<TOTAL-LIABILITY-AND-EQUITY> 29,507
<SALES> 24,218
<TOTAL-REVENUES> 24,218
<CGS> 9,512
<TOTAL-COSTS> 13,550
<OTHER-EXPENSES> 17
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60
<INCOME-PRETAX> 1,079
<INCOME-TAX> 388
<INCOME-CONTINUING> 691
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 691
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
EXHIBIT 99
RISK FACTORS
RECENT LOSSES; POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
Although the Company has for many years experienced year-to-year revenue
growth, it has incurred net losses of $9.9 million and $.4 million in 1995 and
1994, respectively. There can be no assurance that revenue growth will
continue or that the Company will achieve profitability in the future.
The Company's operating results have fluctuated in the past and may fluctuate
in the future as a result of a variety of factors, some of which are outside of
the Company's control, including general economic conditions, specific economic
conditions in the retail trade industry, the mix of products sold and the cost
and types of advertising through which they are sold, and prices charged by
suppliers, among others.
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS
To complete orders, the Company must record and process customer data quickly
and accurately. While the Company is in the process of significantly upgrading
its management information system, there can be no assurance that the new
system, when fully installed and implemented, will deliver the full range of
data processing functionally expected. The Company believes that the
successful installation and implementation of its new computer system is
important to its continued growth, but there can be no assurance that the
Company will not encounter delays or cost overruns or suffer adverse
consequences in implementing the new system.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its core management team. While the Company has employment
agreements with its four key executives, they still have the ability to
voluntarily terminate their employment with the Company at any time, as do the
Company's other executives and employees. Competition for qualified personnel
in the Company's segment of the retail trade industry is relatively intense
and, from time to time, there are a limited number of persons with knowledge of
and experience in particular sectors of the Company's business. The Company's
success also will depend on its ability to attract and retain qualified
management, marketing, technical and other executives and personnel. The loss
of the services of key personnel, or the inability to attract additional
qualified personnel, could have a material adverse effect on the Company's
results of operations, development efforts and ability to expand. There can be
no assurance that the Company will be successful in attracting and retaining
such executives and personnel.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has been and may continue to be
highly volatile. See the discussion under Item 5 of the Company's 1996 Form
10-K Report, "Market for Registrant's Common Equity and Related Stockholder
Matters". Factors such as variations in the Company's revenue, earnings and
cash flow, the difference between the Company's actual results and the results
expected by investors and analysts, and announcements of new product offerings,
marketing plans or price reductions by the Company or its competitors could
cause the market price of the Company's Common Stock to fluctuate.
CONTROL BY PRESENT STOCKHOLDERS
In the aggregate, Stuart Komer, American Greetings Corporation and Valcheck
Company control approximately 52% of the Company's issued and outstanding
Common Stock. Accordingly, to the extent these stockholders act together in
the voting of their shares, they will have the ability to determine the outcome
of most matters put before the Company's stockholders.
