<PAGE>
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, 1998
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)
<TABLE>
<S> <C>
DELAWARE 16-0909929
-------- ----------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
ONE KOMER CENTER
ELMIRA, NEW YORK 14902
(607) 733-5541
--------------
(Address of principal executive offices, including Registrant's telephone number)
</TABLE>
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 8, 1998 the Registrant had 5,844,946 shares of its common stock issued
and outstanding.
<PAGE>
ARTISTIC GREETINGS INCORPORATED
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED MARCH 31, 1998
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 . 9
PART II. OTHER INFORMATION
Item 3. Other Information . . . . . . . . . . . . . . . . 13
Item 4. Exhibits and Reports on Form 8-K . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . 14
Exhibit Index . . . . . . . . . . . . . . . . . . 15
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARTISTIC GREETINGS INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
In Thousands of Dollars, Except per Share Data (Unaudited)
- ----------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17 $ 160
Marketable securities:
Trading, at market (cost $1,237 in 1998 and $1,230 in 1997) . . . . . . . . . . 1,557 1,403
Available for sale, at market (cost $409 in 1998 and $409 in 1997) . . . . . . . 494 458
Trade receivables - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,163 2,343
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420 420
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,459 2,518
Prepaid advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,320 3,492
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . 323 384
------- -------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,753 11,178
Deferred advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,400 3,683
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . 16,250 16,301
Cash surrender value of life insurance . . . . . . . . . . . . . . . . . . . . . . . 642 629
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 67
------- -------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $31,082 $31,858
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . $ 4,043 $ 4,494
Accounts payable, trade (includes checks in transit of $2,205 in 1998 and
$2,485 in 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,609 12,804
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,475 1,521
Customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 980 571
Income taxes and other payables . . . . . . . . . . . . . . . . . . . . . . . . . 347 --
------- -------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 18,454 19,390
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900 936
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258 283
------- -------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,612 20,609
STOCKHOLDERS' EQUITY:
Common stock, par value $.10:
Authorized: 10,000,000 shares;
Issued: 6,538,520 shares in 1998 and in 1997 . . . . . . . . . . . . . . . . . . 654 654
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,055 11,055
Unrealized (losses) gains on marketable securities held as available for sale,
net of tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 --
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 647 462
------- -------
12,392 12,171
Less: Treasury stock, at cost (695,356 shares in 1998 and in 1997) . . . . . . . . (922) (922)
------- -------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . 11,470 11,249
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . $31,082 $31,858
======= =======
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
3
<PAGE>
ARTISTIC GREETINGS INCORPORATED
UNAUDITED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Quarter Ended
-------------
March 31, March 31,
1998 1997
---- ----
In Thousands of Dollars, Except per Share Data (Unaudited)
- ----------------------------------------------
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,025 $ 24,218
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,342 9,512
---------- ----------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,683 14,706
Selling, advertising, general and administrative expenses . . . . . . . . . . . . . 14,503 13,550
---------- ----------
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 1,156
Other income (expense)
Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . 11 33
Net unrealized gains (losses) on trading securities . . . . . . . . . . . . . . . 145 (78)
Net realized gains (losses) on marketable securities . . . . . . . . . . . . . . 8 6
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (76) (60)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 22
---------- ----------
INCOME BEFORE TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289 1,079
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 388
---------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 185 $ 691
========== ==========
Net income per common and common equivalent share (basic and diluted) . . . . . . . .03 .11
========== ==========
Weighted average number of common shares outstanding . . . . . . . . . . . . . . . . 5,886,723 6,353,531
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
4
<PAGE>
ARTISTIC GREETINGS INCORPORATED
UNAUDITED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Quarter Ended
-------------
March 31, March 31,
1998 1997
---- ----
In Thousands of Dollars, Except per Share Data (Unaudited)
- ----------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 185 $ 691
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 599 424
Allowance for doubtful accounts. . . . . . . . . . . . . . . . . . . . . . . . . . 100 (75)
Net unrealized losses (gains) on trading securities . . . . . . . . . . . . . . . (145) 78
Net realized losses (gains) on marketable securities (equity) . . . . . . . . . . (8) (6)
Purchase of trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . (195) (384)
Proceeds from sale of trading securities . . . . . . . . . . . . . . . . . . . . . 172 362
Accretion of common stock subject to a put option . . . . . . . . . . . . . . . . -- 78
Decrease (increase) in cash surrender value of life insurance . . . . . . . . . -- (14)
Decrease (increase) in assets:
Trade receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 173
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 (304)
Prepaid advertising, prepaid expenses and other . . . . . . . . . . . . . . . . 1,263 1,265
Deferred advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (717) (867)
Increase (decrease) in liabilities:
Checks-in-transit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (279) 173
Accounts payable, trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . (915) (489)
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (47) (598)
Customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409 449
Income taxes and other payables . . . . . . . . . . . . . . . . . . . . . . . . 347 244
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES . . . . . . . . . . . . . 909 1,200
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . (568) (1,223)
Proceeds from sale of marketable securities . . . . . . . . . . . . . . . . . . . . 42 --
Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . (37) --
------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES . . . . . . . . . . . . . (563) (1,223)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowings from the lines of credit . . . . . . . . . . . . . . . . . . (9,262) (1,732)
Proceeds from the lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . 8,811 1,732
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13) (36)
------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES . . . . . . . . . . . . . (489) (38)
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . (143) (61)
Cash and cash equivalents at beginning of quarter . . . . . . . . . . . . . . . . . 160 99
------- -------
Cash and cash equivalents at end of quarter . . . . . . . . . . . . . . . . . . . . $ 17 $ 38
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the quarter for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75 $ (2)
Income taxes, net of refunds received. . . . . . . . . . . . . . . . . . . . . . . $ -- $ 145
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
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 1997
report on Form 10-K as amended by Forms 10-K/A, 10-K/A2 and 10-K/A3.
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>
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 was 5,886,723 for the quarter ended March 31, 1998 and 6,353,531 for
the quarter ended March 31, 1997.
The Company has adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128) and
restated previously reported earnings per share. Basic earnings per common
share was computed by dividing net income by the weighted average number of
shares of common stock outstanding during the three month periods ending March
31, 1998 and 1997. Diluted earnings per share were computed by the weighted
number of common shares outstanding and common stock equivalents using the
treasury stock method for the three month periods ending March 31, 1998 and
1997.
All references to net income per share should be assumed to have been
calculated under SFAS No. 128.
The following table sets forth the computation for basic and diluted
earnings per share for the three month periods ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
3 MONTHS ENDED 3 MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Net Income - basic $ 185 $ 691
Net Income - diluted 185 691
Shares used to compute
net income per share 5,886,723 6,353,531
</TABLE>
NOTE 4. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130 in the first quarter of 1998. This
standard requires disclosure of total non-owner changes in stockholders' equity,
which is defined as net income plus direct adjustments to stockholders' equity
such as equity and cash investment adjustments and pension liability
adjustments. On this basis, these non-owner changes in stockholders' equity,
including net income, for the first quarter of 1998 and 1997, totaled $278 and
$694, respectively.
<TABLE>
<CAPTION>
3/31/98 3/31/97
------- -------
<S> <C> <C>
Comprehensive Income:
Net Income $185 $690
Realized gains on available for sale
securities (net of tax $52 and
$2 in 1998 and 1997 respectively) 93 4
---- ----
Total Comprehensive Income $278 $694
==== ====
</TABLE>
7
<PAGE>
ARTISTIC GREETINGS INCORPORATED
(Unaudited)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
NOTE 5. PROPOSED MERGER
On December 21, 1997, the Company entered into an agreement and plan of
Merger ("Merger Agreement") with MDC Communications Corporation an Ontario,
Canada corporation, and AGI Acquisition Co., a Delaware corporation and a
wholly-owned subsidiary of MDC ("Newco") whereby Newco will merge with and into
the Company (the "Merger") pursuant to which the Company will become a
wholly-owned subsidiary of MDC and each outstanding share of common stock, par
value $0.10 per share, of the Company (other than stock of the Company owned by
the Company, MDC or any of their respective subsidiaries) will be converted into
the right to receive $5.70 in cash without interest. It is a condition to the
consummation of the Merger Agreement that the Company have completed an asset
distribution as set forth in an agreement ("Asset Purchase Agreement") between
the Company and Artistic Direct Incorporated ("ADI"), a New York corporation,
for the sale to ADI of certain assets relating to the personalized product and
catalog businesses of the Company (the "P&C" Businesses) for $9 million in cash
and the assumption of certain liabilities related to the P&C Businesses.
NOTE 6. GOING CONCERN MATTERS
As shown in the financial statements for the year ended December 31, 1997,
the Company incurred a net loss of $1,064 for the year and has classified its
revolver as current for the period ended March 31, 1998. These factors among
others raise substantial doubt about the Company's ability to continue as a
going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that may be necessary should
the Company be unable to continue as a going concern.
The Company was not in compliance with certain of the financial covenants
under its Revolver as of March 31, 1998. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flows to meet
its obligations on a timely basis, to comply with the terms of its Revolver
agreement, to obtain additional financing or refinancing as may be required, and
ultimately to attain profitability.
In light of the Company's projected earnings and cash flows, management
believes the Company has sufficient financial resources to maintain its current
level of operations. However, the Company has violated the minimum tangible net
worth and cash flow covenants for the first quarter of 1998. There can be no
assurance that the lender will provide a waiver for any future covenant
violations nor that the company will be able to obtain other financing.
Accordingly, the Company has classified the Revolver as current liability.
As described in Note 5, the Company has entered into an agreement and plan
of merger with MDC pursuant to which the Company will become a wholly-owned
subsidiary of MDC and the Revolver referred to above will be assumed by MDC. It
is a condition of the merger that the Company have completed the sales of
certain assets and the assumption of certain liabilities relating to the P&C
Businesses of the Company to ADI. ADI has obtained a commitment from a
financial institution to finance the acquisition of the P&C Businesses.
Further, should the plan of merger and asset purchase not occur, the
Company believes that it would be able to obtain other financing to replace the
Revolver. However, there can be no assurances that the Company will be
successful in obtaining such financing.
8
<PAGE>
ARTISTIC GREETINGS INCORPORATED
(Unaudited)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CERTAIN OF THE INFORMATION CONTAINED IN THIS FORM 10-Q CONTAIN 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 RISK FACTORS CONTAINED IN THIS ITEM 2, AS
WELL AS THE OTHER INFORMATION CONTAINED IN THE REPORT AND IN THE COMPANY'S
PERIODIC REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC" OR
"COMMISSION").
RESULTS OF OPERATIONS:
NET SALES
In the first three months of 1998, the Company's net sales increased 7.5%, to
$26,025 from $24,218 in the year earlier period. All three of the Company's
principal business lines (personalized products, catalog and checks) exhibited
gains due to better response rates from more effective advertising initiatives.
Personalized products marked a 5.9% advance, to $9,585 from $9,051, on the
strength of more sharply focused advertising in mass media. Catalog was up
26.7%, to $3,178 from $2,508, in response to wider circulation. Checks advanced
by 9.2%, to $12,386 from $11,338, mostly from increased prices.
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.
Materials cost increased to $6,899, or 26.5% of sales through the first three
months, from $6,021, or 24.9% of sales for the year earlier period, this largely
the result of a higher proportion of catalog sales in the overall revenue mix.
Direct labor charges were flat on a dollar basis, at $1,297 for the first
quarter of 1998 versus $1,295 for the first quarter of 1997. This represented,
on the period's higher volume, a decrease as a percentage of sales to 5.0% from
5.3%. Higher order entry and production costs driven by increased volume
through the quarter were more than offset by lower call center costs. The call
center function, which had been outsourced by the Company in the Fall of 1997 to
more efficiently handle seasonal volume, was not fully back in-house until mid
February, 1998.
Manufacturing overhead increased to $3,145, or 12.1% of sales for the first
quarter of 1998 from $2,195, or 9.1% a year earlier. Contributing to this
increase was the call center outsourcing arrangement, which shifted expense to
this category from direct labor; severance paid early in the quarter with work
force reductions; and higher depreciation expense.
9
<PAGE>
ARTISTIC GREETINGS INCORPORATED
(Unaudited)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
SELLING, GENERAL AND ADMINISTRATIVE (SG&A)
The three largest components of SG&A are advertising, postage and labor.
Advertising expense increased to $10,011, or 38.5% of sales for the first three
months of 1998, from $8,636, or 35.7% of sales in the comparable year earlier
period. Advertising expense for personalized products increased by 10.1%, to
$4,842 from $4,398, on wider circulation through mass media. Catalog
advertising expense grew by 32.5%, to $1,456 from $1,099, as more catalogues
were printed and circulated, consistent with the Company's plan to expand its
catalog revenues. Check advertising expense was up by 24.0%, to $2,847 from
$2,296, as the Company successfully pursued higher response rate vehicles and
broader mass media circulation.
Postage and shipping expense for the first quarter of 1998 increased to $2,390
from $2,239 for the first quarter of 1997. As a component of sales, however,
these costs remained flat at 9.2%. Higher relative mailing costs related to the
outsourced check-printing operation was balanced by more efficient matching of
multi-item orders of personalized and catalog products.
Administrative expenses were lower through the first three months of 1998, at
$2,101, or 8.1% of sales, from $2,330, or 9.6% of sales a year earlier. Reduced
personnel costs stemming from the restructuring of certain managerial
responsibilities contributed to the decline, as did lower depreciation expense.
OTHER EXPENSE (INCOME)
The Company recorded net other income of $109, or 0.4% of sales, through the
first three months of 1998, compared to a net other expense of $422 or (1.7)% of
sales for the year earlier peirod. Most of this swing results from the absence
in the first quarter of 1998 of accruals for employee incentive compensation or
for contributions to the Company profit sharing plan. In the first quarter of
1997, these accruals related to the earnings posted for the 1996 fiscal year; in
fiscal 1997 the Company posted a net loss. Additionally, the Company recorded a
$152 gain (realized and unrealized) on its portfolio of marketable securities in
the most recent quarter, this compared to a loss of $72 for the year earlier
period.
TAX PROVISION
A tax provision of $104 was recorded for the first three months of 1998,
compared to $389 for the first three months of 1997. Both provisions reflect an
effective tax rate of 36%.
NET INCOME
The Company posted net income for the first quarter of 1998 of $185, or $0.03
per share. This compares to $691, or $0.11 per share, for the year earlier
period.
10
<PAGE>
ARTISTIC GREETINGS INCORPORATED
(Unaudited)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
LIQUIDITY & CAPITAL RESOURCES
In March 1996, the Company refinanced a demand discretionary line of credit with
Marine Midland Bank ("Marine") under which it can borrow up to $6,500, with a
revolving line of credit that is committed to the Company until January 1, 1999,
(the "Revolver"). The Company may borrow and repay at its option, and issue
letters of credit, up to an aggregate of $6,500 under the Revolver at either
Marine's quoted Prime Rate or the Money Market Rate as quoted by Marine at the
time of borrowing. Additionally, Marine has provided letters of credit to
secure workers' compensation obligations of the Company in the amount of
approximately $107, which expire on March 31, 1999. The amount of borrowings
available to the Company under the Revolver is dependent upon the amount of
accounts receivable and inventory, and the value of certain intangibles of the
Company (collectively, the "Collateral"), determined at the time as such
borrowing base is calculated quarterly. The Revolver is secured by the
Collateral. The Revolver contains a restriction on the payment of dividends as
well as financial and operating covenants requiring, among other things, the
maintenance of certain financial ratios, including minimum net worth, leverage
and working capital requirements. Various modifications, including working
capital covenants, maturity date and valuation of collateral were made effective
May 30, 1996; November 30, 1996; December 31, 1996; March 31, 1997 and June 30,
1997. The Revolver can be prepaid by the Company at any time without penalty.
As of March 31, 1998, the Company was not in compliance with its minimum
tangible net worth and cash flow ratio covenants. As of May 14, 1998, the
Company had requested and received from Marine a waiver of these covenants as of
March 31, 1998.
Cash and marketable securities totaled $2,021 at December 31, 1997 and $2,068 at
March 31, 1998. Total liabilities decreased by $997, to $19,612 at March 31,
1998 from $20,609 at December 31, 1997. Long term debt decreased by $36, to $900
at March 31, 1998 from $936 at December 31, 1997. Accounts payable were reduced
by $915, to $9,404 at March 31, 1998 from $10,319 at December 31, 1997, while
checks in transit dropped by $279, to $2,205 at March 31, 1998 from $2,485 at
December 31, 1997.
Working capital remained negative at March 31, 1998, the working capital deficit
growing to $8,701 from $8,212 as the increase in deferred advertising was only
partially funded by the period's earnings. Accounts receivable dropped by $181
over the first quarter on improved collections. Inventory of $2,459 at March 31,
1998, was slightly lower than at the recent year end, which in combination with
the quarter's higher volume served to reduce inventory turns to 17 days from 20.
Prepaid advertising dropped by $1,171 over the three month period, the combined
result of the distribution during the quarter of several catalogues and other
advertising media and the reduction of expenditures in this area in anticipation
of seasonal slowing during the second quarter. Deferred advertising,
accordingly, increased by $717, reflecting the higher quantity of active media
in circulation.
The Company had total availability under the Revolver of $6,500 at March 31,
1998, which is subject to a borrowing base formula and certain other conditions.
As of May 6, 1998, the Company had $4,699 outstanding under the Revolver and,
based upon the borrowing base formula, had the entire remaining balance, or
$1,801, available to it thereunder. For additional information concerning the
terms of the Revolver, see the first paragraph above.
Management believes that the operating activities of the Company, together with
the availability under the 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. As of May
14, 1998, the Company had requested and received from Marine a waiver of the
covenants pertaining to the minimum tangible net worth and cash flow ratios of
the Company for the period ending
11
<PAGE>
ARTISTIC GREETINGS INCORPORATED
(Unaudited)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
March 31, 1998. If the waiver were withdrawn or did not become effective, the
Company could be in default of its obligation under the Revolver. Management is
of the opinion that inflation will not have a material effect on the operations
of the Company.
12
<PAGE>
ARTISTIC GREETINGS INCORPORATED
(Unaudited)
PART II - OTHER INFORMATION
ITEM 3. OTHER INFORMATION.
NONE
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits. See Exhibit Index.
b) Reports on Form 8-K. None.
13
<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 14, 1998 By:
---------------------------------------------
David A. Preucil
Vice President Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
14
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGES
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
15
<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.
16
