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 JUNE 30, 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 August 4, 1997, the Registrant had 5,844,946 shares of its common stock
issued and outstanding.
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ARTISTIC GREETINGS INCORPORATED
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED JUNE 30, 1997
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets 3
Unaudited Statements of Operations 4
Unaudited Statements of Cash Flows 5
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 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
Exhibit Index 14
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ARTISTIC GREETINGS INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA (Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 206 $ 99
Marketable securities:
Trading, at market (cost $2,313 in 1997
and $2,452 in 1996) 2,641 2,881
Available for sale, at market (cost $509
in 1997 and $9 in 1996) 525 19
Trade receivables - net 1,339 1,252
Inventories 2,599 2,270
Prepaid advertising 3,513 3,064
Prepaid expenses and other current assets 512 500
TOTAL CURRENT ASSETS 11,335 10,085
Deferred advertising 2,841 2,113
Property, plant and equipment, net 17,573 16,237
Cash surrender value of life insurance 461 433
Other assets 144 130
TOTAL ASSETS $ 32,354 $ 28,998
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 144 153
Accounts payable, trade 10,439 9,847
Accrued liabilities 1,050 2,386
Customer advances 794 451
Income taxes payable 11 113
TOTAL CURRENT LIABILITIES 12,438 12,950
Long-term debt 6,517 1,034
Other liabilities 333 383
TOTAL LIABILITIES 19,288 14,367
Common stock, subject to put option - 500,000 shares - 2,343
STOCKHOLDERS' EQUITY:
Common stock, par value $.10:
Authorized: 10,000,000 shares;
Issued: 6,038,520 shares in 1997;
6,037,720 shares in 1996 654 604
Additional paid-in capital 11,055 11,042
Unrealized gains on marketable securities
held as available for sale,
net of tax effect 8 1
Retained earnings 2,271 1,526
13,988 13,173
Less: Treasury stock, at cost (695,356
and 200,356 shares in 1997 and
1996, respectively) (922) (885)
TOTAL STOCKHOLDERS' EQUITY 13,066 12,288
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 32,354 $ 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
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
June 30, June 30,
IN THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales $ 22,212 $ 22,250 $ 46,431 $ 49,258
Cost of sales 9,662 8,931 19,394 19,982
Gross profit 12,550 13,319 27,037 29,276
Selling, advertising, general
and administrative expenses 12,693 12,806 26,024 27,912
INCOME (LOSS) FROM OPERATIONS (143) 513 1,013 1,364
Other income (expense)
Interest and dividend income 44 11 78 79
Net unrealized gains on
trading securities 223 8 145 52
Net realized gains on
marketable securities 55 44 61 83
Interest expense (111) (187) (172) (518)
Other 15 41 38 42
INCOME BEFORE TAXES 83 430 1,163 1,102
Provision for income taxes 30 0 419 0
NET INCOME $ 53 $ 430 $ 744 $ 1,102
Net income per common
and common equivalent share $ 0.01 $ 0.07 $ 0.12 $ 0.17
Weighted average number of
common shares outstanding 6,361,382 6,321,940 6,360,465 6,321,617
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
4
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ARTISTIC GREETINGS INCORPORATED
UNAUDITED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
June 30, June 30,
1997 1996
IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 744 $ 1,102
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 970 1,279
Allowance for doubtful accounts (75) -
Net unrealized losses (gains) on trading securities (145) (52)
Net realized losses (gains) on marketable securities (equity) (61) (83)
Purchase of trading securities (261) (1,653)
Proceeds from sale of trading securities 60 1,006
Amortization of interest credit from New York State Urban
Development Corporation grant (50) (50)
Accretion of common stock subject to a put option 157 156
Decrease (increase) in cash surrender value of life insurance (28) (28)
Decrease (increase) in assets:
Trade receivables (88) 561
Income taxes receivable 0 900
Inventories (329) 2,454
Prepaid advertising, prepaid expenses and other (474) 1,427
Deferred advertising (728) 1,125
Increase (decrease) in liabilities:
Checks-in-transit 1,012 (625)
Accounts payable, trade (528) (5,175)
Accrued liabilities (1,236) 528
Customer advances 350 25
Income taxes payable (102) -
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (812) 2,897
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (2,305) (615)
Proceeds from sale of marketable securities 68 633
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (2,237) 18
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowings from the lines of credit (4,336) (13,754)
Proceeds from the lines of credit 9,836 11,713
Proceeds from issuance of common stock, treasury stock
and options exercised (2,318) 4
Repayment of long-term debt (26) (874)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,156 (2,911)
Net increase in cash and cash equivalents 107 4
Cash and cash equivalents at beginning of year 99 529
Cash and cash equivalents at end of year $ 206 $ 533
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 38 $ 379
Income taxes, net of refunds received $ 521 $ 906
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
5
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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.
Certain amounts in prior years have been reclassified to conform to the
1997 presentation.
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
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ARTISTIC GREETINGS INCORPORATED
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
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 were 6,361,382 for the quarter ended June 30, 1997 and 6,321,940
for the quarter ended June 30, 1996.
The weighted average number of shares outstanding was 6,360,465 for the
six-month period ended June 30, 1997 and 6,321,617 for the six-month period
ended June 30, 1996.
The Company accounts for net income per common and common equivalent share
in accordance with the provisions of Accounting Principles Board Opinion No. 15
(APB No. 15). In March 1997, Statement of Financial Accounting Standards No.
128 (SFAS No. 128), "Earnings Per Share" was issued. SFAS No. 128 replaces
primary Earnings Per Share (EPS) with basic EPS. Basic EPS is computed by
dividing reported earnings available to common stockholders by weighted average
shares outstanding. No dilution for common share equivalents is included.
Fully diluted EPS, now called diluted EPS, is still required. The Company is
required to adopt SFAS No. 128 retroactively for periods ending after December
15, 1997. On a pro forma basis, basic EPS and diluted EPS for the three and
six months ended June 30, 1997 were $0.01 and $0.12 respectively, the same as
reported EPS.
NOTE 4. SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY.
During May 1995, the Company acquired certain assets of Valcheck Company
("Valcheck") 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 was puttable to the Company, at Valcheck's option, two years from the
acquisition date at $5 per share.
Valcheck exercised its put option in the second quarter of 1997. The
Company paid Valcheck a contractually-determined $5.00 per share or $2.5
million on June 30, 1997, in consideration of the 500,000 shares put to the
Company as of such date.
NOTE 5. LONG-TERM DEBT
Long-term debt consists of the following:
June 30, March 31, December 31,
1997 1997 1996
Marine Revolver $ 5,500 $ - $ -
UDC Mortgage 250 275 300
City of Elmira 911 876 887
Total Long-term Debt $ 6,661 $ 1,151 $ 1,187
Less: Current Portion 144 153 153
Total $ 6,517 $ 998 $ 1,034
Long-term debt rose to $5.5 million since the end of the first quarter.
The Company funded from its revolving credit line (the "Revolver") with Marine
Midland Bank ("Marine"), a contractually specified $2 million advertising
payment to Valassis Communications, Inc. ("Valassis"), the Company's exclusive
provider of Free Standing Insert advertising media. A $2.5 million payment to
Valcheck (as described in Note 4 to the Condensed Financial Statements) was
also funded from the Revolver. Additionally, the Company utilized an
additional $1 million from the Revolver to fund its working capital. As of
August 11, 1997, the balance on the Revolver was reduced to approximately $3.8
million. See "Item 2 - Liquidity and Capital Resources" for a further
description of the Company's cash flow. Finally, the City of Elmira mortgage
increased in principal amount by thirty-five thousand dollars ($35,000) as a
result of the inclusion of interest which had been accruing since 1991.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
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 "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.
Results of Operations:
NET SALES
In the second quarter of 1997, the Company's sales decreased .2% to $22,212
from $22,250 in the comparable period of 1996. This decrease is primarily a
result of lower responses due to delayed placement of advertising 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"). Additionally, certain less
profitable media programs utilized by the Company for checks in the second
quarter of 1996 were eliminated in 1997. Sales in the personalized products
category therefore decreased 6.3% to $7,523 in the second quarter of 1997 from
$8,026 in the comparable period of the prior year. Catalog sales decreased by
8.1% to $2,313 in the second quarter of 1997 from $2,518 in 1996, due to lower
responses caused principally by the testing of new mixes of product in the
Personal Touch{<reg-trade-mark> }catalog. These decreases were offset by an
increase in check sales of 3.6% to $11,030 in the second quarter of 1997 from
$10,642 the prior year. The increase in check sales was primarily attributable
to a decline in the backlog of customer orders.
For the six months ended June 30, 1997, sales of $46,431 were 5.7% lower
than the $49,258 revenues reported for the comparable 1996 period. Check sales
grew .5% to $22,385 in the first half of 1997 from $22,180 in the comparable
prior period. Personalized product sales decreased 13.6% to $16,574 in the
first six months of 1997 from $19,186 in the first half of 1996. This decrease
resulted from the planned elimination of less profitable mass media circulation
and the delayed placement of other such advertising. Catalog shipments were
7.9% lower at $4,821 through June 30, 1997, as compared to $5,356 in 1996,
which reflects the affects of lower response rates for the reason stated above.
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 second quarter of 1997 increased 30.6% to
$5,860 from $4,487 in the comparable period of 1996, which is a 6.2% increase
as a percentage of sales. The increase as a percentage of sales represents a
higher component of material cost allocated for check production with the
Company's outsourcing partner, as compared to mostly in-house manufacturing in
the prior comparable period. This increase in check material cost was offset
by less scrap and exchanges in personalized products and catalog manufacturing,
as well as a reduction in manufacturing overhead and direct labor expense
associated with the outsourcing of check production. The cost of materials for
the first six months of 1997 increased 13.6% to $11,880 from $10,463 in the
first half of 1996, which reflects a 4.4% increase as a percentage of sales
from year to year. The increase as a percentage of sales is due to the reasons
outlined above for the second quarter.
Direct labor decreased 24.7% to $1,299 in the second quarter of 1997 from
$1,725 in the second quarter of 1996, which represents a decrease of 2.0% as a
component of sales during that period. Such decrease is primarily attributable
to the elimination of in-house check production in late 1996, combined with
higher labor efficiencies in remaining production activities. Direct labor for
the first six months of 1997 decreased 30.5% to $2,532 from $3,643 in the first
half of 1996. This represents a decrease of 1.9% as a component of sales
during that period. The same reasons as above for quarterly direct labor
changes apply to the six month changes from 1996 to 1997.
Manufacturing overhead decreased 8.0% to $2,503 in the second quarter of
1997 from $2,718 in the comparable period of 1996, representing a .9% decrease
as a component of sales between periods. Employee benefits were lower in the
second quarter of 1997 due to lower employment levels attributable primarily to
the outsourcing of check production. Finally, depreciation expense decreased
due to the sale of check-printing equipment in the third quarter of 1996 in
connection with the outsourcing of check manufacturing to John H. Harland
Company ("Harland"). Manufacturing overhead decreased 15.2% to $4,982 in the
first half of 1997 from $5,875 in the comparable period of 1996. This
represents a decrease of 1.2% as a component of sales during that period. The
same reasons as outlined above for quarterly manufacturing overhead changes
apply to the six-month changes from 1996 to 1997.
SELLING, ADVERTISING, GENERAL AND ADMINISTRATIVE (SG&A)
The three largest components of SG&A expenses are advertising, postage and
labor.
Advertising expense of $8,781 in the second quarter of 1997 was
approximately equal to the $8,747 advertising expense in the comparable period
of 1996. Advertising expense decreased 9.3% to $17,395 in the first half of
1997 from $19,186 in the comparable period of 1996, which represents a decrease
of 1.4% as a component of sales. Advertising expense changes through June 30
represent the continuation of the Company's strategy to forego less profitable
advertising circulation.
Postage and shipping expense in the second quarter of 1997 increased 1.6%
to $2,017 from $1,985 in the comparable period of 1996, which represents a .2%
increase as a component of sales. The increase in postage is attributable to
an increase in the cost of check postage, shipping and handling with Harland,
offset by a decrease in this category for personalized products due to lower
exchanges and returns. Postage and shipping expense for the first six months
of 1997 decreased 3.7% to $4,256 from $4,417 in the comparable period of 1996,
which represents an increase of .2% as a component of sales. The same reasons
as above for quarterly postage and shipping changes apply to the six-month
changes from 1996 to 1997.
Other administrative expense increased in the second quarter of 1997 by
7.5% to $1,938 from $1,803 in the comparable period of 1996, representing an
increase of .6% as a component of sales. Other administrative expense
increased in the first six months of 1997 by 7.1% to $4,070 from $3,799 in the
comparable period of 1996, representing an increase of 1% as a component of
sales. These increases are primarily due to increased depreciation from the
implementation of a new management information computer system, higher
professional fees associated with business development efforts and non-
recurring personnel-related expenses.
OTHER
The Company recognized other income of $226 in the second quarter of 1997,
compared to an expense of $83 in the comparable period of 1996. Interest
expense decreased to $111 in the second quarter of 1997 from $187 in the
comparable period of 1996. 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. A substantial increase in
interest expense was not experienced by the Company in the second quarter
because the majority of its borrowings under the Revolver (as described in Note
5 to the Condensed Financial Statements) did not occur until the mid-to-late
June time frame. Net unrealized gains on trading securities increased to $223
in the second quarter of 1997 from $8 in the comparable period of 1996. The
Company recognized other income of $150 in the first six months of 1997,
compared to an expense of $262 in the comparable period of 1996. Year-to-year
changes through June 30 are due to the same reasons as discussed above.
TAX PROVISION
A tax provision of $30, reflecting an effective tax rate of 36%, was
recorded in the second quarter of 1997 as compared to no tax provision recorded
in the second quarter of 1996. The benefit of a net operating loss
carryforward was utilized in the second quarter of 1996, but due to 1997
expected profitability, a tax provision was required. A $419 tax provision was
recorded in the first six months of 1997 as compared to no tax provision in the
comparable six months of 1996. The reason stated above applies to the year-to-
year comparison.
NET INCOME
For the reasons discussed above, the Company's net income in the second
quarter of 1997 decreased to $53 or $.01 per share, from the prior period of
$430 or $.07 per share. The Company's net income in the first half of 1997
decreased to $744 or $.12 per share, from a net income of $1,102 or $.17 per
share.
LIQUIDITY & CAPITAL RESOURCES
Cash and cash equivalents, combined with marketable securities totaled
$3,372 at June 30, 1997 and $2,999 at December 31, 1996. Total liabilities
increased by $4,921 to $19,288 at June 30, 1997 from $14,367 at December 31,
1996, primarily because, as a result of its outsourcing arrangement with
Harland, the Company has no inventory for its check business but records
accounts payable for the cost of the subcontracted check production. Long-term
debt increased to $6,517 at June 30, 1997 from $1,034 at December 31, 1996 for
the reasons described in Note 5 to the Condensed Financial Statements. Income
tax payable decreased to $11 at June 30, 1997 from $113 at December 31, 1996.
Accounts payable increased by 6% to $10,439 at June 30, 1997 from $9,847 at
December 31, 1996, as inventories grew to service expected higher volume in the
second half of the year.
Working capital at June 30, 1997 was a negative $1.1 million. The Company
is operating with a working capital deficit as a result of the outsourcing
agreement with Harland in which the Company has no inventory for its check
business but records accounts payable for the costs of Harland's check
production. Cash flow in the second quarter of 1997 was also negative by $1
million as expected because of the Company's traditionally lower sales in the
second quarter.
The Company has historically met its cash requirements primarily from
operating activities. As described in Note 5 to the Condensed Financial
Statements, an aggregate of $4.5 million in payments were made in June of 1997,
all of which were funded from the Revolver. These payments, in combination
with negative cash flow of $1 million for the second quarter, elevated the
balance under the Revolver to $5.5 million with availability thereunder capped
by a borrowing base of $5.6 million. As of July 18, 1997, the Company
liquidated $1.5 million of its investments to pay down the Revolver. As of
August 11, 1997, the outstanding balance on the Revolver was $3.8 million and
the Company does not expect to further liquidate its other investments to pay
down the Revolver with such proceeds. Operating activities are again fully
funding the Company's cash requirements and the balance under the Revolver is
regularly declining.
Management believes that the operating activities of the Company, together
with the line of credit available under its Revolver, will substantially
support its cash requirements for the next twelve months and that sufficient
capital resources are available to the Company to provide adequate liquidity
overall.
Management is of the opinion that inflation will not have a material effect
on the operations of the Company.
As of June 30, 1997, the Company and Marine Midland Bank executed Amendment
No. 5 to the Revolver, filed herewith as Exhibit No. 10. This amendment
eliminated certain covenants and imposed minimum tangible net worth, capital
expenditure, cash flow and leverage tests, while extending the term of the
Revolver until January 1, 1999. The Company is in compliance under all
financial and operating covenants of the Revolver.
7
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ARTISTIC GREETINGS INCORPORATED
(UNAUDITED)
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on May 1, 1997. At
that Meeting, there were two Proposals acted upon. The first was the election
of the Company's Board of Directors. Joseph A. Calabro, Norman S. Edelcup,
Lyndon E. Goodridge, Stuart Komer, Alan F. Schultz, Irving I. Stone and Morry
Weiss were each re-elected as Directors of the Company for a one-year term.
The detail concerning the votes cast for, against and withheld from voting with
respect to each such Director was as follows:
Votes
Name For Against Withheld
J. Calabro 4,598,205 0 18,940
N. Edelcup 4,594,155 4,050 18,940
L. Goodridge 4,594,455 3,750 18,940
S. Komer 4,591,055 7,150 18,940
A. Schultz 4,598,205 0 18,940
I. Stone 4,594,005 4,200 18,940
M. Weiss 4,594,455 3,750 18,940
Also at this Meeting, the Company's stockholders ratified the selection of
Arthur Andersen LLP as the Company's independent auditors for its 1997 fiscal
year. The detail concerning the votes cast for, against and withheld from
voting with respect to this Proposal was as follows:
Votes
For Against Withheld
4,598,506 14,334 4,305
ITEM 5. OTHER INFORMATION.
Following the determination of Valassis to cause Valcheck to put its
500,000 shares to the Company, on August 4, 1997, Alan F. Schultz, a member of
the Company's Board of Directors since May 1995, resigned his position as a
member of the Board. The Board of Directors is considering the
replacement of Mr. Schultz.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits. See Exhibit Index.
b) Reports on Form 8-K. None.
8
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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: August 14, 1997 By: /S/THOMAS C. WYCKOFF
Thomas C. Wyckoff
Chief Operating Officer & Executive
Vice President
(Acting Principal Financial
and Accounting Officer)
9
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGES
<S> <C> <C>
10 Amendment No. 5 to Revolving Credit Filed Herewith
Agreement dated June 30, 1997,
between the Company and Marine
Midland Bank
11 Statement re: computation of per See Note 3 to the Financial
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)
99 Risk Factors Filed Herewith
</TABLE>
EXHIBIT 10
AMENDMENT NO. 5 TO
REVOLVING CREDIT AGREEMENT
THIS AMENDMENT NO. 5, dated as of June 30, 1997, is made by and between
ARTISTIC GREETINGS INCORPORATED, a Delaware corporation (the "Borrower")
and MARINE MIDLAND BANK, a bank organized under the laws of the State of
New York (the "Bank").
RECITALS:
WHEREAS, the Borrower and the Bank are parties to a Revolving Credit
Agreement, dated March 8, 1996, as amended by Amendment No. 1 to Revolving
Credit Agreement dated May 30, 1996, Amendment No. 2 to Revolving Credit
Agreement dated November 14, 1996, Amendment No. 3 to Revolving Credit
Agreement dated as of December 31, 1996 and Amendment No. 4 to Revolving
Credit Agreement dated as of March 31, 1997 (as so amended, the
"Agreement"); and
WHEREAS, the Borrower and the Bank desire to amend the Agreement as
originally executed for the purpose of extending the Termination Date and
modifying certain financial covenants as set forth below.
NOW THEREFORE, the parties hereto agree as follows:
ARTICLE 1. DEFINED TERMS.
(a) Except as otherwise provided herein, all terms used herein and
defined in the Agreement shall have the meanings ascribed to such terms in
the Agreement. The terms "Agreement," "hereunder," "herein," and similar
references in the Agreement shall be deemed to refer to the Agreement as
amended hereby.
(b) The definition of "Termination Date" shall be amended by deleting
such definition in its entirety and replacing it with the following:
"TERMINATION DATE" means January 1, 1999.
ARTICLE 2. AMENDMENT TO SECTION 5.8(3).
The Agreement shall be amended by deleting Section 5.8(3) in its
entirety and substituting the following Section 5.8(3) in lieu thereof:
(3) BORROWING BASE/CERTIFICATE OF NO DEFAULT. Within forty five
(45) days after the end of each fiscal quarter, a certificate of a duly
authorized executive officer of the Borrower (a) showing a calculation
of the Borrowing Base (which shall include, attached thereto, an
accounts receivable aging schedule) and (b) certifying that to the best
of his knowledge no Default or Event of Default has occurred and is
continuing or, if a Default or Event of Default has occurred and is
continuing, a statement as to the nature thereof and the action which
is proposed to be taken with respect thereto.
ARTICLE 3. AMENDMENT TO ARTICLE VII.
The Agreement shall be amended by deleting Article VII in its entirety
and substituting the following Article VII in lieu thereof:
ARTICLE VII
FINANCIAL COVENANTS
So long as any amount of the Note remains unpaid, this Agreement
remains in effect, or the Borrower shall have the right to borrow
hereunder:
SECTION 7.1 MINIMUM TANGIBLE NET WORTH. Commencing June 30, 1997,
the Borrower will maintain at all times a tangible net worth of not
less than (i) $12,000,000, plus (ii) 100% of the net proceeds of
capital stock issued by the Borrower after June 30, 1997. For the
purposes of this covenant, prepaid and deferred advertising expenses
shall be treated as tangible assets.
SECTION 7.2 CAPITAL EXPENDITURES The Borrower shall not permit
Capital Expenditures to exceed $5,000,000 in the aggregate during
fiscal 1997 and $3,000,000 in the aggregate during fiscal 1998.
SECTION 7.3 LEVERAGE RATIO. The Borrower will maintain at all
times a ratio of total liabilities to tangible net worth of not greater
than 2.25 to 1.0. For the purposes of this covenant, prepaid and
deferred advertising expenses shall be treated as tangible assets.
SECTION 7.4 CASH FLOW RATIO. The Borrower will maintain a ratio
of EBITDA to Total Debt Service of not less than 6.0 to 1.0, for the
twelve month period ending on the last day of each fiscal quarter. As
used herein, EBITDA means the Borrower's earnings before interest
expense, taxes, depreciation and amortization for such twelve month
period and Total Debt Service means all interest payments during such
twelve month period plus current maturities of long-term debt as of the
last day of such fiscal quarter.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES.
The Borrower represents and warrants to the Bank (which representations
and warranties shall survive the execution and delivery of this Amendment)
that each of the Representations and Warranties of the Borrower contained
in Article IV of the Agreement is true and correct on the date hereof. For
purposes of this Article 2, where a Representation and Warranty contained
in the Agreement makes reference to the Agreement, the term "Agreement"
shall be deemed, where appropriate, to include the execution, delivery and
performance of this Amendment.
ARTICLE 5. COSTS, EXPENSES AND TAXES.
The Borrower agrees to pay all costs and expenses in connection with
the preparation, execution, delivery, filing and recording of any of the
Loan Documents, including without limitation the reasonable fees and out-
of-pocket expenses of counsel for the Bank, and local counsel who may be
retained by said counsel, with respect thereto. In addition, the Borrower
shall pay any and all stamp and other taxes and fees payable or determined
to be payable in connection with the execution, delivery, filing, and
recording of any of the Loan Documents and the other documents to be
delivered (if any) under any such Loan Documents, and agrees to save the
Bank harmless from and against any and all liabilities with respect to or
resulting from any delay in paying or omission to pay such taxes and fees.
ARTICLE 6. AMENDMENTS.
This Amendment may not be amended or modified except in writing signed
by the Borrower and the Bank.
ARTICLE 7. SUCCESSORS AND ASSIGNS.
This Amendment shall be binding upon and shall inure to the benefit of
the Borrower, the Bank and their respective successors and assigns,
including each successive holder or holders of the Note (or any interest
therein).
ARTICLE 8. LIMITATION OF AMENDMENTS.
The amendments set forth herein are limited precisely as written and
shall not be deemed to be a consent or any waiver of or modification of any
other term or condition of the Agreement, the Security Agreement or any of
the instruments or agreements referred to therein, or prejudice any right
or rights which the Bank may now have or may have in the future under or in
connection with the Agreement, the Security Agreement or any of the
instruments or agreements referred to therein. Except as expressly
modified hereby, the terms and provisions of this Agreement and the
Security Agreement shall continue in full force and effect.
- 1 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the
day and year first above written.
ARTISTIC GREETINGS INCORPORATED
By: /s/ Thomas C. Wyckoff
Thomas C. Wyckoff
Executive Vice President and Chief Operating Officer
MARINE MIDLAND BANK
By: /s/ David Brooks
David Brooks
Vice President
- 2 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ARTISTIC
GREETINGS INCORPORATED'S FORM 10-Q FOR ITS QUARTER ENDED JUNE 30, 1997, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1.00
<CASH> 206
<SECURITIES> 3,166
<RECEIVABLES> 1,414
<ALLOWANCES> 75
<INVENTORY> 2,599
<CURRENT-ASSETS> 11,335
<PP&E> 28,926
<DEPRECIATION> 11,353
<TOTAL-ASSETS> 32,354
<CURRENT-LIABILITIES> 12,438
<BONDS> 6,517<F1>
0
0
<COMMON> 654
<OTHER-SE> 12,412
<TOTAL-LIABILITY-AND-EQUITY> 32,354
<SALES> 46,431
<TOTAL-REVENUES> 46,431
<CGS> 19,394
<TOTAL-COSTS> 26,024
<OTHER-EXPENSES> (322)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 172
<INCOME-PRETAX> 1,163
<INCOME-TAX> 419
<INCOME-CONTINUING> 744
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 744
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
<FN>
<F1>Long-term debt.
</FN>
</TABLE>
<PAGE>
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 three 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 and American Greetings Corporation control
approximately 48% 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 significantly influence the outcome
of matters put before the Company's stockholders.
