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Date: September 4, 2000
Vol. IV, No. 17

Printer Version

TABLE OF CONTENTS

bulletCommentary
bulletMichaels: Strong Second Quarter
bulletAugust Heat Melts Sales Figures
bulletInternet Copyright News
bulletHSA Takes Action On Copyright Problem
bulletMedia Highlights Scrapbookers' Enthusiasm
bulletWall Street Praises, Worries About Michaels
bulletMiscellaneous News
bulletRandom Views, Random Quotes
bulletMichaels' Redesigned Site: A Work In Progress
bulletE-Commerce Update
bulletAdvice On Offering Freebies
bulletThe Creative Network: Job Openings
bulletCreative Network: Job Of The Month
bulletThe CLN Retail Index
bulletSimplify...Simplify

COMMENTARY

A few months ago I recommended a piece in the New Yorker, "Clicks & Mortar", as the best article I'd ever read about the Internet and e-commerce. It still is, and is available on the author's website, www.malcolmgladwell.com.

Since then, Gladwell published a best-selling book, The Tipping Point, which gives a fascinating look at how trends begin and grow. Thoughtful reading for any vendor who would like to see a new product line become the next scrapbooking, fabric painting, or cross stitch.

To read an interview by eMarketer in which Gladwell briefly describes his theories, go to http://www.emarketer.com/enews/20000821_gladwell.html?ref=wn.

Why did fabric painting languish for years, then suddenly become the scrapbooking of the 80's? People have made scrapbooks for generations. Why such interest now? The Tipping Point can give you some insights.
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MICHAELS: STRONG SECOND QUARTER

Net income the second quarter which ended July 29th was $5.7 million ($0.16/diluted share), compared to $958,000 ($0.03), excluding the after-tax effect of a non-recurring charge, in the same period last year. Eleven analysts polled by First Call expected the company to earn 13 cents a share, CBS Market Watch reported..

Total sales for the quarter increased 22% to $438.4 million. Same-store sales were up 8%.

During the company conference call with Wall Street officials, President John Martin listed the strongest categories: ribbon, +37%; crafts, +25%; custom framing, +16%; and art supplies, +10%. He cited candle- and soap-making, scrapbooking, glass, and bridal supplies.

CEO Michael Rouleau said, "We believe we are very well prepared for a successful Christmas selling season. We have made significant progress with the management of our inventory. Our average inventory per Michaels store is $1.035 million, down 1% from the $1.046 million we reported for the first half last year, and on track towards our year-end forecast of 5% under last year."

During the quarter, Michaels opened 13 new stores, relocated 5, and closed 2 -- plus the company opened 7 new Aaron Brothers stores and relocated 1. The store count is now 600 Michaels and 104 Aaron Brothers stores.
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AUGUST HEAT MELTS SALES FIGURES

A slowing economy, hot weather, and disappointing back-to-school sales and promotional events created gloomy same-store sales figures for most retailers.

One chain bucking the trend was Hancock Fabrics, whose same-store sales grew 5.3%. CEO Larry Kirk stated, "Sales in comparable stores during August continued to reflect the favorable trend that we began to see in December of last year. The sales gains have been generally broad-based; however, home decorating products and a more focused fashion apparel category are particularly active."

Michaels' same-store sales grew only 1%, the company's smallest increase in many months. CEO Michael Rouleau said, "While we are pleased with the customers' early response to our fall and Christmas merchandise offerings, we did experience a sales shortfall during the second week of August, when customers did not respond to the month's largest promotion."

Wal-Mart's overall sales increased by more than $1 billion again in August, but its same-store sales increase, 5.8%, was only slightly more than half of what it was for August, 1999.

Ames' same-store sales fell 0.5%. Chair/CEO Joseph Ettore did not list crafts as one of the categories that performed well.

ShopKo, owner of the Pamida chain which carries some craft supplies, reported same-store sales dropped 1.1%. "The company continues to face a very difficult retail climate in its markets," a spokesperson said.

Duckwall/ALCO's same-store sales rose only 1.8%. The company cited various product categories as strong sellers, but crafts was not one of them, and back-to-school products "lagged behind expectations," a spokesperson said.

Kmart's sales rose 2.8%, which new Chair/CEO Chuck Conaway called "flat."

Target's sales rose 3.2% and warned analysts that third-quarter earnings/share would probably "decline somewhat" but growth should resume in the fourth quarter. Just a few weeks ago the company had told analysts it would meet or exceed their estimates for the remainder of the year, CBS Market Watch reported.

Comment: As we reported previously, recent research shows consumers are buying school products earlier than ever. Perhaps retailers should readjust expectations for July and August.
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INTERNET COPYRIGHT NEWS

In recent issues, we've reported on the problem of consumers scanning and posting copyrighted projects on the Internet, thus depriving retailers, publishers, and designers of revenue that rightfully belongs to them. Some recent developments:

1. Jim Hedgepath of Pegasus Originals set up a list for companies who want to keep up with sites that appear to be infringing on copyrights. "This list allows industry members to report sites to everyone on the list with one email and then everyone on the list can check the site to see if their designs are being ripped off," Jim says. The address is http://stitching.com/copyright. "There are about 20 companies on this list now and we are seeing about three new sites a week reported. Plastic canvas books are being seen a lot now." Jim adds.

2. As we reported earlier, Jim and others are planning to publish a book of cross-stitch designs, which will be distributed by Hoffman Distributing. All proceeds will go to the legal fund set up to combat this Internet copyright problem. "... but we need a publisher who can front the money for printing costs either as a contribution to the industry or until sales can pay back the printing costs," Jim said, who hopes the book can be unveiled in time for the HIA show in Anaheim and the Needlework Markets show in Nashville in early 2001.

3. The fund, set up under the International Needlework Retailers Guild, has collected about $1,500 since it informally began at the INRG show in late July.

4. The Associated Press published its article on our industry's Internet copyright problem and it was carried in a wide variety of newspapers. (The AP sends its articles to 1,550 newspapers.) There was nothing in it that we haven't already reported, but all the national publicity should educate more consumers. From the article: "We're not looking to put Grandmother in jail, but Grandmother is stealing from us," Gary Gardner, president of Great Notions, told the AP.

5. The Napster trial begins the week of October 2nd. A three-member panel of a federal appeals court will hear the case between Napster (and its song-swapping software) and a number of major music industry companies. The verdict could set precedents that apply to our industry.

6. Reminder: A more thorough, comprehensive description and analysis of the problem will appear in the September issue of CNA magazine. For more information on the INRG legal fund, contact Jim Hedgepath at jim@peweb.com.
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HSA TAKES ACTION ON COPYRIGHT PROBLEM

A note from Joan Campbell, Executive Director of the Home Sewing Association:

"As you know, the Home Sewing Association has been operating the Embroidery Software Protection Coalition for about a year now. Its main purpose is to educate -- both consumers and retailers -- on the copyright laws and how their violation hurts everyone in the 'food chain.'

"We've seen some results from our efforts, but know that it will be an ongoing activity. In many cases it's an innocent mistake (after all, how many of us have copied articles from magazines and passed them along?) and the violators apologize for their actions. But in some cases it's a blatant illegal activity and the lawbreakers seem to thumb their noses at the system.

"We have a detective who 'lurks' in chat rooms and on bulletin boards, uncovering violators and offering educational information on what is and is not legal. He has been threatened numerous times. It's amazing how many people think it is their 'right' to obtain software for free. I wonder how they will feel someday if no new designs are available because there's no financial incentive to market any."
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MEDIA HIGHLIGHTS SCRAPBOOKERS' ENTHUSIASM

The Dallas Morning News published a major article on scrapbooking. Among the highlights:

1. Free-lance writer Peggy Martin's enthusiasm overcame her objectivity; she said she herself had become "hooked" on scrapbooking.

2. The fourth annual Great American Scrapbook Convention (GASC), held this summer, drew 5,800 attendees.

3. The Dallas area now has more than a dozen scrapbook stores, and more than half a dozen opened just this year.

4. The article cited storage products and luggage designed to transport scrapbooking supplies to crop parties, crop nights at stores, etc. The manufacturers featured were Generations by Hazel, Crop in Style, and Leeco Industries, with some products costing $100-plus.

5. Cropping clubs, such as the Texas Bluebonnet Scrappers and the DFW Scrappers, are popping up.

6. Retailer Lee Ann Johnson (Creative Scrappers) in Mesquite, Texas offers "cropping getaways" for groups to use the crop room in her store -- even arranging catered meals and hotels for out-of-towners.

7. The article described a GASC attendee who bought a floor model of The Keeps Sake Creation Station, a specially designed, maple and cherry scrapbooking desk for $1,299.

Read the article at http://dallasnews.com/lifestyles/hg/160022_scrapbook_01ho.html.
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WALL STREET PRAISES, WORRIES ABOUT MICHAELS

Despite better than expected quarterly earnings, Michaels' stock tumbled 12% the day after the data was released and a conference call was conducted with analysts. Analysts appear confident about Michaels' long-term growth potential, but some thought reports of a disappointing "Dollar Days" sale last month indicated a possible slowdown in the near-term sales growth. The stock tumbled again a few days later after Michaels released its August sales report (see article above).

Wachovia cut its rating to Neutral from Strong Buy, saying "We think the potential for upside surprise has disappeared for third-quarter earnings and diminished for fourth-quarter results as well," CBS Market Watch reported. AG Edwards also downgraded Michaels to Accumulate. A Robertson Stephens analyst praised Michaels' current execution, but expressed concern about slowing consumer trends and Wall Street's high expectations. The company's rating remains Long-Term Attractive.

Not all analysts were worried, though. Southwest Securities reiterated coverage at Buy, with a price target of $53, and Pacific Crest reiterated its Strong Buy rating, with a target of $56.
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MISCELLANEOUS NEWS

WAGES. Thanks to a pending compromise in Congress, you can expect a 50-cent rise in the minimum wage, effective January 1, 2001, and another 50-cent rise a year later. As part of the package, business meals and entertainment deductions will increase from 50% to 80%.

ELECTION. The new board of directors of International Needlework Retailers Guild are President Lois Hoeft, A Stitch In Time; VP Dee Jenkins, Dee's Needleworks; Secretary Ginger Edwards, Ginger's Needlearts; and Treasurer Susan Tyler, Susan's Stitchery. Committee chairs include Saundra Cox, Membership (The Finishing Touch) and Carol Grant, Education (Cross My Heart). Sharon Wainwright, Sew Original Needlearts, is past president.

PEOPLE. Erik Mandleberg has left DMC to take a position as Sales VP for Natural Science Industries with the mission of growing its new craft division ... Joseph Pollicino was named to the Ames board of directors. He has 40-plus years of retail and banking experience, most recently as vice chair of the CIT Group.

FOR SALE. Easel manufacturing company is for sale. For more information, contact Mike Hartnett, in complete confidence, at 309-925-5593 or email mike@clnonline.com.

ACQUISITION. September 9th is the reported date for a major industry company to be sold -- to another industry company.

STORES. After moving into Houston and Dallas, Aaron Brothers has its sights on Denver.

APPLIANCES. Wal-Mart will test-market selling major General Electric appliances in 12 stores. The stores will display about 40 appliances, plus a kiosk which will offer another 150 appliances. No word which departments it will shrink to make room for the appliances.

AMES. FMR Corp. lowered its stake in Ames to 6.2%; in early May FMR had reported a 11.356% stake, Dow Jones News reported ... Moody's Investor Service confirmed the debt rating for Ames; however, the company changed the rating outlook from stable to negative, "due to higher debt levels and decreased financial flexibility to handle potential adverse conditions in the near term," Dow Jones News reported.

HIA. Members can go to hobby.org/2001 to make hotel reservations for the Anaheim show -- or call 800-388-8107. Reservations for non-members will be taken starting October 1.

DATA. Results of the July survey at the HIA website, hobby.org, indicate consumers are spending more time crafting -- and computing -- than before. 54% of respondents said they spend up to 10 hours/week crafting; that up from 46% a year ago.

ACCI. The 2001 show is July 20-23. Call 888-360-2224, ext. 3131, or visit accicrafts.org.

AWARD. Winners of the Scott Ladd Memorial Award at ACCI in July were Accents Unlimited, Back Street, Caron, Craft Wholesalers, DecoArt, Needlemagic, Prime Arts, Ryco Trimming, What's New, Wilton, and Wrights.

AWARD. Communications Concepts gave an Apex award for excellence in graphic design, editorial content, etc., to HIA for its materials created for the Crafts. Discover Life's Little Pleasures branding campaign.

SCHOOLS. Interested in the school market? The National School Supply & Equipment Assoc. issued its annual State of the School Market, available to non-members for $99. Call 800-395-5550.

DESIGN. The annual Educational Seminar, "Partners in the Creative Life", of the Society of Craft Designers will be October 4-7 in Minneapolis. Silvana Clark, publisher of Taming the Marketing Jungle, is the keynote speaker. Congrats to SCD on its 25th anniversary! Call 740-452-4541; email scd@offinger.com, or visit craftdesigners.org for more info.

OFFICERS. Art Glass Supplies Assn. Int.'s offers for 2000-2001 are Chair Ron Bearer, Art Glass House; Vice-Chair Randy Wardell, Wardell Publications; Treasurer Gene Mayo, Stained Glass Images; and Secretary Steve Trebacz, The Glass House.
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RANDOM VIEWS, RANDOM QUOTES

1. Ever walk the aisles of a competitor and write down prices? If you introduce yourself to the manager, most won't mind. Others, though, will throw you out. In those cases, how about a cell phone? Call your store and dictate prices you see. Cell phones are so common now, retailers don't think twice if they see someone in their aisles talking on the phone.

2. Craft Cove, a long, long-time independent retailer in Peoria, Illinois, is having a "Going Out of Business" sale. Michaels and Hobby Lobby had moved into the area and an Illinois chain, Jeffrey Alans/PGI, is expanding its Peoria store. Meanwhile, another long-time retailer in the East called, saying she's probably going to close. Michaels and Jo-Ann had moved nearby and despite her wealth of craft knowledge and customer service, customers were going to the chains for the lower prices.

It used to be, a good general craft independent could compete successfully with the chains. Now, you have to be an outstanding craft retailer to compete.

3. An old friend, Jeff Horner, has recently taken a position with the ad agency, The Borenstein Group. I don't claim to be an expert on advertising, but over the years Jeff has created some of the most memorable, creative, and effective ads I've ever seen in this industry. If you need help with your marketing, branding, new product introductions or advertising, call Jeff at 703-385-8178, ext. 211 or email jeff@borenstein-online.com.

4. Perhaps I'm too sensitive, but it seems the national media is once again taking a vaguely condescending attitude towards our industry. Some of the media's newspaper articles and tv or radio reports about our Internet copyright problem made no distinction between needlepoint and cross stitch, and implied that only older women -- "grannies" -- do needlework. And somehow, "grannies" stealing copyrighted designs is kind of cute.

Excuse me? Aren't these the same national media who recently reported how Julia Roberts and other movie stars have taken up crochet and other crafts? Julia Roberts is a granny? And since when is anyone breaking the law "cute"?

Back in the 80's, at one point Michaels was going gangbusters -- named by USA Today as one of the best performing stocks on Wall Street. So Forbes published a profile. It was quite positive, but the headline read: "Wiggle Eyes, Anyone?"

5. Friends told me mums and, yes, mum-making were huge in Texas stores. I had no idea how big until a recent article in the Dallas Morning News. An example: "Materials: silk roses, silk thistles, real dried mums, glass pebbles, fake fur, animal print tissue paper, gold Christmas balls, black and white ceramic beads, gold Mardi Gras beads from home, silver accents, cat eyes from the hobby store's doll aisle, pillow tassels, and other eyes made from Amy's Incredible Shrinking Plastic. Cost: just under $100. Time of preparation: seven hours. Tools: mainly a stapler, some glue gun work and lots of string to tie. Materials available at hobby stores."

To read for yourself, go to http://dallasnews.com/lifestyles/hg/160184_mum_01hg.html.
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MICHAELS' REDESIGNED SITE: A WORK IN PROGRESS

During the quarterly conference call with Wall Street analysts, CEO Michael Rouleau talked at length about the expanded website, michaels.com.

The site received about 18 million hits and 300,000 visitors since the launch July 28th. Visitors are spending twice as much time at the site, too.

The site is now selling art prints -- 16,000, compared to a typical store's 700. Surfers can browse by Artist, Cultural, Decor, Geography, Room, Style, Subject, 1 Primary Color, 2 Primary Colors.

Immediate plans call for the introduction of art supplies -- 16,000 sku's -- for sale in early November, then 10,000 art & craft books later in the month. The plan for 2000 then calls for the introduction of 700 craft kits later in the year.

All merchandise will be shipped from one facility, a distributor's warehouse.

Rouleau said the site's primary goals are education and driving consumers into Michaels stores. The second priority is selling merchandise online.
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E-COMMERCE UPDATE

PARTNERS. Studio Source (www.studiosource.com), the business-to-business company that builds and operates online art stores for other Internet sites, is seeing its client list growing substantially. New clients include Binders, the Atlanta-based retail chain, and IdeaForest.com, as we reported in our last issue. Other new clients include Artnet.com, an information and e-commerce-auction site, and eCampus.com, an online college bookstore. Studio Source enables its partners to offer their customers a complete inventory of supplies while Studio Source handles all technology, product fulfillment, and customer service. Look for additional, very well known clients to be added soon.

REDESIGNED. Marymaxim.com, one of the leading needlework e-commerce sites, has updated its site, which sells kits, supplies, and books, including numerous private label products and kits. It loads quickly and is very easy to navigate. (Comment: Mary Maxim's experience with mail order and its mail order-and-retail base gives us confidence that this e-commerce site will be one of the industry's long-term winners.)

TAXES. The California legislature passed a bill aimed at collecting California's 7.25% sales tax for purchases over the Internet. The governor has not said if he will sign or veto the bill ... According to tax economist Donald Bruce, online sales could cost US states $11 billion in sales tax revenues in 2003, eMarketer reported.

QUOTATION. "Summer's best decorating ideas from Craftopia.com. Craftopia.com is offering summer's most popular home decorating accents--some for less than $5! Whether you keep them for yourself, or give them as a gift, you're sure to love our scented decorative-candle collection, exquisite paper flowers, and rustic Mosaic Sun End Table Kit. Click below and see!" -- from the email newsletter of MarthaStewart.com

PREDICTIONS. In its 14th annual Communications Industry Forecast, the media merchant bank, Veronis Suhler, predicted that the average daily consumption of media will grow from 9.3 hours in 1999 to 10.4 in 2004 and by then, Americans will spend more hours annually playing video games (161) and using the Internet (228) than they spend reading daily newspapers (147), books (92), and magazines (77), eMarketer reported. Veronis Suhler once owned Crafts and other PJS Publications magazines and sold them to the current owner, Primedia.
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ADVICE ON OFFERING FREEBIES

An obvious, successful way to market your products or your store is to offer a free kit or pattern on your website. Sometimes too successful, as Rick Miller of Miller Woodcrafts discovered.

Rick offered a photo and project instructions at his site, millerwoodcraft.com, but surfers had to send an SASE for the pattern. It didn't produce a lot of traffick, so Rick offered a free pin kit with the pattern and instructions. Consumers had to complete a short questionnaire about the site in order to receive the kit. About 450 customers responded in May and June. "This feedback was very helpful, traffic and sales increased, and life was wonderful," Rick said.

In July he changed to a new pin, a cute little frog, which generated about 400 requests in two weeks, then tapered down to about 10 a day. To drive additional traffic, Rick went to various craft sites, including CraftersCommunity.com, looking for sites which would link to his site. He registered with MyFree.com.

On July 17th, he started receiving 60 requests an hour. By the afternoon of the 18th, it was up to 900 additional requests. On the morning of July 19 there were 5,400 requests, which jumped to 9,000 by that afternoon.

The volume shut down his Netscape, preventing him from receiving any orders. When the computer was fixed, there were another 12,000 requests waiting.

By the time Rick took the free offer off his site, he had more than 22,000 requests.

Rick thinks his total cost will be about $15,000. "I'm staying optimistic though. I figure we should get a lot of new customers out of this," Rick says.

"In retrospect, I probably shouldn't have registered with MyFree.com," Rick added. "Once you get listed with one of those sites there's about 5 or 10 more that list you. That's when it really goes crazy."
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THE CREATIVE NETWORK: JOB OPENINGS

The only personnel recruitment firm specializing in our industry has the following job openings. Go to ACCI #9806 or call 360-834-0802; fax 360-834-0702; email jessica@creativenetworkinc.com; or check www.creativenetworkinc.com.

ATLANTIC: Channel Marketing Manager ... Product Manager.
CENTRAL: Creative Director/Designer ... Design Department Manager.
MID ATLANTIC: Sr. VP Marketing ... Director of Sales/Marketing ... VP Account Exec. (sales) ... VP Marketing ... VP Marketing.
MIDWEST: Editing Manager (web, book content).
NEW ENGLAND: Assistant. Art Director/Designer.
NORTH CENTRAL: Associate Designer/Product Developer ... Branding Manager ... Buyer/Scheduler ... Director of Sculptural Team ... Director of Sports Collectibles ... Director/General Manager ... Operations Manager ... Oracle Developer/Web Master ... Product Development/Designers ... Product Manager/Director of Marketing (2 positions) ... Programs Manager ... VP Product Development (collectibles).
PACIFIC: Director of Product Development ... Marketing Manager ... Marketing-Product Manager ... Media Design Liaison.
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CREATIVE NETWORK: JOB OF THE MONTH

Position: VP Marketing ...Location: Mid Atlantic ...Salary: $90-110K, plus benefits ... Job Description: Develop strategic marketing plans, plan-o-grams, programs to address customer's needs and create new business opportunities; P&L responsibilities ... Requirements: Proven leadership ability; extensive merchandising experience; a background in product development and plan development; knowledge of major customers; strong creative and trend forecasting abilities; ability to put together lines; knowledge of advertising and promotional pieces; product development experience; and the ability to understand new and existing markets.

Position: Design Department Manager ... Location: Central/Atlantic ... Salary: $45-55K, plus relocation and benefits ... Job Description: Responsible for all aspects of creative design and design projects/programs: product testing; design finished samples; supervise in-house and free-lance designers; design show booths; assist in the creative marketing effort for existing and new products; product testing; creating new techniques, create samples; and attend trade shows. For more about these positions, contact The Creative Network at 360-834-0802.
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THE CLN RETAIL INDEX

A. C. Moore (ACMR). Last*: 9 3/32 ... Change**: +19/32
Ames (AMES). Last*: 5 3/16 ... Change**: UNC
Hancock Fabrics (HKF). Last*: 5 1/8 ... Change**: +5/8
Jo-Ann Stores (JAS.A) [a]. Last*: 6 11/16 ... Change**: -3/8
Michaels (MIKE). Last*: 36 3/8 ... Change**: -10 5/8
Rag Shops (RAGS). Last*: 2 1/2 ... Change**: -1/8
Wal-Mart (WMT). Last*: 48 13/16 ... Change**: -1 11/16
CLN Retail Index. Last*: 113.781 ... Change**: -9.2%
Dow Jones Index. Last*: 11,237.78 ... Change**: +1.7%
*September 1 ** from August 18 [a] voting share Note: Prices are exclusive of dividends
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SIMPLIFY ... SIMPLIFY

A note from Tim Mulvey of Houston Art:

Reading your latest newsletter this morning, the article, "THINGS THAT TOOK YEARS TO LEARN", reminded me of the e-mail I received last week:

During the space race back in the 1960's, NASA was faced with a major problem.The astronauts needed a pen that would write in the vacuum of space. NASA went to work. At a cost of $1.5 million, they developed the "Astronaut Pen". Some of you may remember it; it enjoyed minor success on the commercial market.

The Russians were faced with the same dilemma: they used a pencil.

The moral of the story? Don't overcomplicate your life.
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Note: Creative Leisure News is published on the first and third Mondays of each month. Your next issue will be Monday, September 18th.

Need any rumors checked? Company news or comments on industry issues? Call Mike Hartnett, in confidence, at 309-925-5593; fax 309-925-9068; or Email to mike@clnonline.com.

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