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FORM 10-K/A2
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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)
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<S> <C>
DELAWARE 16-0909929
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
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ONE KOMER CENTER
ELMIRA, NEW YORK 14902
(607) 733-5541
(Address of principal executive offices, including telephone number)
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.10 PER SHARE
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the Registrant's voting stock held by
non-affiliates was approximately $17,368,103 on March 2, 1998.
As of March 2, 1998, the Registrant had 5,843,406 shares of its common stock
issued and outstanding.
This report on Form 10-K/A2 constitutes Amendment No. 2 to the registrant's
Form 10-K for the year ended December 31, 1997 and restates the registrant's
Form 10K, as amended by Form 10K/A in its entirety.
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PART I
ITEM 1. BUSINESS.
CERTAIN OF THE INFORMATION CONTAINED IN THIS FORM 10-K, INCLUDING THE
DISCUSSION WHICH FOLLOWS IN THIS ITEM 1 OF THE COMPANY'S PLANS AND STRATEGIES
FOR ITS BUSINESS AND RELATED FINANCING AND THE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A") FOUND IN ITEM
7 OF THIS REPORT, 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 1, AS WELL AS THE OTHER INFORMATION CONTAINED IN
THIS REPORT AND IN THE COMPANY'S PERIODIC REPORTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION (THE "SEC" OR "COMMISSION").
GENERAL
Artistic Greetings Incorporated ("Artistic" or the "Company") sells, markets
and manufactures domestically a broad range of personalized products focused on
three core business lines (i) personalized bank checks ("Checks"), (ii) name and
address products ("Personalized Products") and (iii) gift items (some of which
are personalized), greeting cards, apparel and household consumable items
("Catalog Items"). The merchandise is sold via free standing newspaper inserts
("FSIs"), co-op mailing programs ("Co-ops" and, together with FSIs, "Mass
Media") and catalogs throughout the United States. The Company also generates
revenues from personalized product and catalog fulfillment services
("Fulfillment Services"), package insert programs ("PI Programs") and mailing
list rentals to other concerns ("List Rentals"). Additionally, the Company
conducts an advertising and sales campaign over the Internet where its
interactive, order-capable home page can be found at www.artisticgreetings.com.
The Company also markets certain of its merchandise internationally in countries
which include Canada, the United Kingdom (the "U.K.") and Australia.
SUBSEQUENT EVENTS
On January 26, 1998, the Company filed with the Commission a preliminary
Proxy Statement (the "Preliminary Proxy Statement") on Schedule 14A and a Rule
13e-3 Transaction Statement (the "Schedule 13E-3") relating to a proposed merger
and the asset sale by the Company. On March 13, 1998, the Company filed a
revised Proxy Statement (the "Revised Proxy Statement") and an amendment to the
Schedule 13E-3 (the "Amendment No. 1 to the Schedule 13E-3") whereby the
stockholders of the Company (the "Stockholders") are asked to vote upon the
following proposals, which have been unanimously approved by the Board of
Directors (the "Board").
1. Consider and vote upon a proposal (the "Merger Proposal") to approve
and adopt the Agreement and Plan of Merger (the "Merger Agreement"),
attached as Annex I to the Revised Proxy Statement, dated as of December 21,
1997, among MDC Communications, an Ontario, Canada corporation ("MDC"), AGI
Acquisition Co., a Delaware corporation and a wholly-owned subsidiary of MDC
("Newco"), and the Company, and to approve consummation of the merger of
Newco with and into the Company (the "Merger"), pursuant to which (a) the
Company will be the surviving corporation and will become a wholly-owned
subsidiary of MDC and (b) each outstanding share of common stock, par value
$0.10 per share (the "Shares"), 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 (the "Merger
Consideration"), without interest. Consummation of the transactions
contemplated by the Merger Agreement is conditioned upon consummation of the
Asset Sale described below.
2. Consider and vote upon a proposal (the "Asset Sale Proposal") to
approve and adopt the Asset Purchase Agreement (the "Asset Purchase
Agreement"), attached as Annex II to the Revised Proxy Statement, dated as
of December 21, 1997, between Artistic Direct Incorporated, a New York
corporation ("ADI"), and the Company, and to approve the sale (the "Asset
Sale") of certain assets
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relating to the Personalized Product and Catalog Businesses of the Company
(the "P&C Businesses") for the consideration set forth therein and the
assumption of certain liabilities relating to the P&C Businesses, on the
terms and conditions more fully described therein. Consummation of the
transactions contemplated by the Asset Purchase Agreement is conditioned
upon consummation of the Merger.
3. Consider a proposal to adjourn the Special Meeting if necessary to
permit further solicitation of proxies in the event there are not sufficient
votes at the time of the Special Meeting to approve and adopt the Merger
Agreement and the Asset Purchase Agreement and to approve the Merger and the
Asset Sale.
4. Transact such other business as may properly come before the Special
Meeting or any adjournments or postponements thereof.
In the event the Stockholders of the Company (i) vote in favor of the
proposal to approve and adopt the Merger Agreement and approve consummation of
the Merger but vote against the proposal to approve and adopt the Asset Purchase
Agreement and approve consummation of the Asset Sale or (ii) vote in favor of
the proposal to approve and adopt the Asset Purchase Agreement and approve
consummation of the Asset Sale but vote against the proposal to approve and
adopt the Merger Agreement and approve consummation of the Merger, neither
transaction will be consummated. Subject to certain conditions, holders of
approximately 45% of the Shares of the Company have agreed with MDC to vote
their Shares in favor of approval and adoption of the Merger Agreement, the
Merger, the Asset Purchase Agreement and the Asset Sale.
The items of business to be considered at the Special Meeting are more fully
described in the Proxy Statement. Details of the Merger Agreement, the Merger,
the Asset Purchase Agreement, the Asset Sale and other important information
concerning the Company appear in the Proxy Statement.
For the reasons set forth in the Proxy Statement, the Board based upon the
unanimous recommendation of the two non-interested directors and of a special
committee of the Board, has approved the Merger Agreement and the Asset Purchase
Agreement and consummation of the Merger and the Asset Sale and has determined
that the Merger is fair and in the best interests of the Company and its
unaffiliated Stockholders and has recommended a vote by the Stockholders of the
Company for approval and adoption of the Merger Agreement and the Asset Purchase
Agreement and approval of consummation of the Merger and the Asset Sale.
Consummation of the transactions contemplated by the Merger Agreement is
conditioned upon consummation of the Asset Sale.
MARKETING AND PROMOTION
The Company's advertising efforts for its Checks and Personalized Products
are focused primarily on Mass Media. An exclusive agreement with Valassis
Communications, Inc. ("Valassis") provides the Company with a right of first
refusal to participate in Valassis FSI media publications distributed through
Sunday newspapers in 55 million homes across the country at least 48 weeks each
year (the "Advertising Agreement"). The Company considers this exclusive access
to its customers crucial to geographically and demographically targeting, and
profitably managing, its customer solicitation efforts. In particular, the
Advertising Agreement enables the Company to target its advertising and measure
response from customers in regions which have historically produced the highest
response rates for specific products, as well as determine which regions are
less suitable for the Company's solicitation efforts.
Since the early 1980's, Artistic has also participated in nationwide Co-op
mailing programs in order to enhance its domestic market penetration. Under
these programs, printed inserts advertising the Company's products are
distributed through the mail along with inserts of other participating
marketers. Additionally, the Company has been advertising in Co-op mailings in
Canada and Australia since 1993 and 1997, respectively, and PI Programs in the
U.K. since the late 1980's.
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The Company also distributes its catalog, The Personal
Touch-Registered Trademark-, through the mail and in the Company's PI Program.
The Personal Touch Catalog-Registered Trademark- is a digest-size catalog of low
to middle-priced consumer products that mails monthly, with four distinct
seasonally thematic merchandise groupings (Spring, Summer, Fall and Holiday).
More than 90% of the 400,000 Personal Touch Catalog-Registered Trademark-
customers who have purchased merchandise from the catalog in the last 12 months
are middle to upper income bracket (average income above $50,000), educated
females between 25 and 55 years old. The catalog features personalized and
decorative labels, stationery, greeting cards, gifts, apparel and creative
accessories. The three major product groupings sold in the catalog are: (i)
utilitarian paper, labels, home/office paper and productivity tools, (ii)
licensed character items and (iii) natural-decoratively themed items such as
flowers, angels and animals.
The Company began to advertise its Checks on the World Wide Web in August
1994. The web pages have had the advantage of showing substantially all
available Artistic Check designs, and the Company has recently completed the
next step in an ongoing initiative to expand its Internet presence to include
Personalized Products, with an order-capable Internet server displaying a home
page at www.artisticgreetings.com.
CHECKS
GENERAL. Artistic Checks-Registered Trademark-, the Company's Check product
line, was initiated in August 1993 and was expanded in May 1995 through the
acquisition from Valassis of the assets of its direct-mail check operation, The
Valcheck Company (the "Valcheck Acquisition"), which, like the Company, had been
engaged in the direct-mail check distribution channel (the "Direct-Mail
Channel"). The Valcheck Acquisition added significantly to the Company's check
sales and added nearly one million names to its customer list. Check sales
represented 46% of the Company's 1997 net sales, compared with 44% and 39% in
1996 and 1995, respectively. Artistic subcontracts its check printing through an
arrangement with the John H. Harland Company ("Harland") at a
contractually-determined price per box of checks printed. For a further
description of this arrangement, see "Manufacturing--Checks."
MARKETPLACE. Management believes that the domestic market for personalized
bank checks in 1997 was approximately $2 billion in sales with checks being sold
through financial institutions (the "Bank Channel") representing 85% or $1.7
billion and the Direct-Mail Channel representing 15% or $300 million of the
total. The Company believes that the total market for checks in the United
States is growing at a 2% to 3% rate annually, which, management believes,
represents a diminishing per capita usage of checks as electronic banking and
debit card usage increases, offset by the growth in population of the United
States. The slow growth of the total check market does not, however, reflect
negatively on the Direct-Mail Channel which has seen growth rates averaging
10%-12% per year over the past five years, as consumers continue to recognize
the significant favorable price differential, convenience, variety of design and
high quality of checks offered through the Direct-Mail Channel.
The Direct-Mail Channel is fragmented with a trend toward consolidation
similar to that evidenced over the past five to seven years in the Bank Channel,
where regional-check marketers and manufacturers took advantage of economies of
scale by merging with larger companies like Deluxe Corporation ("Deluxe"),
Harland and Clarke American ("Clarke American"). Management believes that the
high solicitation costs of new customers in the Direct-Mail Channel favors
established, direct-mail check purveyors like Artistic over the long-term. This
advantage results from the costs of acquiring new customers being financed by
higher-margin check reorders for which the Company incurs virtually no
advertising expense, thereby increasing profitability and supporting the ongoing
expense of advertising campaigns for first-time customers. The largest
direct-mail check producer in the Direct-Mail Channel is Current, Inc., owned by
Deluxe, with an estimated 40% share of the Direct-Mail Channel in 1997. The
Company believes that its sales are approaching those of its nearest size
competitor, Checks In The Mail, a subsidiary of Clarke-American, and that both
companies are vying for the number two position in the Direct-Mail Channel, with
another approximate 33% share of the Direct-Mail Channel between them in
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1997. Management believes that the remaining share of the Direct-Mail Channel is
represented by numerous other smaller companies.
STRATEGY. In the Check business, management expects regular and predictable
growth to occur in initial customer orders as advertising continues at levels
similar to those experienced in 1997 and 1996, with higher growth in revenue
from the check-reorder stream as customers acquired previously return to
Artistic to replenish their check supplies at the Company's low-reorder prices.
BUSINESS CHECKS. The Company began a campaign in 1997 for the sale of
three-to-a page business and desk checks ("Desk Checks") in its mass media
advertising vehicles. The Company believes that the sale of Desk Checks
represent 8% of the total check market and that such percentage will continue to
grow as consumers recognize Desk Checks as a convenient and efficient
alternative to the traditional pocket check.
PERSONALIZED PRODUCTS
GENERAL. Personalized Products consist primarily of labels, miniprinters,
stamps and other lower-price point items, personalized in high volume for
millions of the Company's customers. The shipment of these approximately 3
million units in 1997 has the additional benefit to the Company of providing
"ride-along" opportunities for the Company's own advertising material, including
its catalog, as well as the sale of the space in those packages to third parties
in the Company's PI Program. See "--PI Program." Personalized Products sales
represented 33% of the Company's 1997 net sales, compared with 37% and 45% in
1996 and 1995, respectively.
Personalized Products include labels, pens, pencils, stationery, calling
cards, self-inking stampers, other stamps, memo pads, keychains, nameplates,
letter openers, hand embossers, luggage tags and greeting cards. The Company
also markets Personalized Products with images such as Looney Toons-TM- and Star
Trek-TM- licensed from Warner Brothers and Viacom Consumer Products,
respectively, among others.
MARKETPLACE. Management believes that the approximate domestic market size
for this segment in 1997 was approximately $250 million in sales. Artistic's
1997 sales of $34 million in this segment represented an approximate 13% market
share, making it a major competitor along with Current and Concepts Direct,
Inc., among others, in this category. Management believes that the Personalized
Products market has growth potential of approximately 3%-5% per annum, which
would tend to minimize the entrance of new participants. There exists severe
price competition in this product line as the customers' primary focus in their
purchase decision for these highly consumable products is price.
Success in this segment is driven partially by the ability to utilize
existing printing technologies and Mass Media marketing techniques to access new
market segments, by leveraging database expertise and by targeting new customers
and repeat buyers. The Company is redesigning the management of its database
with the assistance of a third-party partner whose expertise and advice the
Company believes should enable it to more scientifically determine, among other
things, Artistic's "best" customers across its name lists and allow the Company
to cross-sell and more carefully deliver its product offerings to such proven
buyers. See "--List Rentals."
STRATEGY. In the P&C Businesses, management expects to maintain sales at
traditional levels in the United States, while continuing to test the
international marketplaces in such areas as the U.K. and Australia. The
Company's strategy is to attempt to replicate abroad its domestic success with
the Personalized Products line by focusing on new customers who do not have
readily available access to the simplicity and convenience of labels,
miniprinters and other Personalized Products, which the Company can manufacture
and ship quickly and efficiently. An added benefit of the international
marketplace is the Company's ability to introduce and market its Personalized
Products at higher price points than are available domestically, potentially
improving overall Company margins.
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CATALOG
GENERAL. More than ten years ago, the Company began a catalog solicitation
program as a tool to market the Company's Personalized Products and broaden the
number of products sold, as well as to attract a more upscale market with higher
margin merchandise and to increase its mail-order customer base. The Company
distributes its catalog through direct mailings to its own customers, to
customers whose names are rented from mailing lists and by inclusion of its
catalog in each of the millions of boxes shipped in the Company's PI Programs
each year, as well as in orders shipped by other catalog and merchandise
mailers. In 1997 Artistic shipped more than 23 million catalogs and expects to
distribute 3% less in 1998. Catalog sales represented 18% of the Company's 1997
net sales, compared with 15% and 10% in 1996 and 1995, respectively.
MARKETPLACE. Management believes that the direct mail, Catalog Items market
has annual sales in excess of $800 million. With an approximate 2% market share,
the Company is a relatively small competitor and believes it has significant
growth opportunities in this market. Management believes that gift and
merchandise companies compete in three distinct demographic income segments:
low-middle; upper-middle; and upper. Artistic's PERSONAL TOUCH
CATALOG-Registered Trademark- targets primarily upper-middle level income
customers, defined as those with household incomes higher than $50,000.
STRATEGY. In the Catalog Items business the Company is expecting sales
growth and improved margins from its newly refocused PERSONAL TOUCH
CATALOG-Registered Trademark-. The Company has redesigned the layout of the
PERSONAL TOUCH CATALOG-Registered Trademark- and has refined its product
offerings to further appeal to its upper-middle income and primarily female
customers. The Company is furthering its plan to build the circulation and sales
performance of the PERSONAL TOUCH CATALOG-Registered Trademark- by
systematically accentuating the most successful products and eliminating those
evidencing the poorest performance. Concurrently, management has determined to
leverage its fixed expenses of this well-established franchise by offering to
provide marketing and manufacturing fulfillment services to other catalog
merchants--primarily in the nonprofit sector--where the economies of developing
new catalog programs are somewhat more favorable than in the "for-profit"
sector. For a further description of these efforts, see "Fulfillment
Services--HSUS."
While the Check and Personalized Product businesses employ more aggressive
pricing to attract customers, the Catalog Items market relies more on the
novelty, variety and quality of merchandise to secure orders. Sales tend to be
more seasonal with a large percentage of sales occurring during the October
through December period. However, with the strategic development of the breadth
of product in the PERSONAL TOUCH CATALOG-Registered Trademark- described above,
management expects to mitigate the historically cyclical nature of this
business.
FULFILLMENT SERVICES
GENERAL. The Company has a highly efficient, well-established marketing and
manufacturing infrastructure which it maintains to service its three core
business lines. This infrastructure is flexible, scaleable and lends itself to
providing additional capacity in a low-cost manner. The Company has contracted
to produce for Harland stampers and miniprinters ("Stamps") sold through
Harland's network of financial institutions (the "Harland Stamp Program") and
has completed the first year of a five-year arrangement with The Humane Society
of the United States ("HSUS") to market, merchandise and fulfill orders for its
HSUS catalog program (the "HSUS Catalog Program").
HARLAND STAMP PROGRAM. In furtherance of the Company's relationship with
Harland as described under "Manufacturing--Checks," Harland has contracted to
have the Company produce its requirements for "Slim Stamps" and for a high
percentage of Harland's requirements for the production of other Stamp products.
Harland receives orders for Stamps from its customers, processes the orders and
electronically transmits the personalized information directly to the Company's
manufacturing facility where the Stamps are produced and shipped, generally
within a twenty-four hour period. Although the revenue derived from
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the Harland Stamp Program, which began in September of 1996, does not represent
a significant portion of the Company's sales, management believes that, because
of the success of the program, additional opportunities exist to produce more
Stamps and other products for Harland and other third parties.
HSUS CATALOG PROGRAM. The HSUS is an international, non-profit organization
devoted to the promotion, protection and the humane treatment of animals.
Artistic and the HSUS have agreed to a five-year program in which Artistic
provides its catalog expertise to create, design, merchandise and fulfill orders
in keeping with the mission-related activity of the HSUS. The Company is a
"turnkey" provider of these services to the HSUS. The services provided to the
HSUS have been developed with limited additional cost as the Company is
utilizing its existing capabilities for marketing, production and fulfillment of
its PERSONAL TOUCH CATALOG-Registered Trademark-.
PI PROGRAMS
The Company's PI Program is an important element in the continuing
development of its ability to access, service and solicit orders from its
established customer base of over 7 million buyers. The PERSONAL TOUCH
CATALOG-Registered Trademark- and other Artistic advertising material is
inserted in each package that is shipped to the Company's customers and provides
an inexpensive means of targeted solicitation to proven Artistic buyers that
results in favorable response rates. As the Company's customer base continues to
grow through general sales activity, the PI Program becomes a more powerful
marketing asset of the Company. The Company also derives revenue from the
marketing of the space in its outgoing packages to other direct-mail
participants for their advertising to "ridealong" with the Company's shipments.
LIST RENTALS
Artistic has approximately 400,000 PERSONAL TOUCH
CATALOG-Registered Trademark- customers who have purchased Catalog Items from
the Company in the past 12 months, 3 million direct-to-consumer check customers,
and 3.5 million customers of other P&C Businesses advertised in Mass Media
(collectively, the "Artistic Names"). As of January 1, 1997, the Company
contracted with Brigar Computer Services, Inc. and Direct Marketing
Technologies, Inc. ("BDT") for the management and maintenance of the Artistic
Names. With support, training and advisement of the BDT consultants, Artistic
has been able to more effectively utilize its catalog database management,
statistical modeling and other file management techniques such as recency-
frequency-monetary file segmentation. As a result of the proven success of sales
through Artistic's in-house PI Program, management will continue to focus on
building package insert opportunities or the "back end," to leverage the
Artistic Names as that list continues to grow. Additionally, management is
focusing on cross-selling between the Artistic Names and the names of the
partners for whom it will conduct catalog fulfillment and other services. The
Company has also historically generated revenue from the rental and exchange of
the Artistic Names to and with other direct-mail companies. Management expects
that with its renewed focus on the maintenance of the Artistic Names, the
Company should derive additional revenue from such list rental activities as it
becomes easier to market the Artistic Names to other direct mailers who would
benefit from the characteristics of the Artistic customers represented by the
Artistic Names.
MANAGEMENT INFORMATION SYSTEMS
In 1996 the Company began an extensive effort to overhaul its entire
information systems infrastructure following a full-scale review of the
Company's system capabilities. The study determined that the Company was
enduring substantive capacity and reliability problems with its proprietary
software and hardware. After the completion of the systems assessment in July of
1996, a strategic information systems plan was developed and a software package
systems selection made. The following improvements have been accomplished in
1997:
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- Aging proprietary enterprise hardware was replaced with an open systems
architecture relying on common HP 9000 hardware and the UNIX operating
system, which has been networked with client/server enterprise
applications and PC based office automation tools.
- Proprietary financial and inventory systems were replaced with Lawson
Insight, a client/server based enterprise software package.
- Existing PICK operating system-based order processing protocol was
converted to run under the UNIX operating system on the new HP 9000
hardware.
- Use of stand-alone PC's was consolidated to a modern PC network running
standard Microsoft Office tools with e-mail and on-line calendaring and
scheduling systems for office automation.
From this enterprise-wide effort, the Company experienced enhanced access to
financial and operational information for decision making and control in terms
of both order content and timeliness of production and delivery, as well as a
flexible information system architecture that can be easily scaled upward to
support growth of the Company's business.
MANUFACTURING
CATALOG ITEMS AND PERSONALIZED PRODUCTS. The Company personalizes
approximately 90% of the products that it sells, while other items are
manufactured by outside vendors, "pick-packed and shipped" at Artistic Plaza or
"drop-shipped" directly from the vendor. The Company has completed renovation of
Artistic Plaza, a 142,000 square foot facility, which provides the necessary
space for all current manufacturing operations of the Company. Management
believes that housing all manufacturing under one roof has decreased the cost of
material movement and increased productivity through more efficient utilization
of its personnel.
Manufacturing operations utilize some of the newest technology available for
production of the Company's products. Activities are monitored to provide
up-to-the-minute order tracking and training programs assure a qualified group
of employees. Quality assurance is maintained to provide the Company's customers
with the highest degree of accuracy of product received.
The Company maintains a wide variety of paper inventory to meet the demand
for its customers' orders. The Company has been better able to plan its
inventory replenishment cycle which reduces the commitment of large amounts of
working capital to inventory. These improvements have been accomplished through
major programs such as supplier partnerships, replenishment, just-in-time
material management, consigned supply and inventory concepts, and strict quality
management practices. These approaches have resulted in reduced supply freight
costs and scrap costs, and more efficient reporting and tracking procedures and
controls. The warehouse operations utilize efficient storage location and
handling methods to ensure security of materials, reduced loss and damage, and
ease of movement. These concepts add to a more efficient and low-cost operation.
CHECKS. On August 29, 1996, the Company contracted with Harland for the
production of the Company's requirements for checks for a period of seven years
(the "Harland Contract"). All orders for Check products are received by the
Company, processed and electronically transferred to a Harland production
facility in Denver, Colorado. Harland imprints the customers' checks and ships
the orders directly from its facilities for a contractually determined price per
box. The Harland Contract is a valuable asset to the Company as it provides for
virtually unlimited check production capacity with no significant limitations or
capital expenditure requirements which would otherwise be associated with the
growth of the Check-product line. As a part of the Harland Contract, the Company
sold its check-production equipment to Harland at net book value resulting in no
gain or loss being recognized. The Company believes that its relationship with
Harland is positive.
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BACKLOG/POSTAGE. The Company's backlog of orders is generally small in
relation to total sales and is not material to an understanding of the Company's
business. Additionally, rapid order fulfillment is one means by which the
Company can distinguish itself from its competition. Once a product is available
for shipment, the mode of transportation can be U.S. bulk mail, priority mail or
Federal Express. Because the Company is heavily involved in direct-mail
solicitations and shipping of orders, increases in U.S. Postal Service ("USPS")
rates affect its cost of doing business to a degree. Each time the USPS raises
postage rates, the Company evaluates the classes of postage affected, the rates
of increase and the potential impact on Company profits before it passes those
increases on to its customers. The Company ships 2% of its products through
private shipping providers such as Federal Express pursuant to contractual
arrangements. The cost of such shipping is, generally, passed on to the customer
and the Company is therefore not detrimentally affected by changes in price
structure under such contracts.
DATA ENTRY/ORDER PROCESSING. Over 6.9 million incoming orders were handled
in the Company's order processing department in 1997. Approximately 85% of the
Company's orders are received through the mail, with the remainder being
accepted via the telephones. The orders received through the mail are opened,
processed and batched for data entry usually within four hours of receipt from
the post office.
Two data entry sites, one at Artistic Plaza and the other in Binghamton, New
York, key and verify each order. Networked computers utilizing post-relational
database technology, along with fully integrated scanning devices, assist data
entry clerks in the entry of personalized and other information related to each
order. The speed and accuracy consistently exhibited by this department
contributes to a high level of customer satisfaction, as well as the retention
and growth of repeat customers.
THE CALL CENTER. An increasing percentage of the Company's revenue is being
generated through its call center. In 1997, over 2.4 million telephone calls
were answered as compared to 3.2 million calls in 1996. Though the volume of
calls has decreased, the overall revenue from the phone center has increased.
This is a direct reflection of the reduction of customer service related phone
calls. With a base of over 12 million customers, along with a direct link to the
manufacturing floor, the customer service/call center representatives are able
to recall detailed order history, facilitating customer inquiries, reorders or
problem resolution. The use of cross-selling and "up-selling" techniques results
in the average order from the Company being 20-30% higher when placed over the
telephone versus when it is received through the mail.
RAW MATERIALS. The raw materials necessary for the Company's business are
principally paper, paper products and printing supplies. While increases in the
prices of these commodities affect the Company's cost of goods sold, such
increases likewise affect the Company's competition; thus, it is not uniquely
vulnerable to such changes. The Company historically has found the necessary
materials readily available in sufficient quantities.
EMPLOYEES. As of March 2, 1998, the Company had approximately 549
employees, including 477 hourly and 72 salaried workers. The Company maintains
strong employee relations which has helped to build a cohesive organization that
is focused, innovative and highly motivated. To enhance its workforce, Artistic
has established ongoing programs for employee training, safety and
communications. The Company believes its employee relations to be good. Artistic
has never experienced a work stoppage and its employees are not represented by a
labor union.
8
<PAGE>
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 as well as a net loss in 1997 of $1.1 million. There can be no
assurance 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, 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 has significantly upgraded its management information system, there can
be no assurance that the new system will continue to deliver the full range of
data processing functionality demonstrated to date.
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 three of its 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 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 6 of this 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 ("AGC") control approximately 45% 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.
NON-CONSUMMATION OF THE MERGER AND/OR THE ASSET SALE. The consummation of
the Merger and the Asset Sale require Stockholder consent. There can be no
assurance that the Company will be successful in receiving such Stockholder
consent for the Merger and the Asset Sale at the Special Meeting. Further, the
consummation of the transactions contemplated by the Merger Agreement is
conditioned upon consummation of the Asset Sale and consummation of the
transactions contemplated by the Asset Purchase Agreement is conditioned upon
consummation of the Merger. If the conditions to either of the Merger Agreement
or the Asset Purchase Agreement are not met, then it is probable that both the
Merger and the Asset Sale would not be consummated. If the Merger and Asset Sale
were not consummated, the Company, under the terms of the Merger Agreement and
the Asset Sale Agreement, would be responsible for substantial fees, expenses
and other costs in connection with the proposed transaction. The payment of such
amounts would be likely to have a material adverse effect on the financial
position of the Company.
9
<PAGE>
WAIVER OF COVENANTS UNDER REVOLVING CREDIT FACILITY. In March 1996, the
Company obtained a line of credit with Marine Midland Bank ("Marine") (the
"Revolver"). The Revolver contains a number of financial and operating covenants
requiring, among other things, the maintenance of certain financial ratios,
including minimum net worth, leverage and working capital requirements. As of
March 20, 1998, the Company had requested and received from Marine a waiver (the
"Waiver") of the covenants pertaining to the minimum tangible net worth and the
cash flow ratio for the period ending December 31, 1997. If the Waiver had not
been received, the Company would have been in technical default of its
obligation under the Revolver.
GOING CONCERN MATTERS. As described in note 17 of the accompanying Notes to
the Financial Statements, the Company incurred a net loss of $1,064 for the year
ended December 31, 1997. This factor, among others, raises substantial doubt
about the Company's ability to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to comply with
the terms of the Revolver, to obtain additional financing or refinancing as may
be required, and ultimately to obtain profitability. In light of the Company's
projected earnings and cash flow, management believes the Company has sufficient
financial resources to maintain its current level of operations. However, cash
generated from operations alone may not be sufficient to repay the Revolver in
the event of future covenant violations, which would give the lender the right
to call the obligation. There can be no assurance that the Company will not have
covenant violations in future periods. In addition, based on the projected
earnings, it is substantially likely that the Company will be in technical
violation of the minimum tangible net worth covenant for the first quarter of
1998. There can be no assurance that the lender will not call the Revolver or if
such obligation is called, that the Company will be in a financial position to
repay such obligations in such event.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 The statements contained herein which are not historical facts may
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and are subject to the safe harbors created thereby.
These forward-looking statements involve risks and uncertainties, including, but
not limited to, those discussed in this "Risk Factors" section.
ITEM 2. PROPERTIES.
Artistic's corporate headquarters is located at The Komer Center, 146 West
Water Street, Elmira, New York, approximately 240 miles northwest of New York
City. All of the Company's facilities are in good condition and have been
regularly maintained. The table below summarizes the Company's locations:
<TABLE>
<CAPTION>
FACILITY OWNERSHIP SQ. FT. USE
- ------------------------------------------- ------------- --------- ------------------------------------
<S> <C> <C> <C>
Artistic Plaza............................. Owned 142,000 Manufacturing
The Komer Center........................... Owned 49,000 Corporate Headquarters
110-112 North Main......................... Owned 21,000 Retail Store/Human Resources
401-409 William............................ Owned 30,000 Vacant
308 William................................ Owned 28,000 Leased to Third Party
1576 Lake Street........................... Owned 7 acres Vacant Land (Adjacent to Plaza)
Binghamton................................. Leased 3,500 Data Entry/Retail Store
</TABLE>
Each of the Company's properties (except its leased facilities in
Binghamton) reside in an economic development zone within the City of Elmira and
are easily accessible to regional transportation centers. Artistic also leases
office space in Binghamton, New York, which is used as a data entry satellite
facility.
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
There were no material legal proceedings involving the Company pending at
December 31, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS.
No matter was submitted to a vote of the Company's stockholders during the
fourth quarter of the Company's fiscal year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The following represents the range of quarterly high and low sales prices
for the Company's common stock for 1997 and 1996 as provided by the NASDAQ.
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
QUARTER HIGH LOW HIGH LOW
- ------------- --------- --------- --------- ---
<S> <C> <C> <C> <C>
1 5 4 1/4 3 2 3/8
2 5 3/16 3 1/4 4 1/16 2 3/4
3 4 7/16 3 3/8 5 7/8 3 3/8
4 5 3/8 4 7/16 5 15/16 4 1/4
</TABLE>
On March 2, 1998, the closing price on the Company's common stock was $5.44
per share, as quoted by NASDAQ-NMS and published in The Wall Street Journal.
The number of holders of record of the Company's common stock on March 2,
1998 was in excess of 539, as supplied by the Company's transfer agent.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEAR
-----------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales............................................ $ 78,442 $ 91,121 $ 97,042 $ 98,911 $ 101,499
Net income (loss).................................... 1,163 (426) (9,952) 2,675 (1,064)
Per common share:
Net income (loss).................................. 0.20 (0.07) (1.57) (0.42) (0.17)
Net cash provided by (used in) operating
activities.......................................... 2,697 (1,902) (4,275) 11,500 1,655
Net cash provided by (used in) investing
activities.......................................... (1,692) (2,690) (481) (1,747) (3,328)
Net cash provided by (used in) financing
activities.......................................... (1,014) 4,129 5,136 (10,183) 1,734
AT YEAR END
Total assets......................................... $ 31,733 $ 37,909 $ 38,654 $ 28,998 $ 31,858
Current liabilities.................................. 9,198 16,852 16,998 12,915 19,390
Long-term debt....................................... 1,848 1,559 9,593 1,069 936
Stockholders' equity................................. 20,295 19,308 9,548 12,288 11,249
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
1997 VS. 1996
SALES
In 1997, the Company's sales increased 2.6% to $101,499 compared to $98,911
in 1996, as it continued its efforts to develop its Check business, increase
volume in its Catalog business, and service new business from its HSUS
fulfillment program. Sales volume decreased in the Company's Personalized
Products business by an aggregate of 7.1% from $36,539 in 1996 to $33,957 in
1997. As in 1996, these reductions resulted from discontinuing marginally
profitable products and advertising initiatives. Check sales increased by 7.5%
from $43,217 in 1996 to $46,325 in 1997. This growth was primarily the result of
additional mass media circulation in the Fall. Catalog sales increased 15.0%
from $14,556 in 1996 to $16,733 in 1997, as more catalogs were produced and
mailed. This category also benefited from the inclusion of a larger mix of
higher priced items.
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 1997 increased 23.9% from $21,973 in 1996 to
$27,229 in 1997. Cost of catalog materials increased as a result of the HSUS
Catalog Program and the addition of new catalog items with higher material cost
than in 1996. In addition, the cost attributable to Checks increased year to
year as the increased variable costs to manufacture checks under the Harland
Agreement were recorded for the full year of 1997 as compared to only a quarter
year of such increased cost in 1996 when the Harland Agreement was initiated.
12
<PAGE>
Direct labor decreased 20.7% from $6,928 in 1996 to $5,496 in 1997, a
decrease of 1.4% as a component of sales. Despite higher overall sales volume,
factors including attention to improving manufacturing efficiencies and savings
realized from the subcontracting of the Company's Check production to Harland
for the entire year, resulted in less direct labor required for manufacturing.
Manufacturing overhead increased 4.7% from $11,764 in 1996 to $12,313 in
1997, and such increase represented a .5% increase as a component of net sales
during that period. Manufacturing overhead represented by indirect labor
increased as the manufacturing support for quality and management infrastructure
were strengthened. Outside services and telephone expenses increased in 1997,
primarily as a result of an outsourcing agreement with The Product Line ("TPL")
for the overflow capacity of the Company's call center in the third and fourth
quarters. As a result of the costs of the program, the agreement with TPL was
terminated in accordance with its terms by the Company in January of 1998.
SELLING, ADVERTISING, GENERAL AND ADMINISTRATIVE
(SG&A)
The three largest components of SG&A expenses are advertising, postage and
labor.
Advertising expense remained relatively flat at $37,835 in 1997 compared to
$37,809 in 1996, indicating that the Company's advertising strategies were more
efficient in 1997 than in 1996. Personalized Products advertising decreased $476
from $18,193 in 1996 to $17,717 in 1997, as the Company withdrew from certain
programs as a result of higher costs of such programs. Catalog advertising was
increased $1,516 from $6,002 in 1996 to $7,518 in 1997 in an effort to pursue
higher-margin growth through increased circulation and the initiation of an
additional Christmas card catalog program. International advertising decreased
$508 from $929 in 1996 to $421 in 1997, as marginally profitable Canadian
circulation was eliminated. Additionally, expenses amortized by the Company in
1997 in connection with the Advertising Agreement were $500 lower than in 1996
as a result of a reduction in an annual required payment to Valassis under the
Advertising Agreement.
Postage and shipping expense in 1997 increased 8.1% from $8,876 in 1996 to
$9,594, which represents an approximate increase of .7% as a component of sales.
This increase resulted from the mailing of more catalogs and the shipment of
more catalog product in 1997, as well as from the shipment of a higher number of
check boxes which are heavier and more expensive to mail than Personalized
Products.
Other administrative expense increased 13.9% from $7,797 in 1996 to $8,882
in 1997. This increase was primarily the result of expenses incurred in relation
to the Merger and the Asset Sale, as well as severance costs relating to a
management restructuring in 1997.
OTHER INCOME AND EXPENSE
The Company incurred other expense of $666 in 1997 compared to of $414 in
1996. Interest expense decreased to $380 in 1997 compared to $848 in 1996, which
represents a decrease of .5% as a component of sales. The decrease in interest
expense was due to minimal borrowing in the first half of the year. Under the
Company's revolving credit agreement with its bank (the "Revolver") and the
subsequent increase in borrowing beginning in June to fund payments to Valassis
of $2,500 and $2,000 for payment in exchange for the put to the Company by
Valassis of 500,000 shares of the Company's Common Stock and in connection with
the Advertising Agreement, respectively. The Company also recorded a charge of
$897 resulting from the writedown of fixed assets determined to be necessary
following a fixed-asset inventory.
TAX PROVISION
The Company recorded a net tax expense of $253 in 1997 related to an
increase in the valuation allowance for deferred tax assets recorded in the
prior year net of investment tax credits realized in 1997. The $317 tax benefit
recorded in 1996 was substantially the result of the recognition of tax assets
for which
13
<PAGE>
a valuation allowance was previously recorded. As the company demonstrated
profitability through 1996, a portion of the net operating loss carryforward was
utilized. The tax benefit of this carryforward was not fully recorded in 1995.
NET LOSS
For reasons discussed above, the Company's 1997 net loss was $1,064 or $.17
per share, compared to 1996 net income of $2,675 or $.42 per share.
RESULTS OF OPERATIONS
1996 VS. 1995
SALES
In 1996, the Company's sales increased 1.9% to $98,911 compared to $97,042
in 1995. Sales volume decreased in the Personalized Product category by an
aggregate of 17.3%, from $44,196 in 1995 to $36,539 in 1996. These reductions
resulted from discontinuing marginally profitable products and advertising
initiatives. Check sales increased by 14.0% from $37,806 in 1995 to $43,217 in
1996. This growth was primarily the result of the full-year effect in 1996 of
the Valcheck Acquisition in 1995, combined with the growth of higher-margin
check reorders. Catalog sales increased by 49.4%, from $9,828 to $14,679, on
greater circulation and strong customer response to licensed products.
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 1996 decreased 3.6% from $22,802 in 1995 to $21,973
in 1996. Lower sales volume in Personalized Products partially offset
volume-related increases in materials costs for Checks and Catalogs. Costs of
materials for Personalized Products, Checks and Catalogs decreased as a result
of savings from additional management focus on manufacturing efficiencies in
these areas. Material costs decreased 1.3% as a component of sales between years
due to the effect of the Harland Agreement in the fourth quarter.
Direct labor was down 19.4% from $8,595 in 1995 to $6,928 in 1996, a
decrease of 1.9% as a component of sales. Overall sales volume was higher, as
discussed above. More than offsetting this factor in the production areas,
however, was the effect of continued management attention to improving
manufacturing efficiencies, combined with increased subcontracting of Check
production to Harland, as discussed above. Labor to receive incoming orders was
higher resulting from the increased mix of Check reorders and Catalog volume, as
well as customer-service difficulties caused in late 1995 and early 1996, which
caused higher call volume.
Manufacturing overhead increased 6.0% from $11,101 in 1995 to $11,764 in
1996, and such increase represented a .5% increase as a component of sales
during that period. Manufacturing overhead represented by indirect labor
increased as the manufacturing support and management infrastructure were
strengthened. Employee benefits expense increased in 1996 primarily as a result
of the prior conversion of long-term temporary personnel to full-time status in
the third quarter of 1995.
SELLING, ADVERTISING, GENERAL AND ADMINISTRATIVE
(SG&A)
The three largest components of SG&A expenses are advertising, postage and
labor.
Advertising expense decreased 22.8% from $48,978 in 1995 to $37,809 in 1996,
which represents a decrease of 12.3% as a component of sales. Personalized
Products advertising decreased $9,010 from 1995
14
<PAGE>
as marginal programs were reduced or eliminated. Catalog advertising increased
$2,476 in an effort to pursue higher-margin growth through increased
circulation. Check advertising decreased $4,705 due to a lower level of FSI
circulation, mostly in the third and fourth quarters of 1996 as compared to
1995, in an effort to achieve targeted advertising with higher margin potential.
An additional factor in Check advertising which partially offset the lower FSI
circulation was the increased amortization expense, for all of 1996 as compared
to the second half of 1995, for annual payments related to the Advertising
Agreement. Postage and shipping expense in 1996 decreased 4.6% to $8,876 from
$9,300 in 1995, which represents a decrease of .6% as a component of sales. This
decrease in postage and shipping expense occurred despite higher production
volumes and was attributable primarily to a significant reduction in exchanges
resulting from improved product and process quality.
Other administrative expense was reduced by 2.7% to $7,797 in 1996 from
$8,010 in 1995, representing a reduction of .4% as a component of sales. This
reduction is substantially the result of decreases in utilities and depreciation
partially offset by increases in expenses for consulting, legal and other
outside advisors to the Company.
OTHER INCOME AND EXPENSE
The Company incurred other expense of $414 in 1996 compared to expense of
$919 in 1995. Interest expense decreased to $536 in 1996 from $881 in 1995,
which represents a decrease of .4% as a component of sales. The decrease in
interest expense was due to reductions in both long- and short-term borrowing as
the Company applied its strong cash flow from operations to debt reduction.
Accruals for employee incentive compensation and contributions to the Company
profit-sharing plan were $992 in 1996, as compared to zero in 1995.
TAX PROVISION
The Company's effective tax benefit rate for 1995 was 21.4%. In 1995, the
Company was not able to recognize, in its tax provision, the full benefit for
its 1995 loss and credits generated. The Company's tax benefits were reduced
through the application of FAS 109. FAS 109 requires that the Company assess the
value of the deferred tax assets on its balance sheet. The Company was required
to establish a valuation allowance in 1995 for the deferred tax assets to reduce
the value of these assets to a level that was more likely than not to be
realized. The effect of recording a valuation allowance related to the Company's
1995 deferred tax assets was to reduce the 1995 tax benefit from the statutory
rate. The $317 tax benefit recorded in 1996 is substantially the result of the
recognition of tax assets for which a valuation allowance was previously
recorded. As the Company demonstrated profitability through 1996, a portion of
the net operating loss carryforward was utilized. The tax benefit of this
carryforward was not fully recorded in 1995 due to the valuation allowance
described above. Additionally, based upon the 1996 profitability and the
profitability expected in the future, the Company has recorded benefits for the
remaining net operating loss and credit carryforwards.
NET INCOME
For the reasons discussed above, the Company's 1996 net income was $2,675 or
$0.42 per share, compared to 1995's net loss of $9,952 or $1.57 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its cash requirements primarily from
operating activities. Although the Company's liquidity was decreased in 1997 by
the year's loss, the operating activities of the Company sufficiently provided
for the Company's cash-operating requirements.
As described in Note 17 of the accompanying Notes to the Financial
Statements, the Company incurred a net loss of $1,064 for the year ended
December 31, 1997. This factor, among others, raises
15
<PAGE>
substantial doubt about the Company's ability to continue as a going concern.
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
comply with the terms of the Revolver, to obtain additional financing or
refinancing as may be required, and ultimately to obtain profitability. In light
of the Company's projected earnings and cash flow, management believes the
Company has sufficient financial resources to maintain its current level of
operations. However, cash generated from operations alone may not be sufficient
to repay the outstanding line of credit in the event of future covenant
violations, which would give the lender the right to call the obligation. There
can be no assurance that the Company will not have covenant violations in future
periods. In addition, based on the projected earnings, it is substantially
likely that the Company will violate the minimum tangible net worth covenant for
the first quarter of 1998. There can be no assurance that the lender will not
call the Revolver or if such obligation is called, that the Company will be in a
financial position to repay such obligations in such event.
The Company's balance sheet at year end reflected the impact of the year's
loss and of substantial payments made to Valassis as described in "Results of
Operations 1997 vs. 1996--Other".
Working capital remained negative at December 31, 1997, the year's loss and
the reclassification of the outstanding balance on the Revolver from long term
debt to current liabilities serving to increase the working capital deficit to
$8,212 in 1997 from $2,830 in 1996, Marketable securities, cash and cash
equivalents were $2,021 at year end 1997 and $2,999 at year end 1996. A $2,500
payment was made to Valassis on June 30, 1997, upon the exercise of a put
option, in addition to a $2,000 contractual obligation also paid in June under
the Advertising Agreement. These payments, and the year's loss, were funded by
drawings of $4,349 under the Revolver and a reduction in marketable securities
of $1,039. Accounts receivable, which are generated principally from List Rental
and the sale of various direct mail services, increased by $1,091 on the success
of the Company's efforts to further develop these revenue sources. The increase
in inventories of $248 and prepaid advertising of $428 both reflect the
Company's commitment to grow it's Catalog business. Although inventory remained
consistent relative to sales, as evidenced by inventory turns remaining steady
at 20 days, an improvement in the Company's inventory management practice was
offset by an increase in higher-cost items associated with the Catalog business.
Similarly, the higher prepaid advertising costs at year end result from the
greater accumulation of costs associated with creating catalogs prior to
distribution.
The Company had total availability under the Revolver of $6,500 as of year
end, which is subject to a borrowing base formula and certain other conditions.
As of March 18, 1998, the Company had $4,475 outstanding under the Revolver and,
based upon the borrowing base formula, had the entire remaining balance, or
$2,025, available to it thereunder. For additional information concerning the
terms of the Revolver, see Note 8 to the Notes to the Financial Statements
contained herein.
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 March
20, 1998, the Company had requested and received from Marine a waiver of the
covenants pertaining to the minimum tangible net worth and cash flow ratio of
the Company for the period ending December 31, 1997. 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.
The Company has evaluated its information technology infrastructure to
ensure that computer systems and software will recognize and process the year
2000 and beyond with no effect on customers or disruptions to business
operations. The Company does not expect the cost of modifying its information
technology infrastructure for Year 2000 compliance to be material to its
financial condition or results of operations. The Company does not anticipate
any material disruption in its operations as a result of any failure by the
Company to be in compliance.
16
<PAGE>
SIGNIFICANT AGREEMENTS
On December 21, 1997, the Company entered into the Agreement and Plan of
Merger with MDC and Newco whereby Newco will merge with and into the Company,
pursuant to which the Company will be the surviving corporation and 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 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. Contemporaneously therewith and
pursuant to the Asset Purchase Agreement, dated December 21, 1997, between the
Company and ADI, the Company will sell certain assets relating to the P&C
Businesses to ADI. For a further description of these agreements see
"Business--Subsequent Events."
In 1996, the Company entered into the Harland Agreement under which Harland
agreed to manufacture and ship all Check orders received by the Company at a
contractually-determined price per box together with related shipping and
handling fees. The Harland Agreement is for an initial term of seven years and
provides the Company with access to virtually unlimited Check-production
capacity without the capital expenditure requirements or inventory costs that
the Company would otherwise have to incur in connection with the growth of its
check product line. The Harland Agreement provides that, in the event either
party wishes to terminate the Agreement, such party must provide one year's
notice of such intention to terminate prior to its effectiveness. The Harland
Agreement also provided for Harland's purchase of the company's Check-production
equipment at net book value resulting in no gain or loss being recognized.
In 1995, the Company entered into the Advertising Agreement, under which, in
return for the payment of an annual fee to Valassis, the Company obtained an
exclusive right of first refusal to place its weekly newspaper FSI advertising
at competitive rates in all circulation in which Valassis has contracts for the
placement of such advertising. The Company has committed to pay $10 million over
the term of the Agreement which expires in May 2000. As of December 31, 1997,
the remaining commitment under the contract was $3000, payable in installments
of $2,000 in May 1998 and the final installment of $1,000 due in May 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
ARTISTIC GREETINGS INCORPORATED:
We have audited the accompanying balance sheets of Artistic Greetings
Incorporated (a Delaware corporation) as of December 31, 1997 and 1996, and the
related statements of operations, changes in stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 17 to the
financial statements, the Company experienced a net loss in 1997 and was in
technical default of certain financial convenants in connection with its line of
credit which have been waived by the lender as of December 31, 1997. These
factors among others raises substantial doubts about that the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 17. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Rochester, New York
February 20, 1998, except for
the matter described in the
first paragraph of Note 8,
as to which the date is
March 20, 1998
18
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS, EXCEPT
SHARE DATA)
ASSETS
Current Assets:
Cash and cash equivalents............................................................. $ 160 $ 99
Marketable securities:
Trading, at market (cost $1,230 in 1997 and $2,699 in 1996)......................... 1,403 2,881
Available for sale, at market (cost $409 in 1997 and $11 in 1996)................... 458 19
Trade receivables (net of allowance for doubtful accounts of $271 and $112 in 1997 and
1996, respectively)................................................................. 2,343 1,252
Income taxes receivable............................................................... 420 --
Inventories........................................................................... 2,518 2,270
Prepaid advertising................................................................... 3,492 3,064
Prepaid expenses and other current assets............................................. 384 500
--------- ---------
Total current assets.............................................................. 11,178 10,085
Deferred advertising.................................................................... 3,683 2,113
Property, plant and equipment, net...................................................... 16,301 16,237
Cash surrender value of life insurance (net of policy loans of $0 and $127 in 1997 and
1996, respectively)................................................................... 629 433
Other assets............................................................................ 67 130
--------- ---------
Total assets...................................................................... $ 31,858 $ 28,998
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt..................................................... $ 4,494 $ 153
Accounts payable, trade (includes checks-in-transit of $2,485 in 1997 and $243 in
1996)............................................................................... 12,804 9,847
Accrued liabilities................................................................... 1,521 2,351
Customer advances..................................................................... 571 451
Income taxes payable.................................................................. -- 113
--------- ---------
Total current liabilities......................................................... 19,390 12,915
Long-term debt.......................................................................... 936 1,069
Other liabilities....................................................................... 283 383
--------- ---------
Total liabilities................................................................. $ 20,609 $ 14,367
--------- ---------
Commitments and contingencies
Common stock, subject to put option--500,000 shares..................................... -- 2,343
Stockholders' Equity:
Common stock, par value $0.10:
Authorized:10,000,000 shares;
Issued:6,538,520 shares in 1997 and 6,037,720 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.............................................................................. -- 1
Retained earnings..................................................................... 462 1,526
--------- ---------
12,171 13,173
Less: Treasury stock, at cost (695,356 and 200,356 shares in 1997 and 1996,
respectively)....................................................................... (922) (885)
--------- ---------
Total stockholders' equity.......................................................... 11,249 12,288
--------- ---------
Total liabilities and stockholders' equity.......................................... $ 31,858 $ 28,998
--------- ---------
--------- ---------
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
19
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT
SHARE DATA)
NET SALES................................................................. $ 101,499 $ 98,911 $ 97,042
Cost of sales............................................................. 45,038 40,665 42,498
---------- ---------- ----------
GROSS PROFIT.............................................................. 56,461 58,246 54,544
Selling, advertising, general and administrative expenses................. 56,607 55,474 66,287
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS............................................. (146) 2,772 (11,743)
Other income (expense):
Interest and dividend income............................................ 84 158 278
Net unrealized gains (losses) on trading securities..................... 32 (34) 230
Net realized gains (losses) on marketable securities.................... 340 328 (161)
Loss on disposition of fixed assets..................................... (897) -- --
Interest expense........................................................ (280) (536) (881)
Other................................................................... 56 (330) (385)
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES......................................... (811) 2,358 (12,662)
Provision for (benefit from) income taxes................................. 253 (317) (2,710)
---------- ---------- ----------
NET INCOME (LOSS)......................................................... $ (1,064) $ 2,675 $ (9,952)
---------- ---------- ----------
Basic and diluted earnings per share...................................... $ (0.17) $ 0.42 $ (1.57)
---------- ---------- ----------
Weighted average number of common and common equivalent shares
outstanding............................................................. 6,090,023 6,349,318 6,331,688
---------- ---------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
20
<PAGE>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK OTHER
---------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE DECEMBER 31, 1994....................... 6,036,820 $ 604 $ 11,031 $ 8,803 $ (945) $ (185)
Exercise of stock options by employees.......... 900 -- 2 -- -- --
Stock grants to directors/employees............. -- -- (5) -- 9 --
Unrealized gains (losses) on marketable
securities.................................... -- -- -- -- -- 186
Net loss........................................ -- -- -- (9,952) -- --
---------- ----- ----------- ----------- ----- ---------
BALANCE DECEMBER 31, 1995....................... 6,037,720 604 11,028 (1,149) (936) 1
Stock grant to directors/employees.............. -- -- 14 -- 51 --
Net income...................................... -- -- -- 2,675 -- --
---------- ----- ----------- ----------- ----- ---------
BALANCE DECEMBER 31, 1996....................... 6,037,720 604 11,042 1,526 (885) 1
Exercise of stock options by employees.......... 800 -- 3 -- -- --
Stock grant to directors/employees.............. -- -- 10 -- 13 --
Exercise of put option.......................... 500,000 50 -- -- (50) --
Unrealized gains (losses) on marketable
securities.................................... -- -- -- -- -- (1)
Net loss........................................ -- -- -- (1,064) -- --
---------- ----- ----------- ----------- ----- ---------
BALANCE DECEMBER 31, 1997....................... 6,538,520 $ 654 $ 11,055 $ 462 $ (922) $ --
---------- ----- ----------- ----------- ----- ---------
<CAPTION>
TOTAL
---------
<S> <C>
BALANCE DECEMBER 31, 1994....................... $ 19,308
Exercise of stock options by employees.......... 2
Stock grants to directors/employees............. 4
Unrealized gains (losses) on marketable
securities.................................... 186
Net loss........................................ (9,952)
---------
BALANCE DECEMBER 31, 1995....................... 9,548
Stock grant to directors/employees.............. 65
Net income...................................... 2,675
---------
BALANCE DECEMBER 31, 1996....................... 12,288
Exercise of stock options by employees.......... 3
Stock grant to directors/employees.............. 23
Exercise of put option.......................... --
Unrealized gains (losses) on marketable
securities.................................... (1)
Net loss........................................ (1,064)
---------
BALANCE DECEMBER 31, 1997....................... $ 11,249
---------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
21
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT
SHARE DATA)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................. $ (1,064) $ 2,675 $ (9,952)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization................................................... 2,118 2,379 2,544
Loss on disposal of fixed assets................................................ 897 -- --
Allowance for doubtful accounts................................................. 159 (1) 113
Net unrealized losses (gains) on trading securities............................. (33) 40 (230)
Net realized losses (gains) on marketable securities............................ (340) (328) 161
Purchase of trading securities.................................................. (2,278) (4,891) (1,922)
Proceeds from sale of trading securities 3,938 4,858 1,268
Amortization of interest grant.................................................. (100) -- --
Accretion of common stock subject to a put option............................... 157 311 157
Increase in cash surrender value of life insurance.............................. (196) (125) (66)
Decrease (increase) in assets:
Trade receivables........................................................... (1,250) 552 (360)
Income taxes receivable..................................................... (420) 900 14
Inventories................................................................. (248) 3,579 341
Prepaid advertising, prepaid expenses and other............................. (721) 3,058 (2,772)
Deferred advertising........................................................ (1,570) 1,424 3,180
Deferred income taxes....................................................... 472 (472) --
Increase (decrease) in liabilities:
Checks-in-transit........................................................... 2,242 (1,195) 507
Accounts payable, trade..................................................... 715 (2,951) 4,895
Accrued liabilities......................................................... (830) 1,360 (241)
Customer advances........................................................... 120 214 54
Deferred income taxes....................................................... -- -- (1,966)
Income taxes payable........................................................ (113) 113 --
--------- --------- ---------
Net cash provided by (used in) operating activities..................... 1,655 11,500 (4,275)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment....................................... (3,079) (5,388) (6,101)
Proceeds from sale of equipment................................................. -- 3,641 --
Purchase of marketable securities............................................... (498) -- (1,595)
Proceeds from sale of marketable securities..................................... 249 -- 7,215
--------- --------- ---------
Net cash used in investing activities................................... (3,328) (1,747) (481)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the line of credit................................................ 31,304 20,349 40,757
Repayment of borrowings from the line of credit................................. (26,955) (25,311) (40,663)
Proceeds from long-term debt.................................................... -- -- 5,036
Repayment of long-term debt..................................................... (141) (5,286) --
Proceeds from issuance of common stock, treasury stock and options exercised.... 26 65 6
Payment for exercise of put options............................................. (2,500) -- --
--------- --------- ---------
Net cash provided by (used in) financing activities..................... 1,734 (10,183) 5,136
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.................... 61 (430) 380
Cash and cash equivalents at beginning of year.................................... 99 529 149
--------- --------- ---------
Cash and cash equivalents at end of year.......................................... $ 160 $ 99 $ 529
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest........................................................................ $ 208 $ 527 $ 735
Income taxes, net of refunds received........................................... 314 (858) (771)
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company is engaged primarily in the direct-mail order marketing and sale
of personalized checks, personalized name and address products, stationery and
gift items, and performing services such as package insertion and mailing list
rental. Artistic sells its products through Sunday newspaper supplements,
magazines, co-operative mailings, direct mailings, its catalogs and through its
retail store. Sales are predominately to individuals throughout the United
States. Corporate headquarters and manufacturing facilities are located in
Elmira, New York. Artistic processes its orders in several locations in Elmira
and the surrounding area.
CASH AND CASH EQUIVALENTS
The Company considers liquid investments with a maturity of three months or
less to be cash equivalents, which are reflected at their approximate fair
value.
INVENTORIES
Inventories are stated at the lower of first-in, first-out ("FIFO") cost or
market, based upon the lower of replacement cost or estimated realizable value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation and
amortization is provided principally by the straight-line method over the
following estimated useful lives of the assets:
<TABLE>
<S> <C>
Transportation equipment...................................... 5 years
Furniture and fixtures........................................ 5-7 years
Machinery and equipment....................................... 5-12 years
Buildings..................................................... 18-31 years
</TABLE>
Betterments, renewals and extraordinary repairs that extend the life of the
assets are capitalized. Other repairs and maintenance are expensed. When sold,
the cost and accumulated depreciation applicable to assets retired are removed
from the accounts, and the gain or loss on disposition is recognized in income.
During 1996, the Company adopted Statement of Financial Accounting Standards
No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If such
events or changes in circumstances are present, a loss is recognized to the
extent the carrying value of the asset is in excess of the sum of the
undiscounted cash flows expected to result from the use of the asset and its
eventual disposition.
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREPAID ADVERTISING AND DEFERRED ADVERTISING
The Company capitalizes costs for direct response advertising and amortizes
the costs over the period of expected future benefit. All other advertising
costs are expensed the first time the advertisement takes place. Direct response
advertising consists of prepaid advertising costs and deferred advertising
costs.
Prepaid advertising costs consist principally of the materials and labor
incurred in developing the advertising materials, including sales literature and
catalogs. These costs are accumulated until the materials are used or
distributed to a customer at which time they are transferred to deferred
advertising costs.
Deferred advertising includes the costs previously described and the costs
associated with distributing advertisements to customers, such as insertion and
mailing costs. Advertising is amortized over a period not to exceed one year
following the date the literature or catalog is mailed or inserted into a
newspaper or co-op mailing. The amortization period corresponds to the expected
sales cycle of the advertising material, based on actual advertising responses.
Check advertising is amortized over a period not to exceed twelve months based
upon the original sales order and one corresponding reorder. These amortization
periods are in compliance with American Institute of Certified Public
Accountants Statement of Position 93-7, "Reporting on Advertising Costs."
At December 31, 1997 and 1996, $7,175 and $5,177, respectively, of
advertising costs, was reported as assets. Advertising expense for the years
ended December 31, 1997, 1996 and 1995 was $37,835, $37,809 and $48,978,
respectively. The expense in 1995 includes a charge of $2,229 to writedown
deferred advertising to its net realizable value. The expense for 1997, 1996 and
1995 includes approximately $13,400, $12,500 and $8,500, respectively, in
advertising placements related to the Advertising Agreement described in Note 13
to the Financial Statements.
CASH SURRENDER VALUE OF LIFE INSURANCE
Face value of the policies is approximately $1,841, with $1,341 being key
man life insurance.
INCOME TAXES
The Company uses the liability method of accounting for deferred income
taxes. The liability method accounts for deferred income taxes by applying
statutory rates to the difference between the financial reporting and the tax
bases of assets and liabilities. Deferred federal and state income taxes result
from temporary differences in the recognition of revenue and expense for income
tax and financial statement purposes. Such differences arise principally from
depreciation, tax credit carryforwards and promotional costs. Tax credits are
applied as a reduction to the provision for federal and state income taxes using
the flow-through method.
REVENUE RECOGNITION
For direct-mail products, the Company recognizes revenue when merchandise is
shipped. Name list rental income is recognized upon delivery, and fulfillment
income upon performance of the service.
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER SHARE
Net income or loss per common and common equivalent share is based on the
weighted average number of common and common equivalent shares (stock options
determined under the treasury stock method) outstanding during the period. The
Company accounts for net income per common and common equivalent share in
accordance with the provisions of Accounting Principle Board Opinion No. 15 (APB
No. 15). In March 1997, Statement of Financial Accounting Standards No. 128
(SFAS No. 128), "Earning 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 required to be presented. The Company adopted
SFAS No. 128 retroactively for all periods presented. Early adoption is not
permitted. Accordingly, the Company has restated its previously presented EPS
amounts. The weighted average number of shares outstanding is computed as
follows:
(The following table reconciles the numerators and denominators of basic and
diluted earnings per share).
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-----------------------------------------
<S> <C> <C> <C>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- -----------
BASIC EPS
Net income applicable to common stock.................................... $ 2,675 6,328,207 $ 0.42
EFFECT OF DILUTIVE SECURITIES
Stock options............................................................ -- 21,111 --
------ ------------- -----
DILUTED EPS
Net income applicable to common stock.................................... $ 2,675 6,349,318 $ 0.42
------ ------------- -----
------ ------------- -----
</TABLE>
No reconciliation is provided for 1997 and 1995 as the effect would be
anti-dilutive. All share information noted above represents the weighted-average
number of shares during the period.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, trade receivables, accounts payable, accrued
liabilities and other current liabilities, other than long-term debt, are
reflected in the financial statements at fair value because of the short-term
maturity of those instruments.
The estimated fair value of the Company's financial instruments is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1997 1996
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Marketable securities................................ $ 1,861 $ 1,861 $ 2,900 $ 2,900
Long-term debt, including current portion............ $ 5,430 $ 5,042 $ 1,222 $ 812
</TABLE>
The fair values of the Company's financial instruments were determined as
follows:
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Marketable securities: The fair value is based on quoted market prices for
these or similar instruments. Accordingly, the carrying amount of marketable
securities approximates fair value.
Long-term debt including current portion: The fair value of the long-term
debt is estimated based upon interest rates available to the Company for
issuance of similar debt with similar terms and remaining maturities.
MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform to the 1997 presentation.
NOTE 2 MARKETABLE SECURITIES
The Company accounts for its investments in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
The Company has classified its securities into two categories, available for
sale and trading securities. The value of the investment accounts is stated at
market value based on quoted market prices. The cost of investments sold is
determined on a specific identification basis. Gains and losses from these
securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Securities available for sale
Realized loss............................................................... $ 6 $ --
Net unrealized gain......................................................... 49 8
Trading securities
Realized gain............................................................... 346 358
Realized loss............................................................... -- 30
Net unrealized gain......................................................... 173 182
</TABLE>
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 3 INVENTORIES
Inventories include cost of materials, labor and overhead and are comprised
of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Finished goods............................................................. $ 582 $ 652
Work-in-process............................................................ 100 561
Raw materials and supplies................................................. 1,836 1,057
--------- ---------
Total...................................................................... $ 2,518 $ 2,270
--------- ---------
--------- ---------
</TABLE>
NOTE 4 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Land.................................................................... $ 387 $ 385
Buildings............................................................... 9,170 9,160
Machinery and equipment................................................. 12,481 15,203
Furniture and fixtures.................................................. 1,301 1,667
Transportation equipment................................................ 149 194
--------- ---------
Subtotal.............................................................. 23,488 26,609
Less: Accumulated depreciation and amortization......................... 7,187 10,372
--------- ---------
Net................................................................... $ 16,301 $ 16,237
--------- ---------
--------- ---------
</TABLE>
Depreciation and amortization expense charged to operations amounted to
$2,118, $2,379 and $2,434 for the years ended December 31, 1997, 1996 and 1995,
respectively.
NOTE 5 ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Accrued executive bonuses.................................................. $ 70 $ 691
Accrued employee profit sharing............................................ -- 301
Accrued and deferred compensation.......................................... 220 406
Accrued vacation........................................................... 456 396
Miscellaneous accrued liabilities.......................................... 775 557
--------- ---------
Total...................................................................... $ 1,521 $ 2,351
--------- ---------
--------- ---------
</TABLE>
27
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 6 INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." The provision for (benefit from) income taxes is
comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Currently payable:
Federal......................................................... $ (231) $ 134 $ (757)
State........................................................... 12 21 13
--------- --------- ---------
Total current..................................................... (219) 155 (744)
--------- --------- ---------
Deferred:
Net loss carryforward........................................... (284) 786 (917)
Receivable reserve.............................................. (20) (41) --
Depreciation.................................................... 43 (108) 293
Promotional costs............................................... 503 (752) (1,361)
Deferred compensation........................................... -- -- 35
Vacation expense................................................ (14) 2 (3)
Insurance liability............................................. (79) (122) --
Investment losses and carryforwards............................. 10 (14) 154
Contribution carryforward....................................... 440 (281) 172
Inventory reserve............................................... (42) 219 (348)
Investment credits.............................................. (174) -- 270
Other........................................................... 89 (161) (261)
--------- --------- ---------
Total deferred.................................................... 472 (472) (1,966)
--------- --------- ---------
Total............................................................. $ 253 $ (317) $ (2,710)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following is a reconciliation of the expected federal tax at statutory
rates to the effective rates:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Expected tax..................................................... $ (276) $ 802 $ (4,305)
State tax effect................................................. (4) 19 (30)
Interest and dividend exclusion.................................. (6) (5) (49)
Investment credit................................................ (219) -- --
Nondeductible interest........................................... 53 106 --
Adjustment of prior years' accruals.............................. -- 53 --
Contributions.................................................... -- (125) --
Federal valuation allowance...................................... 472 (1,144) 1,381
Merger Costs..................................................... 203 -- --
Other............................................................ 18 -- --
--------- --------- ---------
Federal tax...................................................... -- (261) (2,798)
State tax........................................................ 12 (56) 88
--------- --------- ---------
Total............................................................ $ 253 $ (317) $ (2,710)
--------- --------- ---------
--------- --------- ---------
</TABLE>
28
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 6 INCOME TAXES (CONTINUED)
The contribution amount is the tax benefit related to certain inventory
donated to various charities which qualify for a tax deduction in excess of cost
under the Internal Revenue Code.
Deferred tax liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Depreciation............................................................... $ 816 $ 773
Promotional costs.......................................................... 1,290 781
Marketable securities...................................................... 78 68
--------- ---------
Gross deferred tax liabilities........................................... 2,184 1,622
--------- ---------
Promotional costs.......................................................... (416) (410)
Vacation expense........................................................... (160) (146)
Contribution carryforward.................................................. (611) (579)
Net loss carryforward...................................................... (958) (674)
Alternate minimum tax credits.............................................. (218) (307)
Inventory reserve.......................................................... (94) (52)
Receivable reserve......................................................... (61) (41)
Insurance liability........................................................ (201) (122)
Credit carryforwards....................................................... (1,176) (1,002)
--------- ---------
Gross deferred tax assets................................................ (3,895) (3,333)
--------- ---------
Deferred tax assets valuation allowance.................................... 1,711 1,239
--------- ---------
Total net deferred taxes $ -- $ (472)
--------- ---------
--------- ---------
</TABLE>
The valuation allowance for deferred tax assets was $1,711 and $1,239, in
1997 and 1996, respectively, and relates primarily to the realizability of the
contribution carryforward and the uncertainty of realizing the tax benefit of
certain state tax credits.
The Company has New York State Investment Tax Credits and Economic
Development Zone Credits that will provide tax benefit in future years. The
Company has available investment tax credits of approximately $100 with varying
expiration dates through 2002. The Company also has available Economic
Development Zone Credits of approximately $900 which may be carried forward
indefinitely.
NOTE 7 LEASES
During 1997, the Company leased a portion of its manufacturing and office
space from an officer who is a substantial stockholder of the Company. Rental
expense under these arrangements amounted to $42, $42 and $91 in 1997, 1996 and
1995, respectively. Other rental expense amounted to $70, $90 and $255 in 1997,
1996 and 1995, respectively.
29
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 8 DEBT
MARINE REVOLVING LINE OF CREDIT
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 20, 1998, the Company had requested and received from Marine a waiver
of the covenants pertaining to the minimum tangible net worth and the cash flow
ratio for the period ending December 31, 1997. As of December 31, 1997, the
Company was not in compliance with its minimum tangible net worth and cash flow
ratio covenants. As of March 20, 1998, the Company had requested and received
from Marine a waiver of these covenants as of December 31, 1997.
NEW YORK STATE URBAN DEVELOPMENT CORPORATION LOAN
In October 1995, the Company executed a mortgage loan agreement (the "UDC
Mortgage") with the New York State Urban Development Corporation under which it
borrowed $400, the proceeds of which were used to finance expenses incurred in
the purchase and buildout of Artistic Plaza. The UDC Mortgage is secured by
Artistic Plaza, does not incur interest and requires amortization for four years
with the principal amount thereunder due to be repaid in November 1999. The UDC
Mortgage can be prepaid by the Company at any time without penalty.
CITY OF ELMIRA MORTGAGE
In April 1991, the Company executed a Sales and Development Agreement with
the City of Elmira (the "City of Elmira Mortgage"). As part of this agreement,
the Company acquired two office buildings located in the City of Elmira. This
agreement provided financing for the purchase of these buildings evidenced by a
promissory note for $920 at one percent per annum using the simple interest
method over 25 years. Both the principal and interest payments were deferred
until May 1996. Interest accrued on the principal balance during this period at
one percent per annum using the simple interest method. After such time, both
the accrued interest and principal were reamortized over the remaining 20 years
by making equal quarterly payments of principal and interest. The note also
provides that the Company will have the right to prepay any part of, or all of,
the outstanding principal and accrued interest at any time without penalty. This
agreement is secured by a first mortgage on these buildings.
30
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 8 DEBT (CONTINUED)
LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Marine Revolver............................................................ $ 4,349 $ --
UDC Mortgage............................................................... 192 300
City of Elmira Mortgage.................................................... 889 922
--------- ---------
Total long-term debt....................................................... 5,430 1,222
Less: Current portion...................................................... 4,494 153
--------- ---------
Total...................................................................... $ 936 $ 1,069
--------- ---------
--------- ---------
</TABLE>
Minimum debt repayments under long-term obligations for the next five years
and thereafter are as follows:
<TABLE>
<S> <C>
1998................................................ $ 4,494
1999................................................ 137
2000................................................ 46
2001................................................ 46
2002................................................ 46
Thereafter.......................................... 661
</TABLE>
The weighted average interest rate on short-term borrowings outstanding are
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Money-market line....................................................... 7.23% 6.82% 7.36%
Regular line............................................................ 8.50 8.25 8.78
</TABLE>
NOTE 9 DEFINED CONTRIBUTION SAVINGS PLAN
The Company has a defined contribution savings plan under which employees
with one year of service, who have worked 1,000 hours and attained 21 years of
age, are eligible for participation. In 1997 the Company matched 50% of the
first 4% contributed by each participating employee annually. The Company's
matching contributions were $105, $39 and $35 during 1997, 1996 and 1995,
respectively. Eligible employees enrolled and active at December 31 are eligible
for employer contributions and may make voluntary contributions subject to
certain limitations. Company profit sharing contributions are discretionary. The
profit-sharing contribution was $0, $301 and $0, for 1997, 1996 and 1995,
respectively.
NOTE 10 STOCK OPTIONS
The Company has an Employee Long-Term Incentive Plan (the "Plan") under
which Incentive Stock Options ("ISOs") to purchase, and/or Stock Incentive
Rights ("SIRs") to receive, a total of 1,800,000 shares of the Company's Common
Stock may be awarded.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation". The Statement encourages, but
does not require, a fair value based method of accounting for an employee stock
option or similar equity instrument. The Company accounts for its stock options
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees". Accordingly, no compensation cost has been recognized for the
options. Had compensation cost for these options been determined based on the
fair value at the grant dates of the awards, consistent
31
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 10 STOCK OPTIONS (CONTINUED)
with SFAS 123, the Company's pro forma amounts for net income and earnings per
share would have been as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Net income (loss)
As reported........................................................... $ (1,064) $ 2,675
Pro forma............................................................. (1,153) 2,604
Net income (loss) per common and common equivalent share
As reported........................................................... (0.17) 0.42
Pro forma............................................................. (0.19) 0.41
</TABLE>
SFAS No. 123 has only been applied to options granted after January 1, 1995.
As a result, the pro forma compensation expense may not be representative of
that to be expected in future years.
The weighted-average assumptions used to estimate the fair value of each
option on the date of grant using the Black-Scholes option pricing model
include:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Risk-free interest rate.................................................. 6.59% 6.37%
Expected life............................................................ 5 years 5 years
Expected volatility...................................................... 48.2% 51.1%
Expected dividends....................................................... -- --
Weighted average fair value of options granted........................... $ 2.44 $ 2.24
</TABLE>
ISOs are granted at not less than fair value on the date of grant, expire no
later than ten years from the date of grant and are exercisable over variable
periods from three to five years. The following table
32
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 10 STOCK OPTIONS (CONTINUED)
summarizes the changes in ISOs outstanding and related price ranges for shares
of the Company's common stock under the Plan.
<TABLE>
<CAPTION>
NUMBER OF SHARES PRICE RANGE
----------------- -------------------------------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1995......................... 635,530 $ 3.20 to $ 11.75
Granted.............................................. 15,000 3.12 to 3.50
Exercised............................................ (900) 2.62 to 2.62
Canceled............................................. (148,730) 4.00 to 9.50
--------
Outstanding at December 31, 1995....................... 500,900 3.12 to 10.31
-------- -----------------
Exercisable at December 31, 1995....................... 272,908 $ 3.12 to $ 10.31
-------- -----------------
Outstanding at January 1, 1996......................... 500,900 $ 3.12 to 10.31
Granted.............................................. 147,000 2.62 to 5.00
Exercised............................................ -- -- to --
Canceled............................................. (259,490) 3.20 to 9.38
--------
Outstanding at December 31, 1996....................... 388,410 2.62 to 10.31
-------- -----------------
Exercisable at December 31, 1996....................... 139,700 $ 2.62 to $ 10.31
-------- -----------------
Outstanding at January 1, 1997......................... 388,410 $ 2.62 to $ 10.31
Granted.............................................. 62,500 4.81 to 4.81
Exercised............................................ (800) 3.56 to 3.56
Canceled............................................. (37,200) 6.06 to 8.12
--------
Outstanding at December 31, 1997....................... 412,910 2.62 to 10.31
-------- -----------------
Exercisable at December 31, 1997....................... 258,410 $ 2.62 to $ 10.31
-------- -----------------
</TABLE>
SIRs are rights to receive shares of the Company's common stock without any
cash payment to the Company, conditioned only on continued employment with the
Company over a specified four-year incentive period. During that incentive
period, the recipient of a SIR award would receive "dividend-equivalent"
payments on the number of shares covered by his/her SIR award, but would not
have any other rights, e.g., voting rights, etc., with respect to such shares
until they were issued to him/her under the terms of the award. To date, no SIRs
have been granted under the Plan.
The following table represents additional information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
WEIGHTED-
AVERAGE OPTIONS EXERCISABLE
RANGE OF REMAINING WEIGHTED- WEIGHTED-
EXERCISE NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------- ----------- --------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$2.62-$ 5.00 250,200 3.5 Years $ 4.44 100,700 $ 4.42
5.25- 8.12 99,960 0.6 Years 6.38 94,960 6.42
9.12- 10.31 62,250 0.3 Years 9.74 62,750 9.74
----------- --------------- ----- ----------- -----
$2.62-$10.31 412,910 2.3 Years $ 5.71 258,410 $ 6.45
----------- --------------- ----- ----------- -----
</TABLE>
The Company had options available for awards amounting to 750,620, 775,920
and 663,430 at December 31, 1997, 1996 and 1995, respectively. The Company is
able to realize an income tax benefit from the exercise and early disposition of
ISOs. For financial reporting purposes, this benefit results in a decrease in
current income taxes payable and an increase in additional paid-in capital.
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 11 STOCKHOLDERS' EQUITY
In 1997, the Company granted 5,000 shares of its treasury stock to an
officer at a price per share of $4.50, for services rendered. This stock grant
was recorded as compensation expense. In 1996, the Company granted 1,071 shares
of its treasury stock to a director at a price per share of $3.50 for services
rendered. In 1996, the Company granted 10,000 and 5,000 shares of its treasury
stock to two officers at a price per share of $3.88 and $4.69, respectively, for
services rendered. These stock grants were also recorded as compensation
expense. In 1995, the Company granted 1,363 shares of its treasury stock to a
director at a price per share of $2.75 for services rendered.
NOTE 12 RELATED PARTY TRANSACTIONS
The son of the Chairman of the Board of Directors of the Company, who is a
licensed stock broker, processes the Company's marketable securities
transactions. Total commissions paid to this individual were approximately $6,
$17 and $21 in 1997, 1996 and 1995, respectively.
NOTE 13 COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS
In 1997, the Company entered into a three-year employment agreement with its
Chief Operating Officer and Executive Vice President, which provides for a
minimum annual compensation of $146 and for participation in the Company's
executive bonus plan. In 1996, the Company entered into a three-year employment
agreement with its Chief Executive Officer and President of the Company, which
provides for a minimum annual compensation of $200 and for participation in the
Company's executive bonus program. In 1993, the Company entered into a five-year
employment agreement with the Chairman of the Board of Directors of the Company
which provides minimum annual compensation of $225 and an annual bonus based on
net income before taxes.
LEGAL MATTERS
The Company is subject to litigation from time to time in the ordinary
course of business. Although the amount of any liability with respect to any
such litigation cannot be determined, in the opinion of management, such
liability, if any, will not have a material adverse effect on the Company's
financial condition or results of operations.
COMMITMENTS
In May 1995, the Company negotiated a contract with a supplier to obtain
right of first refusal for advertising placement at competitive rates. As of
December 31, 1997, the remaining commitment under the contract, which expires
May 2000, was $3,000, payable in annual installments of $2,000 due in May 1998
and the final installment of $1,000 due in May 1999.
NOTE 14 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITY
During 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
34
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 14 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITY
(CONTINUED)
$1,875. The Common Stock is puttable to the Company, at Valcheck's option, two
years from the acquisition date at $5 per share.
<TABLE>
<CAPTION>
1995
---------
<S> <C>
Fair value of assets acquired
Inventory.......................................................................... $ 361
Property, plant and equipment...................................................... 1,481
Name list.......................................................................... 33
---------
Total............................................................................ $ 1,875
Less: common stock issued............................................................ 1,875
---------
Cash paid............................................................................ $ --
---------
---------
</TABLE>
NOTE 15 NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130 "Reporting Comprehensive Income" establishes standards for
reporting and display of comprehensive income and its components. The standard
is applicable for fiscal years beginning after December 15, 1997. The Company
will adopt this standard in its 1998 financial statements. The Company has not
yet determined the impact of this standard on its financial statements.
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for reporting information about operating
segments in the financial statements. The standard is required to be adopted for
fiscal years beginning after December 15, 1997. The Company will adopt this
standard in its 1998 financial statements. The Company has not yet determined
the impact of this standard on its financial statements.
NOTE 16 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.
In connection with the agreements, the Company has incurred $597 of expenses
on behalf of ADI, such as cash advances and professional fees. This amount has
been recorded as an expense as of December 31, 1997.
NOTE 17 GOING CONCERN MATTERS
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements for the year ended December 31, 1997, the Company incurred a net loss
of
35
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 17 GOING CONCERN MATTERS (CONTINUED)
$1,064 and has classified its Revolver as current for the year ended December
31, 1997. 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.
As described in Note 8, the Company was not in compliance with certain of
the financial covenants under its Revolver as of December 31, 1997. 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, based on projected earnings, the Company may
violate the minimum tangible net worth covenant 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 a current liability.
As described in Note 16, 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 sale 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following sets forth information concerning the principal occupations
and business experience during the past five years of the members of the Board
of Directors of the Company (the "Board"):
JOSEPH A. CALABRO, 57, has served as the Company's Chief Executive Officer
and President since August 1996. Prior to being named to his current position,
Mr. Calabro served as the Company's Senior Vice President of Manufacturing from
January through August 1996 and before that, worked as a consultant to the
Company from August through December 1995. Prior to his relationship with the
Company, Mr. Calabro served from 1993 through July 1995 as President and CEO of
Calabro and Associates, a Seattle-based consulting company. For more than five
years prior to that, he worked at Prism Group, Inc./MicroDisk Services, a
leading software manufacturing facility in Woodinville, Washington where he held
the positions of Vice President, COO and Director, Prism Group, Inc. and
President and CEO, MicroDisk Services. Mr. Calabro was elected to the Board in
August 1996.
36
<PAGE>
NORMAN S. EDELCUP, 62, serves as Chairman and Chief Executive Officer of
Item Processing of America, a data processing center for financial institutions
located in Miami, Florida. Mr. Edelcup has held such position since July 1987.
During 1988 and 1989, Mr. Edelcup served as Chief Operating Officer of Catalina
Lighting, Inc., Miami, Florida. Since 1975, Mr. Edelcup has been a Director of
Valhi, Inc. and since 1987 he has served as a Trustee of Baron Asset Fund. Mr.
Edelcup has been a Director of the Company since 1985.
LYNDON E. GOODRIDGE, 57, is currently on sabbatical from his position as
Dean of the Whittemore School of Business and Economics, University of New
Hampshire, Durham, New Hampshire. Mr. Goodridge has held such position since
July 1990. Mr. Goodridge has been a Company Director since 1985.
STUART KOMER, 72, has served as a Director and as the Company's Chairman of
the Board since 1966. He also served as its President from 1966 through July
1994 and from September 1995 through August 1996, and as its Chief Executive
Officer from July 1994 until Joseph A. Calabro was elected to these posts in
August 1996. Mr. Komer is the stepfather of Thomas C. Wyckoff, the Company's
Chief Operating Officer, Executive Vice President, General Counsel and Assistant
Secretary.
IRVING I. STONE, 88, was elected a Director in June 1990, as one of two
Directors designated by American Greetings Corporation ("AGC") under the terms
of a Standstill Agreement between the Company and AGC, executed in connection
with AGC's purchase of 2,250,000 shares of the Company's Common Stock in May
1990 (the "Original Standstill Agreement") and discussed further under
"PRINCIPAL HOLDERS OF COMMON STOCK." Mr. Stone now serves as Founder, Chairman
and as a member of the Board of Directors of AGC, headquartered in Cleveland,
Ohio and for a number of years prior to 1992, served as its Chairman.
MORRY WEISS, 57, was elected a Director in September 1991. Mr. Weiss is one
of the two Directors designated by AGC under the Original Standstill Agreement.
In March 1992, Mr. Weiss was named Chairman and Chief Executive Officer of AGC.
For more than five years prior thereto, he had served as President of AGC. He is
also a Director of National City Bank, Cleveland, Ohio and of Syratech Corp.,
Boston, Massachusetts. Mr. Weiss is the son-in-law of Irving I. Stone.
EXECUTIVE OFFICERS
The following sets forth information concerning the principal occupations
and business experience of the executive officers of the Company, in addition to
Stuart Komer, for the past five years:
MICHELLE CRANE-ALDERMAN, 29, has served as Vice President Manufacturing
since August 1996. From January through August 1996, she served as Vice
President Catalogs and Mass Media and prior to that as Vice President--Catalog
Division from September through December 1995. Ms. Crane-Alderman has served in
a number of managerial positions with the Company, including International
Sales, Retail Sales and Data Entry since 1988.
WILLIAM F. INGRAM, 53, has served as the Company's Vice President and Chief
Information Officer since October 1996. Prior to that, he served as the
Company's Manager of Materials/Warehouse since joining the Company in September
1995. Previously, Mr. Ingram served as Vice President Material Management with
Okuma Machine Tools, Charlotte, North Carolina, from August 1993 to May 1995.
From November 1985 through May 1992, Mr. Ingram held senior management positions
in both information services and sales and marketing at Hardinge Brothers, Inc.,
in Elmira, New York.
ROBERT T. MCDONOUGH, 49, has served as the Company's Senior Vice President
Marketing/Sales since January 1996 and formerly served as Vice President of
General Merchandise from February 1995 through December 1995. For more than five
years prior thereto, Mr. McDonough served first as the Company's Catalog Manager
and then as its Manager of Domestic Mass Media Sales.
37
<PAGE>
THOMAS C. WYCKOFF, 31, has served as the Company's Chief Operating Officer,
Executive Vice President, General Counsel and Assistant Secretary since May
1997. Prior to that, he served as Senior Vice President Administration/Corporate
Development, General Counsel and Assistant Secretary since October 1996. From
January through October 1996, he served as Senior Vice President, General
Counsel and Assistant Secretary and as Artistic's General Counsel from July
through December 1995. From September 1991 through July 1995, Mr. Wyckoff was
associated with Cahill Gordon & Reindel, a law firm headquartered in New York,
New York where his practice focused on corporate securities and transactional
law.
ITEM 11. EXECUTIVE COMPENSATION.
COMPENSATION OF JOSEPH A. CALABRO, THE COMPANY'S CHIEF EXECUTIVE OFFICER AND
PRESIDENT.
In early 1996, the Board and Stuart Komer, then serving as Chairman of the
Board ("Chairman"), Chief Executive Officer ("CEO") and President, concluded
that a successor to Mr. Komer in his role as CEO and President should be chosen.
The reasons for this determination included: (i) that Mr. Komer had successfully
built a competent and able new management team that led the Company's turnaround
efforts and, therefore, his direct involvement in the day-to-day operating
decisions of the Company were less crucial; (ii) Mr. Komer's expressed desire to
be less involved in future day-to-day activity of the Company in order to pursue
other interests at the appropriate time; (iii) the terms of Mr. Komer's
employment agreement, which provide that a choice of a successor to Mr. Komer be
made prior to its expiration in August 1998 (the "Termination Date"); and (iv)
the strong view of the Board and Mr. Komer that a period of transition (the
"Transition") should occur prior to the Termination Date, during which time Mr.
Komer's years of expertise in the business of the Company would remain available
to be passed to his successor.
Accordingly, the Board instituted a search committee (the "Search
Committee"), which was charged with identifying and selecting the best successor
CEO and President. With the assistance of a professional executive recruiting
firm, the Search Committee identified and interviewed qualified internal and
external candidates for the position. In August 1996, the Board determined that
Joseph A. Calabro, who had been the Company's Senior Vice President of
Manufacturing since January 1996, was the most qualified candidate to assume
this role.
On August 15, 1996, the Board formally elected Mr. Calabro as CEO and
President, and executed a three-year employment agreement with him (the "Calabro
Employment Agreement"). Under the Calabro Employment Agreement, Mr. Calabro is
entitled to receive a base salary of $200,000 per year, plus an annual bonus
determined under the Company's executive bonus program, as well as certain other
benefits provided to the other executive officers, as further detailed in
footnote (3) to the Summary Compensation Table below.
In determining Mr. Calabro's salary and compensation package, the Board
obtained market survey data of competitors of the Company and of selected
companies of comparable size in certain other industries, while also taking into
account the Company's current executive salary and compensation structure.
The Company's current executive bonus program (the "Bonus Program") provides
for the participation of management in the profitability of the Company at a
percentage of a share unit, which is assigned by the Board each year, upon the
recommendations of the CEO. 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.
38
<PAGE>
Under the Bonus Program, upon being elected CEO in August 1996, Mr. Calabro
was assigned 150% of a Share Unit and received a bonus (pro rated from August
1996) of approximately $66,000 for 1996. This amount represented approximately
45% of his aggregate base salary for 1996 and was determined as appropriate by
the Audit Finance and Compensation Committee (the "AFC Committee") in relation
to the size of Share Units awarded to other executive officers and measured
against information available from comparable companies.
The AFC Committee also awarded Mr. Calabro 25,000 ISO's upon his becoming
CEO and President, with the intention of tying a significant portion of his
total compensation to the increase of stockholder value over the longer term. As
it has over the years in respect of Mr. Komer's compensation, the AFC Committee
intended to use grants of stock options to Mr. Calabro under the LTI Plan as a
substantial incentive to tie his compensation as directly as possible to the
financial performance of the Company as reflected in its stock price. This
approach also ensures that his financial interest in increasing the value of the
Company is closely aligned with that of the stockholders.
COMPENSATION OF STUART KOMER, THE COMPANY'S CHAIRMAN. In recognition of his
many years of service to the Company, upon naming Joseph Calabro CEO and
President in August 1996, the Board reaffirmed that the Company's employment
agreement with Mr. Komer (the "Komer Employment Agreement") would continue in
full force and effect as he continues to serve the Company as its Chairman. As
the AFC Committee previously stated, a key goal of the terms negotiated in the
Komer Employment Agreement was the desire to reward Mr. Komer for his more than
40 years of dedicated service to the Company in his many capacities. Mr. Komer
at various times took substantial pay reductions, received no pay raises and
placed his personal assets at risk to guaranty the Company's debts.
It is the Board's view that Mr. Komer's minimum $225,000 base salary
established by the Komer Employment Agreement remains appropriate given his
contribution to the Transition and the continued success of the Company. Mr.
Komer is also eligible to receive annual bonuses under the terms of the Komer
Employment Agreement. These bonuses are not discretionary and are determined
based upon a formula contained in the Komer Employment Agreement. This
arrangement ties Mr. Komer's fortunes directly to the Company's annual operating
performance because it is based upon the Company's net income before taxes,
which the Komer Employment Agreement defines to exclude any extraordinary,
unusual or non-recurring items of loss, expense or income.
The AFC Committee also granted 35,000 ISOs to Mr. Komer in 1996 and 74,960
above-market ISO's with a one-year term in 1997, each in recognition of his many
years of service to the Company.
COMPENSATION OF OTHER EXECUTIVE OFFICERS. During 1995, the Company's Human
Resources Department undertook an analysis of the compensation paid to the
Company's senior management to determine whether it was competitive with the
marketplace and whether it was sufficient to attract and retain competent senior
management. Based upon the salary survey information obtained from both the
Human Resources Department and from outside consultants, beginning in January of
1996 the base salaries for certain of the executive officers were adjusted
upward, based primarily upon the size of the Company and the respective level of
the executive's responsibilities.
In addition, executive officers participate in the Bonus Program at levels
recommended to the Board by the Company's CEO and President. Because the AFC
Committee believes that the incentives provided by the Bonus Program, as
measured by the Company's financial performance, have a significant impact on
the Company's stock price, it intends, by using this measuring device, to link
executive bonuses to both the financial performance of the Company and its stock
price. For 1997 and 1996, in addition to the bonuses paid to Messrs. Calabro and
Komer, the Company paid an aggregate total of $[25,943] and $189,417,
respectively, in executive bonuses to its other four executive officers.
As with the CEO and President, the AFC Committee has used grants under the
Company's LTI Plan with a similar motivation. Since the LTI Plan was instituted
in 1983, the Committee has generally awarded
39
<PAGE>
annual ISO grants to the Company's executive officers as a further incentive to
tie their compensation as directly as possible to the financial performance of
the Company, which also ensures that their financial interest in increasing the
value of the Company is closely aligned with that of the stockholders. In
determining the size of the ISO grants to individual executives, the Committee
also makes judgments as to how well the individual executive met or exceeded his
or her performance goals during the previous year, based primarily on
consultations with the CEO and President. In addition to the ISO grants made to
Messrs. Calabro and Komer, during 1997 and 1996, the AFC Committee granted an
aggregate total of approximately [25,000] and 29,000, respectively, ISOs to the
Company's other four executive officers.
Because the Company's executive compensation levels do not approach the $1
million per year range for any of its most highly paid executives, the AFC
Committee does not believe that it is necessary to take additional measures to
comply with the tax deductibility requirements for executive compensation that
exceeds $1 million per year imposed by the Revenue Reconciliation Act of 1993.
The AFC Committee will continue to monitor this issue and will take further
action as developments warrant.
This report was prepared by the members of the AFC Committee: Norman S.
Edelcup, Chairman and Morry Weiss.
40
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation and
benefits paid by the Company for all services rendered during 1997, 1996 and
1995 to five individuals: Joseph A. Calabro, who is and was, at December 31,
1997, serving as the Company's CEO and President, and Stuart Komer, serving as
the Company's Chairman and Thomas C. Wyckoff, Robert T. McDonough, William F.
Ingram and Michelle A. Crane-Alderman, who were, as of December 31, 1997, the
other most highly compensated Executive Officers whose 1997 salary and bonus
exceeded $100,000 in amount (individually, a "Named Executive" and collectively,
the "Named Executives"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ALL
OTHER
COMPENSATION
-------------
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION(1,2) SECURITIES
NAME AND ------------------------ UNDERLYING
POSITION YEAR SALARY BONUS OPTIONS
- ---------------------------------------------------------------------- ---- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Joseph A. Calabro (3)................................................. 1997 $200,000 $ 13,898 25,000(4) $ 43,647(5)
CEO and President 1996 $148,558 $ 66,061 45,000(6) $ 12,968(7)
1995 $ NA $ NA NA $ NA
Stuart Komer (8)...................................................... 1997 $235,924 $219,037(9) 74,960(10) $ 17,928(11)
Chairman 1996 $233,915 $273,414 35,000(12) $ 25,194(11)
1995 $225,547 $ -0- 25,000(13) $ 10,796(11)
Thomas C. Wyckoff (14)................................................ 1997 $139,231 $ 9,266 10,000(15) $ 2,241(16)
COO and Executive 1996 $100,825 $ 33,877 8,000(17) $ 139,649(18)
Vice President 1995 $ 28,276 $ -0- 10,000(19) $ 55,807(20)
Robert T. McDonough (21).............................................. 1997 $104,424 $ 5,559 5,000(22) $ 1,141(23)
Senior Vice President- 1996 $ 90,733 $ 33,877 8,000(24) $ 5,986(23)
Marketing/Sales 1995 $ 76,138 $ -0- -0- $ 761(23)
William F. Ingram..................................................... 1997 $ 93,077 $ 5,559 5,000(25) $ 1,693(26)
Vice President and 1996 $ 64,656 $ 8,469 6,000(27) $ 0(26)
Chief Information Officer 1995 $ 14,101 $ -0- -0- $ 3,857(26)
Michelle Crane-Alderman............................................... 1997 $ 93,077 $ 5,559 5,000(28) $ 0(29)
Vice President Manufacturing 1996 $ 76,539 $ 22,585 7,000(30) $ 4,030(29)
1995 $ 39,918 $ -0- -0- $ 402(29)
</TABLE>
- ------------------------
NA Indicates Not Applicable, because the particular Named Executive was not an
Executive Officer of the Company during the year indicated.
(1) Under applicable SEC rules, the value of any perquisites or other personal
benefits provided by the Company to any of the Named Executives need not be
separately detailed and described if their aggregate value does not exceed
the lesser of $50,000 or 10% of that executive's total salary and bonus for
the year shown. For the years indicated, the value of such personal
benefits, if any, provided by the Company to these Named Executives did not
exceed such thresholds.
(2) Includes all compensation deferred for the years shown under the Company's
LTI Plan and/or its Deferred Compensation Plan, as further described under
"Compensation Pursuant to Plans."
(3) In August 1996, the Company entered into the three-year Calabro Employment
Agreement with Mr. Calabro providing for: (i) his employment as the CEO and
President under which he is entitled to receive a base salary of $200,000
per year; (ii) an annual bonus determined under the Bonus Program; (iii)
certain other benefits provided to the other Executive Officers; and (iv)
the August 1996 ISO
41
<PAGE>
grant detailed in note (4) below. The Calabro Employment Agreement also
provides that, should he ever be terminated without cause (including in the
event of a change in control of the Company), or if he should elect to
terminate his employment as a result of certain events (including his not
being retained after a change in control of the Company), or if the Company
takes any action that reduces or limits his authority as CEO or reduces his
compensation or benefits, then he will receive (x) a minimum of 18 months'
of his then-current salary or if greater, his then-current salary for the
remaining term of the Agreement, (y) automatic vesting of all unvested
options granted under the LTI Plan, and (z) a bonus for the year in which
the termination occurs, pro-rated through the last day of the calendar month
prior to the date on which the termination occurs, with the value of all
such cash compensation payable being calculated and paid in a lump sum
within 30 days following the occurrence of any such event of termination. In
the event of his disability during the term of the Calabro Employment
Agreement, Mr. Calabro will be entitled to receive all compensation and
benefits payable thereunder for the remainder of its term. In the event of
his death during the term of the Calabro Employment Agreement, Mr. Calabro's
estate will be entitled to receive a lump-sum payment of the present value
of the amount of all compensation and benefits payable for the remainder of
the contract term. The Calabro Employment Agreement also provides that Mr.
Calabro will not compete with the Company for a five-year period beginning
on August 15, 1996.
(4) In April of 1997, Mr. Calabro was awarded 25,000 ISOs, exercisable over a
five-year term, to purchase 25,000 shares of Common Stock at an exercise
price of $4.81.
(5) This amount includes the fair market value of a one-time grant of 5,000
shares of Common Stock awarded to Mr. Calabro in 1997, together with a tax
"gross up" payment of $11,668 on this amount.
(6) In each of February, May, August and October of 1996, Mr. Calabro was
awarded ISOs, exercisable over a five-year term, to purchase 10,000 shares
of Common Stock at an exercise price of $2.62 per share, 5,000 shares of
Common Stock at an exercise price of $3.56 per share, 25,000 shares of
Common Stock at an exercise price of $3.93 per share and 5,000 shares of
Common Stock at an exercise price of $5.00 per share, respectively.
(7) This amount represents the Company's payment of $11,711 in reimbursement of
moving, relocation expenses and closing costs incurred by Mr. Calabro in
relocating from Seattle, Washington area to Elmira, New York, together with
a tax "gross-up" payment of $1,257 on this amount.
(8) In August 1993, the Company entered into the Komer Employment Agreement with
Mr. Komer providing for his employment as Chairman, CEO and/or President of
the Company for a five-year term from August 31, 1993 (the "Initial
Period"). It also provides that, at the end of the Initial Period, Mr. Komer
has the option to elect to serve as a consultant to the Company for a
two-year term ending on August 31, 2000. During the Initial Period, Mr.
Komer will receive a minimum annual base salary of $225,000 or such greater
amount as the Board shall determine and an annual bonus determined by a
formula based upon the Company's annual pre-tax net income, plus various
insurance and other benefits provided for in the Komer Employment Agreement.
At the end of the Initial Period, Mr. Komer will also receive a lump-sum
payment of $400,000 as consideration for the three years that will then
remain on the term of the non-competition covenant contained in the Komer
Employment Agreement, regardless of whether he elects to serve as a
consultant to the Company for the next two years. At the end of the Initial
Period, should Mr. Komer elect to serve as a consultant to the Company for
two years, his compensation for such services will consist of an annual
bonus determined by a formula based upon the Company's annual pre-tax net
income, plus various insurance and other benefits provided in the Komer
Employment Agreement. In the event that, at any time during the term of the
Komer Employment Agreement, Mr. Komer's employment is terminated without
"Cause" as defined therein or he resigns for "Good Reason" as defined
therein, he shall nevertheless be entitled to receive all compensation and
benefits provided thereunder for the remainder of its term, with the value
of all cash compensation payable being calculated and paid in a lump sum
within 30 days following the occurrence of any such event of termination. In
the event of his disability during the term of the Komer Employment
Agreement, Mr. Komer will be entitled to receive all compensation and
benefits payable thereunder for the remainder of its term. In the event of
his death during the term of the Komer Employment Agreement, Mr. Komer's
estate will be entitled to receive a lump-
42
<PAGE>
sum payment of the present value of the amount of all compensation and
benefits payable for the remainder of the contract term. In connection with
the August 15, 1996 election of Mr. Calabro as the Company's CEO and
President, the Board ratified that the Komer Employment Agreement remains in
full force and effect with respect to Mr. Komer's continued service as
Chairman.
(9) As a consideration to Mr. Komer for financial planning reasons, the Audit,
Finance and Compensation Committee ("AFC Committee") of the Board agreed to
pay $219,037 to Mr. Komer in December 1997, which amount was estimated to be
the bonus he would have been expected to receive for the year. As of the
date hereof, Mr. Komer and the AFC Committee are discussing the most
appropriate formulaic calculation of such bonus amount. As a result of the
continuation of such discussions, the Company has both (i) booked a
receivable from Mr. Komer of approximately $150,000 and (ii) booked reserve
of $150,000, each measure providing for the uncertainty at this time of the
final determination of the bonus amount. At such time as the calculation is
determined, the Company will adjust the receivables and reserve accounts
accordingly.
(10) In April of 1997, Mr. Komer was awarded ISO's to purchase 74,960 shares of
Common Stock at an exercise price of $6.67 per share, exercisable within
twelve months. These ISO's replaced an identical amount that expired in
1997.
(11) The amounts shown represent the Company's matching contributions to Mr.
Komer's account under the 401(k) Plan in the amount of: $3,167 for 1997;
$590 for 1996; and $98 for 1995; plus its profit-sharing contributions to
his 401(k) account of $0 for 1997; plus additional group term life insurance
premiums paid on Mr. Komer's behalf in the amount of: $6,768 for 1997;
$6,768 for 1996; and $4,014 for 1995. The Company also has insurance
policies on Mr. Komer's life as to all of which policies Mr. Komer's
children are the beneficiaries. These are all split-dollar, whole-life
policies whose net cash surrender values will be paid to the Company upon
Mr. Komer's death. The value of the premiums paid by the Company for Mr.
Komer's benefit with respect to the term life insurance component of these
policies was: $7,993 for 1997; $7,688 for 1996; and $6,684 for 1995. These
amounts are also included in the totals shown above.
(12) In October 1996, Mr. Komer was awarded ISOs to purchase 35,000 shares of
Common Stock at an exercise price of $5.00 per share, exercisable over a
five-year term.
(13) In April 1994, Mr. Komer was awarded ISOs to purchase 25,000 shares of
Common Stock at an exercise price of $5.50 per share, exercisable over a
five-year term.
(14) In May 1997, the Company entered into a three-year employment agreement
with Mr. Wyckoff providing for his employment as the Company's Chief
Operating Officer and Executive Vice President and General Counsel under
which he is entitled to receive a base salary of $146,000 per year, plus an
annual bonus determined under the Bonus Program, plus other benefits given
to the Company's other executives. The Wyckoff Employment Agreement also
provides that, should he ever be terminated without cause (including in the
event of a change in control of the Company), or if he should elect to
terminate his employment as a result of certain events (including his not
being retained after a change in control of the Company), or if the Company
takes any action that reduces or limits his authority as COO or reduces his
compensation or benefits, then he will receive (x) a minimum of 18 months'
of his then-current salary or if greater, his then-current salary for the
remaining term of the Agreement, (y) automatic vesting of all unvested
options granted under the LTI Plan, and (z) a bonus for the year in which
the termination occurs, pro-rated through the last day of the calendar month
prior to the date on which the termination occurs, with the value of all
such cash compensation payable being calculated and paid in a lump sum
within 30 days following the occurrence of any such event of termination. In
the event of his disability during the term of the Wyckoff Employment
Agreement, Mr. Wyckoff will be entitled to receive all compensation and
benefits payable thereunder for the remainder of its term. In the event of
his death during the term of the Wyckoff Employment Agreement, Mr. Wyckoff's
estate will be entitled to receive a lump-sum payment of the present value
of the amount of all compensation and benefits payable for the remainder of
the contract term. The Wyckoff Employment Agreement also provides that Mr.
Wyckoff will not compete with the Company for a five-year period beginning
on August 15, 1996.
43
<PAGE>
(15) In April of 1997, Mr. Wyckoff was awarded ISO's to purchase 10,000 shares
of Common Stock at an exercise price of $4.81 per share, exercisable over a
five year term.
(16) This amount includes the Company's matching contribution to Mr. Wyckoff's
account under the 401(k) Plan of $651.
(17) In each of May and October 1996, Mr. Wyckoff was awarded ISOs, exercisable
over a five-year term, to purchase 4,000 shares of Common Stock at an
exercise price of $3.56 per share and 4,000 shares of Common Stock at an
exercise price of $5.00 per share, respectively.
(18) Of this total, $39,200 represents the fair market value of a one-time grant
of 10,000 shares of Common Stock that was awarded to Mr. Wyckoff in August
1995 in connection with his hiring by the Company and earned by him in
August 1996; and $64,285 represents the reimbursement of moving, relocation
expenses and closing costs incurred by Mr. Wyckoff in relocating from the
New York City area to Elmira, New York, together with a tax "gross-up"
payment of $36,164 on this amount.
(19) In August 1995, Mr. Wyckoff was awarded ISOs to purchase 10,000 shares of
Common Stock at an exercise price of $3.12 per share, exercisable over a
five-year term.
(20) This amount represents the payment of $39,054 in reimbursement of moving,
relocation expenses and closing costs incurred by Mr. Wyckoff in relocating
from the New York City area to Elmira, New York, together with a tax
"gross-up" payment of $16,753 on this amount.
(21) Mr. McDonough and the Executive Officers other than Messrs. Calabro and
Wyckoff, each have a letter agreement with the Company providing that, if
they are ever terminated without cause through November 1998, they will
receive: (i) 12 months' worth of their then-current salary, (ii) automatic
vesting of all unvested options granted under the Company's LTI Plan, and
(iii) any bonus accrued at the time at which the termination occurs, with
the value of all such cash compensation to be paid in a lump sum within 30
days following the occurrence of any such event of termination.
(22) In April of 1997, Mr. McDonough was awarded ISO's to purchase 5,000 shares
of Common Stock at an exercise price of $4.81 per share, exercisable over a
a five year term.
(23) The amounts shown represent the Company's matching contributions to Mr.
McDonough's account under the 401(k) Plan in the amount of: $1,141 for 1997;
$907 for 1996; and $761 for 1995; plus its profit-sharing contribution to
his 401(k) account of $0 for 1997 and $4,597 for 1996..
(24) In each of May and October 1996, Mr. McDonough was awarded ISOs,
exercisable over a five-year term, to purchase 4,000 shares of Common Stock
at an exercise price of $3.56 per share and 4,000 shares of Common Stock at
an exercise price of $5.00 per share, respectively.
(25) In April of 1997, Mr. Ingram was awarded ISO's to purchase 5,000 shares of
Common Stock at an exercise price of $4.81 per share, exercisable over a
five year term.
(26) The amounts shown represent the Company's matching contributions to Mr.
Ingrams's account under the 401(k) Plan in the amount of: $1,693 for 1997;
$0 for 1996; and $0 for 1995; plus its profit-sharing contribution to his
401(k) account of $0 for 1997.
(27) In each of May and October 1996, Mr. Ingram was awarded ISOs, exercisable
over a five year term, to purchase 2,000 and 4,000 shares of Common Stock at
an exercise price of $3.56 and $5.00, respectively.
(28) In April of 1997, Ms. Crane-Alderman was awarded ISO's to purchase 5,000
shares of Common Stock at an exercise price of $4.81 per share, exercisable
over a five year term.
(29) The amounts shown represent the Company's matching contributions to Ms.
Crane-Alderman's account under the 401(k) Plan in the amount of: $0 for
1997; $456 for 1996; and $402 for 1995; plus its profit-sharing contribution
to her 401(k) account of $0 for 1997 and $3,574 for 1996..
(30) In each of May and October 1996, Ms. Crane-Alderman was awarded ISOs,
exersisable over a five-year term, to purchase 3,000 and 4,000 shares of
Common Stock at an exercise price of $3.56 and $5.00, respectively.
44
<PAGE>
COMPENSATION OF DIRECTORS
The Company has an Outside Directors' Compensation Plan (the "Director
Plan") which enables all outside Directors to elect to take payment of their
annual retainer fees in shares of Common Stock, in compliance with relevant SEC
rules. Under the Director Plan, outside Directors are paid the following
schedule of fees: an annual retainer of $5,000; an additional annual retainer of
$7,500 to the Chairman of each Board committee; a fee of $800 for each Board
meeting attended; and a fee of $400 per committee meeting attended. The
per-meeting fees are payable only in cash. The annual retainer fees are earned
for a full year of service and are reduced in proportion to the number of Board
or committee meetings from which an outside Director is absent out of the total
number of such meetings held during that year. Each year on the date of the
Board's annual meeting, the outside Directors may elect to receive all or a
portion of their annual retainer fees accrued and payable for the past year of
service in shares of Common Stock. The number of shares payable is then
determined by dividing the amount of such fees to be paid in stock by the
closing price for a share of Common Stock on that date.
The Company also provides between $30,000 and $50,000 in face amount of term
life insurance to each of its Directors, for which the Company pays an annual
premium of between $403 and $672 per Director. Directors are also compensated at
the rate of $350 per day for each day otherwise spent in this capacity on
Company business.
COMPENSATION PURSUANT TO PLANS
COMPENSATION PURSUANT TO THE EMPLOYEE LONG-TERM INCENTIVE PLAN
The LTI Plan provides long-term incentives to key employees as determined by
the AFC Committee. Under the Plan, key employees can be awarded stock incentive
rights ("SIRs") and ISOs.
The LTI Plan is administered by the AFC Committee, whose duties include
selecting the employees who will receive grants and determining the amounts and
types (i.e., ISOs, SIRs or a combination thereof) of grants awarded. In making
its selections and determinations, the AFC Committee has substantial flexibility
and makes its judgments based largely on the functions and responsibilities of
the particular employee, the employee's past and potential contributions to the
Company's profitability and growth, and the value of the employee's services to
the Company. The AFC Committee also interprets and implements the Plan and the
grants made thereunder. The members of the AFC Committee are all outside
Directors and outside Directors are not eligible to receive grants under the LTI
Plan.
The ISOs granted under the LTI Plan represent rights to purchase shares of
Common Stock within a fixed period of time and at a cash price per share
("exercise price") specified by the AFC Committee on the date of grant. The
exercise price cannot be less than the fair market value of a share of Common
Stock on the date of grant. Options are exercisable during the period fixed by
the AFC Committee, except that no option may be exercised more than ten years
from the date of grant.
SIRs are rights to receive shares of Common Stock without any cash payment
to the Company, conditioned only on continued employment with the Company
throughout a specified four-year period. When awarding SIRs, the Committee has
the discretion to establish a full four-year ("100%") incentive period or a
staggered 25% per year four-year incentive period with regard to the earnout of
an SIR. If the Committee awarded an SIR with a 100% four-year incentive period
requirement, the recipient would have to remain employed by the Company for four
years before receiving the shares subject to the SIR award; earlier termination
of employment, except in the event of death, permanent disability or normal
retirement, would result in the automatic cancellation of the SIR. If the
Committee awarded an SIR with a staggered 25% per year four-year incentive
period, the recipient would be entitled to receive 25% of the total number of
shares subject to the SIR grant at the end of each year of the four year
incentive period, so long as the recipient was still employed by the Company at
the end of each such year, with exceptions made in the event of death, permanent
disability or normal retirement. Should a recipient die, become permanently
disabled or retire during an SIR incentive period, he/she or his/her estate, as
the case may be, would receive a pro-rated number of the shares underlying the
SIR award based upon the ratio that the
45
<PAGE>
number of months since the SIR had been granted bore to the full four-year
incentive period, less any shares already issued in the case of a 25% per year
four-year incentive period.
During an SIR incentive period, should the Company declare any cash
dividends on its Common Stock, the holder of an SIR would be entitled to receive
from the Company cash "dividend equivalent" payments equal to any such cash
dividends that the holder would have received had he/she owned the shares of
Common Stock underlying the SIR. However, the holder of an SIR would not have
any other rights with respect to the shares underlying an SIR award, e.g., the
right to vote or pledge such shares, until such shares are actually issued to
the holder.
An employee can be awarded both SIRs and ISOs in any combinations that the
AFC Committee may determine. In such an event, an exercise of an ISO would not
in any way affect or cancel any SIRs an employee may have received.
Subject to the provisions of the Plan, the individuals to whom grants of
ISOs and/or SIRs are awarded, the number of shares covered by each award, the
incentive period applicable to each SIR award, the times when options may be
exercised, the term and other provisions of each option are fixed by the AFC
Committee. No ISO may be granted to a person who owns at the time of grant or
would own after full exercise of all options and rights to acquire the Company's
shares, more than 10% of the total combined voting power of the Common Stock,
unless at the time of grant, the ISO price is at least 110% of the fair market
value of the shares subject to the ISO and the ISO is not exercisable after the
expiration of five years from the date of grant.
The following table shows information concerning the stock options granted
under the LTI Plan during 1997 to the Named Executives. To date, the AFC
Committee has not awarded any SIRs under the Plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------- POTENTIAL REALIZABLE VALUE
% OF AT ASSUMED ANNUAL RATES OF
NUMBER OF TOTAL STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM (1)
OPTIONS EMPLOYEES EXERCISE -------------------------------
GRANTED IN FISCAL PRICE EXPIRATION 0% 5% 10%
NAME # YEAR ($/SHARE) DATE ($) ($) ($)
- ---------------------------------- ----------- ------------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph A. Calabro................. 25,000(2) 18.2% 4.81 4/30/07 15,750 101,280 232,499
Stuart Komer...................... 74,960(3) 54.5% 6.67 4/30/98 -0- N/A N/A
Thomas C. Wyckoff................. 10,000(2) 7.3% 4.81 4/30/07 6,300 40,512 93,000
Robert T. McDonough............... 5,000(2) 3.6% 4.81 4/30/07 3,150 20,256 46,500
William F. Ingram................. 5,000(2) 3.6% 4.81 4/30/07 3,150 20,256 46,500
Michelle Crane-Alderman........... 5,000(2) 3.6% 4.81 4/30/07 3,150 20,256 46,500
</TABLE>
- ------------------------
(1) These calculations show the potential gain that would be realized if the
ISOs shown were not exercised until the end of their full term, assuming the
compound annual rate of appreciation of the stock price indicated (0%, 5%,
and 10%) over the term of the ISOs shown, net of the exercise prices paid.
(2) These ISOs were granted on April 30, 1997, for a term of ten years, 20% of
which first became exercisable on April 30, 1997 and an additional 20% of
which become exercisable on the first, second, third and fourth
anniversaries of the grant date.
(3) These ISOs were granted on April 30, 1997 for a one year term to replace an
identical number of ISOs with the same exercise price that expired in 1997.
46
<PAGE>
During 1997, none of the Named Executives exercised any options under the
LTI Plan. The following table reflects information concerning the number and
value of all unexercised options held by each of the Named Executives at year
end 1997 under the LTI Plan:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- ------------------------------------------------------------- ----------------------- --------------------------
<S> <C> <C>
Joseph A. Calabro............................................ 23,000/47,000 26,925/44,325
Stuart Komer................................................. 133,960/26,000 1,750/2,625
Thomas C. Wyckoff............................................ 11,200/16,800 15,364/14,596
Robert T. McDonough.......................................... 9,600/9,400 3,319/5,391
William F. Ingram............................................ 3,400/7,600 1,767/3,438
Michelle Crane-Alderman...................................... 7,400/8,600 2,593/4,427
</TABLE>
- ------------------------
(1) For each Named Executive, these values are calculated by subtracting the per
share option exercise price for each tranche of options held on December 31,
1997, from the closing price of the Company's Common Stock on that date
($5.13), then multiplying that figure by the number of options in that
tranche, then aggregating the resulting subtotals.
As of December 31, 1997, 750,620 options were available for grants under the
Plan. As of that date, there were 412,910 options outstanding, with a weighted
average exercise price of $5.71 per share. The expiration dates of these option
grants ranged from February 17, 1998 through October 27, 2001.
PROFIT SHARING 401(K) PLAN
The Company has a Profit Sharing 401(k) Plan, in which employees who are 21
years of age or older and who work at least 1,000 hours during one year of
continuous service are eligible to participate. All contributions to an electing
employee's account are made in accordance with the regulations set forth under
Section 401 of the Internal Revenue Code of 1986, as amended. The Company's
matching contribution is vested at the end of the year in which it was received
by the employee and profit-sharing contributions, as described below, are
forfeitable until a participating employee has three years of employment with
the Company with a minimum of 1,000 hours of service in each of those years.
Under the Plan, participating employees can elect to contribute, on a
tax-deferred basis, up to 15% of their annual compensation, subject to a ceiling
of $9,500 for 1997. The Company makes a matching contribution of 50% of each
employee's contributions to the 401(k) Plan, up to the first 4% of the
employee's compensation deferred each year. Also under the 401(k) Plan, the
Company may make annual, discretionary profit-sharing contributions to the
accounts of participating employees based upon the Company's profitability for
the year. These contributions, when made, are calculated under a formula which
is based upon the percentage that an eligible employee's compensation for the
fiscal year bears to the total compensation of all employees participating in
the 401(k) Plan, after taking into account the Company's contribution to Social
Security.
DEFERRED COMPENSATION PLAN
In October 1996, the Board instituted a Nonqualified Deferred Compensation
Plan, pursuant to which Executive Officers permitted to participate in this Plan
by the Board or the CEO can elect to defer payment of all or a portion of their
compensation to a future date, all in accordance with the terms of this Plan,
and by such deferral, likewise defer the payment of income taxes on such
amounts. There are no Executive Officers currently participating in this Plan.
Any amounts deferred by any Executive Officer
47
<PAGE>
under this Plan would be included for the years shown as earned in the Summary
Compensation Table above. Interest on amounts deferred is accrued annually and
is based on the prime rate as in effect from time to time.
Stuart Komer is the only participant in the Company's 1987 Deferred
Compensation Plan, whereby he can elect to defer payment of all or a portion of
his compensation to a future date, all in accordance with the terms of such
Plan, and by such deferral, likewise defer the payment of income taxes on such
amounts. All amounts deferred by Mr. Komer under this Plan are included for the
years shown in the Summary Compensation Table above. Interest on amounts
deferred under this Plan is accrued monthly and is calculated at the prime rate
as in effect from time to time.
48
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of January 21, 1998, by (1) each
beneficial owner of more than 5% of the outstanding Common Stock of the Company,
(2) each Director of the Company, (3) the Executive Officers of the Company, and
(4) all Directors and Executive Officers of the Company as a group. The Company
believes that each of the following persons has sole investment and voting power
in respect of his/her/its shares owned except as otherwise noted.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OWNERSHIP
NAME OF COMMON STOCK OF COMMON STOCK(1)
- ----------------------------------------------------------- ----------------- -----------------------
<S> <C> <C>
2,250,000(2) 38.5%
American Greetings Corporation.............................
One American Road
Cleveland, OH 44144
469,746(3) 8.0%
Stuart Komer...............................................
One Komer Center
Elmira, NY 14902
Joseph A. Calabro.......................................... 35,000(4) *
Norman S. Edelcup.......................................... 8,000 *
Lyndon E. Goodridge........................................ 7,000 *
Irving I. Stone............................................ 1,500(5,6) *
Morry Weiss................................................ 3,364(6) *
Thomas C. Wyckoff.......................................... 40,540(7) *
Robert T. McDonough........................................ 10,650(8) *
William F. Ingram.......................................... 5,900(9)
Michelle Crane-Alderman.................................... 9,600(10)
All Directors and Executive Officers of the Company as a 591,300(3, ,9) 10.1%
group (10 persons).......................................
</TABLE>
- ------------------------
* Indicates less than 1% of the Company's issued and outstanding shares.
(1) Percentages have been calculated assuming, in the case of each person, the
exercise of all options that are currently or will become exercisable within
the next 60 days by each such person, but not the exercise of any options
owned by any other person listed. The calculation of percentage ownership
for all Directors and Executive Officers as a group assumes the exercise of
all options that are currently or will become exercisable within the next 60
days by each such person.
(2) For a description of certain arrangements between the Company and AGC, see
Item 13. Certain Relationships and Related Transactions.
(3) Includes options to purchase 138,960 shares that are currently or will
become exercisable by Mr. Komer within the next 60 days and 4,000 shares
owned by Mr. Komer's wife.
(4) Includes options to purchase 31,000 shares that are currently or will become
exercisable by Mr. Calabro within the next 60 days.
(5) These shares are held in the Judith Stone Weiss Trust for the benefit of Mr.
Stone, who has sole voting and investment power with respect to these
shares.
(6) Does not include the 2,250,000 shares of Common Stock owned by AGC.
(7) Includes options to purchase 14,000 shares that are currently or will become
exercisable by Mr. Wyckoff within the next 60 days and 640 shares owned by
Mr. Wyckoff's wife.
(8) Includes options to purchase 12,000 shares that are currently or will become
exercisable by Mr. McDonough within the next 60 days.
(9) Includes options to purchase 3,400 shares that are or will become
exercisable by Mr. Ingram within the next 60 days.
(10) Includes options to purchase 7,400 shares that are currently or will become
exercisable by Ms. Crane-Alderman within the next 60 days.
49
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On December 21, 1997, the Company entered into the Asset Purchase Agreement
with ADI whereby the Company will sell certain assets of the P&C Businesses to
ADI for $9 million in cash and the assumption of certain liabilities relating to
the P&C Businesses. ADI was formed by Thomas C. Wyckoff, Chief Operating Officer
of the Company, for the sole purpose of effecting the Asset Sale to ADI. In
addition, at the election of ADI, up to $250,000 of the purchase price for the
P&C Businesses may be satisfied by delivery to the Company of a junior
subordinate promissory note. Further, on October 15, 1997 and November 7, 1997,
the Company advanced $50,000, or a total of $100,000, to ADI for the payment of
expenses other than legal and accounting fees, which advance was evidenced by
two promissory notes, each with an interest rate of 6%, from ADI to the Company.
Pursuant to a standstill agreement (the "Original Standstill Agreement"),
AGC purchased 2,250,000 shares (as adjusted for a stock split) of the Company's
Common Stock (the "AGC Shares"), for an aggregate net purchase price of
$6,450,000. AGC acquired its interest in the Company primarily as an investment.
However, in addition, the Company has agreed to promote certain of AGC's
greeting card products through its catalogs and AGC may promote certain of the
Company's personalized products through AGC's retail outlets.
On June 16, 1992, the Company and AGC amended the Original Standstill
Agreement (the "Amended Standstill Agreement") governing the control over the
AGC Shares.
The Amended Standstill Agreement superseded and terminated in their entirety
both the Original Standstill Agreement, which was among the Company, AGC and Mr.
Komer, and the Voting Trust Agreement of the same date and among the same
parties, under which the AGC Shares had been held until that date.
Under the Amended Standstill Agreement, AGC is generally prohibited from
purchasing any additional shares of Common Stock and has agreed to vote the AGC
Shares only in accordance with the recommendations made to the Company's
Stockholders by the Board. AGC retains the right to nominate a maximum of two
Directors to the Board, so long as it owns more than 20% of the outstanding
shares of Common Stock. It can nominate only one Director if its percentage
ownership drops to between 10% and 20% of the outstanding shares of Common Stock
and loses these nomination rights entirely if its percentage ownership drops
below 10%. AGC also has certain anti-dilution rights to enable it to maintain
its present proportionate ownership of approximately 36% of the outstanding
shares of Common Stock.
Additionally, during the term of the Amended Standstill Agreement AGC is
permitted to sell any of the AGC Shares only to the public, either in a
registered offering or under Rule 144 ("Rule 144") of the Securities Act of
1933, as amended (the "Act"), subject, however, to the Company's prior right of
first refusal to purchase any or all of such shares at their then-current market
price. AGC also has certain "demand" and "piggyback" registration rights to
enable it to have the AGC Shares registered for public sale. Under the Amended
Standstill Agreement, AGC can acquire the balance of the outstanding shares of
Common Stock or the Company's assets only in a transaction approved by the Board
(excluding any Directors nominated by AGC).
Unless earlier terminated, the Amended Standstill Agreement will expire on
December 31, 2000. However, it can be terminated at any time by AGC upon 90 days
notice to the Company. As of April 30, 1996, the Company could have terminated
the Amended Standstill Agreement at any time upon giving one year's notice to
AGC and under certain other circumstances. The Amended Standstill Agreement also
can be terminated by either party upon notice given within 90 days following any
termination of a Marketing Agreement (defined below), and automatically
terminates at such time as AGC's holdings constitute less than 5% of the
outstanding shares of Common Stock. Within 60 days prior to the effective date
of any termination of the Amended Standstill Agreement, however, the Company has
the right to purchase all or
50
<PAGE>
any part of the AGC Shares at their then-current market price, and/or to require
AGC to sell all or part of the AGC Shares in a registered public offering.
Mr. Komer is not a party to the Amended Standstill Agreement. However, in a
letter to AGC dated June 16, 1992, he has agreed that, during the term of the
Amended Standstill Agreement, any sales of his Company shareholdings will only
be made through an underwritten public offering or under Rule 144.
Simultaneously with the signing of the Amended Standstill Agreement, the
Company and AGC also executed a direct mail agreement (the "Marketing
Agreement") that gives the Company exclusive rights to market and sell by mail
certain paper products based on AGC's designs through the Company's catalogs,
order fulfillment and other direct mail marketing programs. This Agreement
likewise expires on December 31, 2000, unless earlier terminated upon nine
months advance notice given by either party.
At the Effective Time of the Merger, the foregoing arrangements shall
terminate except that ADI will continue to license certain intellectual property
from AGC.
51
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
INDEX TO FINANCIAL STATEMENTS COVERED BY REPORT OF INDEPENDENT AUDITORS
<TABLE>
<S> <C>
Balance Sheets as of December 31, 1997 and 1996.................................... 18
Statements of Operations for each of the three years ended December 31, 1997, 1996
and 1995......................................................................... 19
Statements of Changes in Stockholders' Equity...................................... 20
Statements of Cash Flows for the three years ended December 31, 1997, 1996 and
1995............................................................................. 21
Notes to Financial Statements...................................................... 22
</TABLE>
LIST OF EXHIBITS
The following constitutes the list of exhibits required to be filed as part
of this report pursuant to Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ----------- -------------------------------------------------- --------------------------------------------------
<C> <S> <C>
2-1 Amended Standstill Agreement dated as of June 1, Incorporated by reference to Exhibit 2-1 to the
1992, between American Greetings Corporation Company's Report on Form 8-K filed on July 2,
("American") and Artistic. 1992.
2-2 Agreement and Plan of Merger, dated December 21, Filed herewith.
1997, between Artistic, MDC Communications
Corporation and AGI Acquisition Co.
3-1 Certificate of Incorporation of the Company, a Incorporated by reference to Exhibit 3-1 to the
Delaware corporation. Company's Form 10-K for the year ended December
31, 1987.
3-2 Bylaws of the Company, as amended. Incorporated by reference to Exhibit 3-2 to the
Company's Report on Form 10-K for the year ended
December 31, 1996.
10-1* Company's Employee Long-Term Incentive Plan, as Incorporated by reference to Exhibit 10-1 to the
amended. Company's Form 10-K for the year ended December
31, 1993 ("1993 10-K").
10-2* Employment Agreement between the Company and Incorporated by reference to Exhibit 10-2 to the
Stuart Komer (the "Komer Agreement"). 1993 10-K.
10-3* Amendment to the Komer Agreement. Incorporated by reference to Exhibit 10-3 to the
Company's Form 10-K for the year ended December
31, 1996.
10-4* Employment Agreement between the Company and Incorporated by reference to Exhibit 10 to the
Joseph A. Calabro. Company's Form 10-Q for the quarter ended
September 30, 1996.
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ----------- -------------------------------------------------- --------------------------------------------------
<C> <S> <C>
10-6* Employment Agreement between the Company and Incorporated by reference to Exhibit 10-6 to the
Thomas C. Wyckoff. Company's Report on Form 10-K for the year ended
December 31, 1996.
10-7* Form of Deferred Compensation Plan between the Incorporated by reference to Exhibit 10-9 to the
Company and Stuart Komer. Company's 10-K for the year ended December 31,
1986.
10-8* Form of Nonqualified Deferred Compensation Plan Incorporated by reference to Exhibit 10-8 to the
between the Company and Certain Highly Compensated Company's Report on Form 10-K for the year ended
Employees of the Company. December 31, 1996.
10-10 Revolving Loan Agreement (the "Revolver") dated Incorporated by reference to Exhibit 10-5 of the
March 8, 1996, between the Company and Marine Company's Report on Form 10-K for the year ended
Midland Bank, N.A. ("Marine"). December 31, 1995 ("1995-10-K").
10-11 Amendment and Modification Agreement of the Incorporated by reference to Exhibit 10-15 of the
Revolver between the Company and Marine, dated as 1995 10-K.
of March 8, 1996.
10-12 Amendment No. 2 to the Revolver, dated as of Incorporated by reference to Exhibit 10-12 to the
November 14, 1996. Company's Report on Form 10-K for the year ended
December 31, 1996.
10-13 Amendment No. 3 to the Revolver, dated as of Incorporated by reference to Exhibit 10-13 to the
December 31, 1996. Company's Report on Form 10-K for the year ended
December 31, 1996.
10-14* Outside Directors Compensation Plan. Incorporated by reference to Exhibit 10-14 to the
Company's Report on Form 10-K for the year ended
December 31, 1992.
10-15 Security Agreement dated March 8, 1996, between Incorporated by reference to Exhibit 10-7 of the
the Company and Marine. 1995 10-K.
10-16 Lease dated March 31, 1993 between the Company and Incorporated by reference to Exhibit 10-8 to the
Stuart Komer leasing premises located at 406 1995 10-K.
Academy Place, Elmira, NY, as amended.
10-17 Sale and Development Agreement dated April 26, Incorporated by reference to Exhibit 10-16 of the
1991 between the Company and the City of Elmira, Company's Report on Form 10-K for the year ended
NY. December 31, 1991.
10-18 Loan Agreement and Direct Mortgage dated November Incorporated by reference to Exhibit 10-14 of the
6, 1995 between the Company and New York State 1995 10-K.
Urban Development Corporation.
10-19 Advertising Agreement between Valassis and the Incorporated by reference to Exhibit 10-17 of the
Company dated May 30, 1995 (the "Advertising 1995 10-K.
Agreement").
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ----------- -------------------------------------------------- --------------------------------------------------
<C> <S> <C>
10-20 Amendment to the Advertising Agreement dated June Incorporated by reference to Exhibit 10-20 to the
28, 1996. Company's Report on Form 10-K for the year ended
December 31, 1996.
10-21 Master Agreement between Artistic and Harland, Incorporated by reference to Exhibit 10-1 of the
dated August 29, 1996. Company's Report on Form 8-K filed on September
20, 1996.
10-22 Fulfillment Agreement between Artistic and Incorporated by reference to Exhibit 10-2 of the
Harland, dated August 29, 1996. Company's Report on Form 8-K filed on September
20, 1996.
10-23 Agreement for Purchase of Equipment between Incorporated by reference to Exhibit 10-3 of the
Artistic and Harland, dated August 29, 1996. Company's Report on Form 8-K filed on September
20, 1996.
10-24 Asset Purchase Agreement, dated December 21, 1997, Incorporated by reference to Exhibit 10-24 of the
between Artistic and Artistic Direct Incorporated. Company's Report on Form 8-K filed on December 30,
1997.
11 Statement re: computation of per share earnings. See Note 1 to the Notes to the Consolidated
Financial Statements Incorporated by reference in
Item 8 hereof.
23 Consent of Arthur Andersen LLP, Certified Public Filed herewith.
Accountants, re: Incorporation by Reference.
27 Financial Data Schedule. Filed only with EDGAR filing, per Regulation S-K,
Rule 601 (c)(1)(v).
</TABLE>
- ------------------------
* Indicates a management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Report pursuant to Item 14 (c) of this
Report.
REPORTS ON FORM 8-K
On December 21, 1997, the Company filed a report on Form 8-K to report,
under the heading of Item 2, Acquisition or Disposition of Assets, that it
entered into an agreement and plan of merger (the "Merger Agreement") with MDC
Communications Corporation, a Canadian company ("MDC"), for the merger of a
wholly-owned subsidiary of MDC with and into Artistic (the "Merger") for cash
consideration of $5.70 for each of the approximately 5.8 million Artistic shares
of common stock outstanding, for total proceeds to the stockholders of Artistic
of approximately $33 million.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 16, 1998
<TABLE>
<S> <C> <C>
ARTISTIC GREETINGS INCORPORATED
By: /s/ DAVID A. PREUCIL
-----------------------------------------
Name: David A. Preucil
Title: VICE PRESIDENT FINANCE AND CHIEF
FINANCIAL OFFICER (PRINCIPAL
FINANCIAL & ACCOUNTING OFFICER)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons, on behalf of the Company,
in the capacities and as of the dates indicated.
<TABLE>
<S> <C> <C>
By: /s/ JOSEPH A. CALABRO Date: April 16, 1998
----------------------
Name: Joseph A. Calabro
Title: Chief Executive Officer, President and a Director
By: /s/ NORMAN S. EDELCUP Date: April 16, 1998
-----------------------
Name: Norman S. Edelcup
Title: Director
By /s/ LYNDON E. GOODRIDGE Date: April 16, 1998
------------------------
Name: Lyndon E. Goodridge
Title: Director
By: /s/ STUART KOMER Date: April 16, 1998
-----------------
Name: Stuart Komer
Title: Chairman and a Director
By: /s/ DAVID A. PREUCIL Date: April 16, 1998
--------------------
Name: David A. Preucil
Title: Vice President Finance and Chief Financial Officer
(Principal Financial & Accounting Officer)
By: /s/ IRVING I. STONE Date: April 16, 1998
------------------
Name: Irving I. Stone
Title: Director
By: /s/ MORRY WEISS Date: April 16, 1998
----------------
Name: Morry Weiss
Title: Director
By: /s/ THOMAS C. WYCKOFF Date: April 16, 1998
-----------------------
Name: Thomas C. Wyckoff
Title: Chief Operating Officer & Executive Vice President
</TABLE>
55
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K into the Company's previously filed
Registration Statements on Form S-8 File Nos. 33-24503 and 33-43605.
Rochester, New York,
March 31, 1998
