PAGE
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-11902
GIBSON GREETINGS, INC.
Incorporated under the laws IRS Employer
of the State of Delaware Identification No. 52-1242761
2100 Section Road, Cincinnati, Ohio 45237
Telephone Number: Area Code 513-841-6600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value; Preferred Stock Purchase Rights
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.
Yes X 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 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 Common Stock, $.01 par value,
of the registrant held by non-affiliates of the registrant as of
August 22, 1994 was approximately $254,709,000.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest
practicable date: 16,095,829 shares of Common Stock, $.01 par
value, at August 22, 1994.
Documents incorporated by reference:
Portions of Gibson Greetings, Inc.'s Proxy Statement for the
1994 Annual Meeting of Stockholders are incorporated by
reference in Part III.
PAGE
PART I
Item 1. Business
Gibson Greetings, Inc. and its wholly-owned and majority-owned
subsidiaries (the "Company") operate in a single industry segment -- the
design, manufacture and sale of everyday and seasonal greeting cards, gift
wrap and accessories, paper partywares and related specialty products.
Products
The Company's major products are extensive lines of greeting cards (both
everyday and seasonal) and gift wrap. Everyday cards are categorized as
conventional greeting cards and alternative market cards. Seasonal cards are
devoted to holiday seasons, which include, in declining order of net sales,
Christmas, Valentine's Day, Mother's Day, Easter, Father's Day, Graduation and
Thanksgiving. In 1993, approximately 58% of net sales of cards were derived
from everyday cards and approximately 42% from seasonal cards. The Company
produces gift wrap and gift wrap accessories (including tissue and kraft
paper, gift bags, tags, ribbons, bows and gift trims) predominately for the
Christmas season. The Company's products also include paper partywares,
candles, calendars, gift items and holiday decorations. The following table
sets forth, in thousands of dollars for the years indicated, the Company's net
sales attributable to each of the principal classes of the Company's products:
Years Ended December 31,
----------------------------------
1993 1992 1991
-------- -------- --------
Greeting cards $268,952 $243,647 $270,579
Gift wrap 192,862 187,965 196,352
Other products 84,351 52,506 55,235
-------- -------- --------
Total net sales $546,165 $484,118 $522,166
======== ======== ========
Many of the Company's products incorporate well-known proprietary
characters. Net sales associated with licensed properties accounted for
approximately 14% of overall 1993 net sales. The Company believes it benefits
from the publication of cartoon strips, television programming, advertising and
other promotional activities by the creators of such licensed characters. The
Company has also developed proprietary properties of its own. See "Trademarks,
Copyrights and Licenses."
Approximately 2% of the Company's revenues in 1993 were attributable to
export sales and royalty income from foreign sources. During 1993, the
Company acquired The Paper Factory of Wisconsin, Inc. ("The Paper Factory") a
Wisconsin corporation, to strengthen the Company's position in the rapidly-
growing party segment of the industry. During 1992, the Company formed Gibson
de Mexico, S.A. de C.V., a Mexican corporation, which purchased the net assets
of a Mexican manufacturer and marketer of greeting cards, to market the
Company's products primarily in Mexico. During 1991, the Company formed
Gibson Greetings International Limited, a Delaware corporation, to market the
Company's products in the United Kingdom and other European countries.
PAGE
Sales and Marketing
The Company's products are sold in more than 50,000 retail outlets
worldwide. Because of the value consumers place on convenience, the Company
continues to concentrate its distribution through one-stop-shopping outlets.
To market effectively through these outlets, the Company has developed
specific product programs and new product lines and introduced new in-store
displays. The Company's products are primarily sold under the Gibson and Cleo
brand names and are primarily distributed to supermarkets, deep discounters,
mass merchandisers, variety stores and drug stores. During 1993, the
Company's five largest customers accounted for approximately 35% of the
Company's net sales and only one customer, Wal-Mart Stores Inc., accounted for
more than 10% of the Company's net sales.
The Company's products under the Gibson brand name are usually stocked
in a department where only these products are displayed. Product displays are
expressly designed for the presentation of greeting cards, gift wrap, paper
partywares, candles and other products. The Company also supplies corrugated
displays for seasonal specialties. The Company's method of selling greeting
cards requires frequent and attentive merchandising service and fast delivery
of reorders. The Company employs a direct field sales force that regularly
visits most of the Company's customers, supported by a larger, nationwide
merchandising service force.
In order to properly display and service these products, a sizable
initial investment is made in store display fixtures, sometimes totaling 300
linear feet, and in the hiring and training of service associates. To
minimize costs and disruption, in the short-term, caused by the loss of a
customer, the Company has entered into longer term contracts with certain
retailers, consistent with general industry practice. These contracts
generally have terms of from three to six years, and sometimes specify a
minimum sales volume commitment. Some of the advantages to the Company
include: less disruption to its distribution channels; the ability to plan
product offerings into the future; and establishment of a reliable service
network to ensure the best product display and salability. In certain of
these contracts, cash payments or credits are negotiated constituting advance
discounts against future sales. These payments are capitalized and amortized
over the initial term of the contract. In the event of contract default by a
retailer, such as bankruptcy or liquidation, a contract may be deemed impaired
and unamortized amounts may be charged against operations immediately
following the default. Use of these contracts has expanded in recent years
within the industry and the Company currently has contracts with a number of
customers including two of its top five customers.
Most of the Company's gift wrap is Christmas-related and is sold under
the Cleo brand name. These products are usually shipped in corrugated cartons
which may be used as temporary free-standing displays. Separate free-standing
product displayers and display planning services are also made available for
the purpose of enhancing the presentation of Cleo products. The Company's
Cleo brand gift wrap is typically sold at lower unit retail price levels than
the Company's other brands of gift wrap. In general, the Company does not
provide in-store merchandising services with respect to Cleo products but
rather ships these products directly to the retailers' stores or their
warehouses for subsequent distribution to individual stores.
It is characteristic of the Company's business and of the industry that
accounts receivable for seasonal merchandise are carried for relatively long
periods, typically as long as six months. Consistent with general industry
practice, the Company allows customers to return for credit certain seasonal
greeting cards.
Design and Production
Most of the Company's greeting cards are designed, printed and finished
at its Cincinnati, Ohio facility and then sent to its facilities in Berea or
Covington, Kentucky for shipment directly to retail stores. Most of the
Company's gift wrap is designed, printed and finished at the Company's
facilities in Memphis, Tennessee and distributed from the Company's facility
in Memphis, Tennessee. The Company also purchases for resale certain finished
and semi-finished products, such as gift items, from both domestic and foreign
sources.
The Company maintains a full-time staff of artists, writers, art
directors and creative planners who design a majority of the Company's
products. Design of everyday products begins approximately 12 months in
advance of shipment. The Company's seasonal greeting cards and other items
are designed and printed over longer periods than the everyday cards.
Designing seasonal products begins approximately 18 months before the holiday
date. Seasonal designs go into production about 12 months before the holiday
date.
Production of the Company's products increases throughout the year until
late September. Because a substantial portion of the Company's shipments are
typically concentrated in the latter half of the year, the Company normally is
required to carry large inventories.
The Company believes that adequate quantities of raw materials used in
its business are and will continue to be available from many suppliers. Paper
costs are the most significant component of the Company's product cost
structure.
Competition
The greeting card and gift wrap industry is highly competitive. Based
upon its general knowledge of the industry and the limited public information
available about its competitors, the Company believes it is the third largest
producer of greeting cards and gift wrap in the United States. The Company's
principal competitors are Hallmark Cards, Inc. and American Greetings
Corporation, which are predominant in the industry, and CPS/Artfaire, Inc.
Certain of the Company's competitors have greater financial and other
resources than the Company.
The Company believes that the principal areas of competition with
respect to its products are quality, design, service to the retail outlet,
price and terms, which may include payments and other concessions to retail
customers under long-term agreements, and that it is competitive in all of
these areas. See "Sales and Marketing".
Trademarks, Copyrights and Licenses
The Company has approximately 40 registrations of trademarks in the
United States and foreign countries. Although the Company does not generally
register its creative artwork and editorial text with the U.S. Copyright
Office, it does obtain certain copyright protection by printing notice of a
claim of copyright on its products. The Company has rights under various
license agreements to incorporate well-known proprietary characters into its
products. These licenses, most of which are exclusive, are generally for
terms of one to four years and are subject to certain renewal options. There
can be no assurance that the Company will be able to renew license agreements
as to any particular proprietary character. The Company believes that its
business is not dependent upon any individual trademark, copyright or license.
PAGE
Employees
As of December 31, 1993, the Company employed approximately 4,600
persons on a full-time basis. In addition, as of December 31, 1993, the
Company employed approximately 4,800 persons on a part-time basis. Because of
the seasonality of the Company's sales, the number of the Company's production
and warehousing employees varies during the year, normally reaching a peak
level in September. Approximately 800 hourly employees in the Company's
Memphis, Tennessee facilities are represented by a local union affiliated with
the United Paper Workers International Union and are employed under a contract
which expires in 1996. Approximately 300 hourly employees currently on the
payroll at the Company's Berea, Kentucky facility are represented by a local
union affiliated with the International Brotherhood of Firemen and Oilers
Union. Unfair labor practice charges have been filed against the Company as
an outgrowth of a strike at the Berea facility in 1989. See "Legal
Proceedings."
Environmental Issues
The Company, over the past ten years, has taken a proactive approach to
environmental concerns. In 1986, the Company's subsidiary Cleo, Inc. ("Cleo")
converted its printing operations to water-based inks. Likewise, since early
1990, the Gibson Card Division ("Gibson") has converted its card and related
products production to water-based inks. Previously, Gibson had its
Cincinnati-produced waste solvents incinerated. All but one underground
storage tank on Company owned and leased premises were removed in or before
1988. In 1990, the last underground storage tank, which had contained
isopropyl alcohol, was also removed in accordance with governmental closure
regulations. For the past seven years, the Company has consulted with
professional firms for environmental audits before entering into potential
long-term real estate transactions. Historically, expenditures associated
with managing and limiting pollution or hazardous substances, as well as
expenditures to remediate previously contaminated sites, have not been
material to the Company's financial statements. At August 22, 1994, the
Company was aware of two contingent environmental liabilities as discussed
below:
DIAZ REFINERY - JACKSON COUNTY, ARKANSAS
In 1989, the Company was identified by the Arkansas Department of
Pollution Control and Ecology ("ADPC&E") as a potentially responsible party
("PRP") in connection with the Diaz Refinery Site in Jackson County, Arkansas.
The Company is participating with approximately 700 other PRPs in a settlement
with ADPC&E for remediation of the Site. To date, the Company's share of total
Site costs has been approximately $46,000, which has been paid. The nature
and extent of the contamination is still being investigated. Thus, it is not
possible at this time to provide an estimate of total clean-up costs for the
Site or the Company's share of such costs.
PAGE
KIRK LANDFILL - DYER COUNTY, TENNESSEE
In December 1993, the Company was advised by the Tennessee Department of
Environment and Conservation ("TDEC") that Cleo had been identified by the
State as a potentially liable party for reimbursement of Superfund
expenditures made by the State of Tennessee for site identification,
investigation, containment and clean-up, including monitoring and maintenance
activities. The Company has ascertained that Cleo's alleged responsibility
involves the alleged disposal of certain waste solvents at the Site during the
period 1972-1975. At this time, insufficient information is available to
determine the Company's potential liability, although such liability could
exceed $200,000. To date, the TDEC has requested payment of approximately
$13,000 in costs. The Company is in the process of notifying insurance
companies believed to have issued insurance policies that may cover Cleo
during the applicable time period.
PAGE
Item 2. Properties
The following is a summary of the Company's principal manufacturing,
distribution and administrative facilities:
Approximate
Floor Space
Location Principal Use (Sq Ft)
- - -------------------- ------------------------------------- -----------
Cincinnati, Ohio Corporate headquarters, manufacturing
and administration 593,700
Memphis, Tennessee Manufacturing, distribution and
administration 1,002,800
Berea, Kentucky Manufacturing and distribution 597,100
Mexico City, Mexico Manufacturing and distribution 26,900
Telford, England Manufacturing, distribution and
administration 58,800
Memphis, Tennessee Manufacturing and distribution 1,153,200
Covington, Kentucky Manufacturing and distribution 293,000
Florence, Kentucky Manufacturing and distribution 80,000
Reynosa, Tamaulipas,
Mexico Manufacturing 86,700
Bloomington, Indiana Distribution 167,700
Memphis, Tennessee Distribution (3 facilities) 796,600
Neenah, Wisconsin Distribution 31,000
---------
Total 4,887,500
=========
The first three facilities listed above are all currently
leased for an initial term expiring in 2002. The Company has
the right to renew the lease for two additional terms of five
years each. The Company also has an option to purchase these
facilities in 2002 at the higher of $35,400,000 or the fair
market value of the properties at that time. For accounting
purposes, this lease has been treated as an operating lease.
See Note 11 of Notes to Consolidated Financial Statements
set forth in Item 8 below.
The Company's 1.1 million square foot manufacturing and distribution
facility in Memphis, Tennessee has been financed primarily through the
issuance, by the Industrial Development Board of the City of Memphis and
County of Shelby, Tennessee (the "Board"), of both taxable and tax-exempt
economic development revenue bonds for the benefit of the Company's
subsidiary, Cleo. Title to the facility will be held until 2004 by the Board.
See Note 6 of Notes to Consolidated Financial Statements set forth in Item 8
below.
The Telford, England, Covington, Kentucky and Bloomington, Indiana
manufacturing and distribution facilities are owned by the Company. The
Covington, Kentucky facility has been financed principally through tax-exempt
debt and is pledged to secure the repayment of such debt. See Note 6 of Notes
to Consolidated Financial Statements set forth in Item 8 below.
The Florence, Kentucky facility, the Mexico City, Mexico facility, the
Reynosa, Tamaulipas, Mexico facility and the distribution facilities at
Memphis, Tennessee, and Neenah, Wisconsin are leased. The Company also leases
sales offices, other manufacturing, distribution and administrative facilities
and, on a temporary basis, uses public warehouse space in various locations
throughout the United States. The Paper Factory leases approximately 140
stores averaging approximately 3,000 to 4,000 square feet per store. Certain
of these leases contain contingent payments based upon individual store sales.
Leases for all such facilities expire at various dates through 2003.
The Company believes that its facilities are adequate for its present
needs and that its properties, including machinery and equipment, are
generally in good condition, well maintained and suitable for their intended
uses.
Item 3. Legal Proceedings
On July 1, 1994, the Company announced that it had determined that the
inventory of Cleo at December 31, 1993 had been overstated, resulting in an
approximate 20% overstatement of the Company's previously reported 1993
consolidated net income. See Item 7 hereof.
In early July, 1994, five purported class actions (Vladimir v. Gibson
Greetings, Inc., Steiner v. Gibson Greetings, Inc., Gambal v. Gibson
Greetings, Inc., Arosa v. Gibson Greetings, Inc., and Kates v. Gibson
Greetings, Inc.) were commenced by certain stockholders (the "Suits") against
the Company and its Chairman, President and Chief Executive Officer in the
United States District Court for the Southern District of Ohio, each alleging
violations of the federal securities laws and, in the case of two of the
Suits, breach of common law duties and seeking unspecified damages for an
asserted public disclosure of false information regarding the Company's
earnings. Each of the Suits points to the inventory valuation issue at Cleo
as the basis for its claims. The Company intends to vigorously defend the
Suits.
The Securities and Exchange Commission is conducting a private
investigation to determine whether the Company or any of its officers,
directors and employees have engaged in conduct in violation of certain
provisions of the Securities Exchange Act of 1934 and the rules and
regulations thereunder. The Company believes that such investigation is
focused principally on the derivative transactions and the overstatement of
the Cleo inventory discussed in Item 7 hereof and the Company's public
statements and accounting systems with respect thereto. The Company is co-
operating in such investigation.
PAGE
In 1989, unfair labor practice charges were filed against the Company as
an outgrowth of a strike at its Berea, Kentucky facility. Remedies sought
include back pay from August 8, 1989 and reinstatement of employment for
approximately 200 employees. In February 1990, the General Counsel of the
National Labor Relations Board ("NLRB") issued a complaint based on certain of
the allegations of these charges (In the Matter of Gibson Greetings, Inc. and
International Brotherhood of Fireman and Oilers, AFL-CIO, Cases 9-CA-26706,
27660, 26875.) On December 18, 1991, an Administrative Law Judge of the NLRB
issued a recommended order, which included reinstatements and back pay
affecting approximately 160 strikers, based on findings that the Company had
violated certain provisions of the National Labor Relations Act. On May 7,
1993, the NLRB upheld the Administrative Law Judge's decision in some
respects, and enlarged the number of strikers entitled to back pay to
approximately 240. A prompt notice of appeal was filed in the United States
Court of Appeals for the District of Columbia Circuit. The Company believes
it has substantial defenses to the charges, and these defenses have been
presented in briefs in the Company's appeal. The appeal is scheduled to be
heard on September 14, 1994. A decision is expected later in 1994 or early in
1995.
In addition, the Company is a defendant in certain other litigation.
Management does not believe that an adverse outcome as to any or all of
these matters would have a material adverse effect on the Company's net worth
or total cash flows; however, the impact on the statement of operations in a
given year could be material.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
See Item 10. Directors and Executive Officers of the Registrant.
PAGE
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The Company's debt agreements contain certain covenants including
limitations on dividends based on a formula related to net income, stock sales
and certain restricted investments. At December 31, 1993, the amount of
unrestricted retained earnings available for dividends (in thousands of
dollars) was $47,152. The Company's business is seasonal with a significant
amount of its net sales and net income historically occurring in the last two
quarters of the year. The following table presents certain consolidated
quarterly financial data (unaudited) for 1993 and 1992:
(Dollars in
thousands except First Second Third Fourth
per share amounts) Quarter(2) Quarter(2) Quarter(3) Quarter(3) Year(3)
-------- -------- -------- -------- --------
1993
- - -------------------
Net sales $ 84,896 $ 83,796 $142,137 $235,336 $546,165
Total revenues 84,907 83,964 142,296 235,759 546,926
Cost of products
sold 30,996 30,813 77,519 137,781 277,109
Net income 1,802 1,215 2,242 14,580 19,839
Net income per share 0.11 0.08 0.14 0.90 1.23
Dividends per share 0.10 0.10 0.10 0.10 0.40
Market price of
common stock (1):
Low 17 7/8 18 17 7/8 18 3/4 17 7/8
High 20 3/8 20 3/4 22 5/8 21 1/4 22 5/8
1992
- - -------------------
Net sales $ 79,097 $ 78,219 $115,238 $211,564 $484,118
Total revenues 79,428 78,736 115,556 212,103 485,823
Cost of products
sold 27,257 28,344 70,643 121,096 247,340
Income (loss)
before cumulative
effect of accounting
changes 2,427 1,202 (12,329) 16,685 7,985
Cumulative effect of
accounting changes,
net of income taxes
of $1,609 (1,449) - - - (1,449)
Net income (loss) 978 1,202 (12,329) 16,685 6,536
Income (loss) per
share before
cumulative effect
of accounting
changes 0.15 0.07 (0.75) 1.03 0.50
Cumulative effect of
accounting changes (0.09) - - - (0.09)
Net income
(loss) per share 0.06 0.07 (0.75) 1.03 0.41
Dividends per share 0.09 0.10 0.10 0.10 0.39
Market price of
common stock (1):
Low 25 1/8 22 16 1/4 16 1/4 16 1/4
High 31 27 5/8 24 1/4 20 31
[FN]
(1) Per share prices are based on the closing price as quoted
in the Nasdaq National Market.
(2) Quarterly results for 1992 have been restated to reflect
the adoption of Statement of Financial Accounting Standards
(SFAS) No. 106 and SFAS No. 109 in the first quarter. The
impact of the adoption of these standards was to reduce
income before cumulative effect of accounting changes
by $73 and $74 in the first and second quarters, respectively,
and reduce net income per share in the second quarter by $.01.
(3) The third and fourth quarters of 1993 and full year results
for 1993 have been restated to correct the Cleo inventory
overstatement and to record unrealized net losses on derivative
transactions (Refer to Note 1 of Notes to Consolidated Financial
Statements). The Cleo inventory restatement reduced income
before income taxes for 1993 by $8,806; $1,400 in the third
quarter and $7,406 in the fourth quarter. The derivatives' net
impact on income before income taxes of $1,118 for 1993
consisted of a reduction in the third quarter of $1,879 partially
offset by an increase in the fourth quarter of $761. The
aggregate effect of these changes was to reduce net income
by $1,903 and $4,110 in the third and fourth quarters,
respectively, and to reduce net income per share by $.12 and $.26
in the third and fourth quarters, respectively.
PAGE
Item 6. Selected Financial Data
The following summaries set forth selected financial data for the
Company for each of the five years in the period ended December 31, 1993.
Selected financial data should be read in conjunction with the Consolidated
Financial Statements set forth in Item 8 below.
Income Statement Data
(Dollars and shares in thousands except per share amounts)
Years Ended December 31,
--------------------------------------------------------
1993(1) 1992 1991 1990 1989
-------- -------- -------- -------- --------
Revenues:
Net sales $546,165 $484,118 $522,166 $511,211 $463,290
Royalty income 761 1,705 2,148 1,985 1,980
-------- -------- -------- -------- --------
Total revenues 546,926 485,823 524,314 513,196 465,270
-------- -------- -------- -------- --------
Cost of products
sold 277,109 247,340 252,217 254,182 231,664
Selling,
distribution and
administrative
expenses 227,863 218,642 194,872 187,282 166,415
Interest expense 7,737 7,803 9,380 8,667 3,842
Interest income (949) (1,023) (342) (819) (2,319)
Loss on
derivative
transactions, net 1,118 - - - -
-------- -------- -------- -------- --------
Income before
income taxes and
cumulative effect
of accounting
changes 34,048 13,061 68,187 63,884 65,668
Income taxes 14,209 5,076 26,303 24,084 23,299
-------- -------- -------- -------- --------
Income before
cumulative effect
of accounting
changes 19,839 7,985 41,884 39,800 42,369
Cumulative effect
of accounting
changes - (1,449) - - -
-------- -------- -------- -------- --------
Net income $ 19,839 $ 6,536 $ 41,884 $ 39,800 $ 42,369
======== ======== ======== ======== ========
Income per share
before cumulative
effect of
accounting
changes $ 1.23 $ 0.50 $ 2.61 $ 2.51 $ 2.68
======== ======== ======== ======== ========
Net income
per share $ 1.23 $ 0.41 $ 2.61 $ 2.51 $ 2.68
======== ======== ======== ======== ========
Dividends
per share $ 0.40 $ 0.39 $ 0.36 $ 0.34 $ 0.33
======== ======== ======== ======== ========
Average common
shares and
equivalents 16,103 16,104 16,039 15,848 15,784
======== ======== ======== ======== ========
Other Financial Data
(Dollars in thousands except per share amounts)
December 31,
--------------------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
Working capital $209,209 $224,261 $215,011 $128,489 $146,676
Plant and
equipment, net 116,900 112,712 110,769 101,996 75,067
Total assets 571,605 501,104 544,261 553,499 438,888
Debt due within
one year (1) 66,187 31,911 71,208 148,302 89,197
Long-term debt 74,365 70,175 71,079 21,755 30,425
Excess of fair
value of companies
acquired over
cost, net - - - 1,430 2,880
Stockholders'
equity 317,668 303,341 300,743 261,402 226,043
Equity per share 19.78 18.92 18.86 16.58 14.41
Capital
expenditures 31,049 30,970 31,736 42,706 31,959
[FN]
(1) The full year results for 1993 have been restated to
correct the Cleo inventory overstatement and to record
unrealized net losses on derivative transactions (Refer
to Note 1 of Notes to Consolidated Financial Statements).
The Cleo inventory restatement reduced income before income
taxes for 1993 by $8,806. The derivatives' net impact on
income before income taxes was a reduction of $1,118 for 1993.
The aggregate effect of these changes was to reduce net income
by $6,013, and to reduce net income per share by $.38.
(2) Includes the current portion of long-term debt which
consisted of $3,917 in 1993, $1,811 in 1992, $708 in 1991,
$6,702 in 1990 and $2,697 in 1989.
PAGE
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
On July 1, 1994, the Company announced that it had determined that the
inventory of Cleo at December 31, 1993 had been overstated, resulting in an
approximate 20% overstatement of the Company's previously reported 1993
consolidated net income. The Company believes such overstatement resulted
from a deliberate attempt by one or more Cleo personnel to overstate Cleo's
income before income taxes. The overstatement of inventory and income before
income taxes was approximately $8.8 million. The accompanying 1993
Consolidated Financial Statements and this Management's Discussion and
Analysis have been amended and restated to reflect the correction of such
overstatement as well as the accrual of an unrealized market value loss of
$3.1 million on two derivative transactions outstanding at December 31, 1993,
which did not qualify as hedges, partially offset by the recognition of a $2.0
million previously deferred gain from certain derivative transactions entered
into and/or terminated during 1993 which also did not qualify as hedges. The
net effect of these two derivative adjustments, a loss of $1.1 million, has
been recognized in the accompanying 1993 consolidated financial statements as
these adjustments became significant in light of the reduction in the
Company's net income resulting from the restatement of Cleo inventory. In
total, the above changes reduced net income and net income per share for the
year ended December 31, 1993 from amounts previously reported by $6.0 million
and $.38, respectively.
Results of Operations
The Company's 1993 results reflected a recovery from the prior year
which was adversely impacted by the Chapter 11 bankruptcy filing by Phar-Mor,
Inc. (Phar-Mor) during 1992. Total revenues in 1993 increased 12.6% to $546.9
million compared to a decrease of 7.3% in 1992 and an increase of 2.2% in
1991. The revenue gains in 1993 were attributable to The Paper Factory of
Wisconsin, Inc. (The Paper Factory) which was acquired in June 1993, as well
as increased domestic and international sales of greeting cards, partially
offset by a modest decline in sales of gift wrap and related products.
Consistent with general industry practice, the Company allows customers to
return for credit certain seasonal greeting cards. Also, consistent with
general industry practice, and where deemed prudent to secure substantial
long-term volume commitments, the Company enters into long-term sales
contracts with certain retailers, some of which include advance payments.
Returns and allowances were 13.3% in 1993 compared to 15.9% in 1992 and 17.2%
in 1991. The decline in 1993 returns and allowances was due to lower returns
of certain seasonal products and lower allowances for certain everyday
products. The Company does not believe that its 1993 results were materially
affected by recessionary pressures. Royalty income of $.8 million for 1993
declined by $.9 million from 1992 primarily due to the expiration of certain
international licensing agreements.
The Company's 1992 results reflected lower revenues from Phar-Mor of
$28.1 million, including the write-off of long-term contracts totalling $16.4
million. In addition, lower unit sales for everyday and seasonal greeting
cards, partially offset by higher unit sales of gift wrap and lower returns of
certain seasonal products contributed to the decline. The 1991 increase in
total revenues resulted from higher selling prices and unit sales for
everyday and seasonal greeting cards partially offset by unit decreases in
gift wrap and increased returns and allowances.
PAGE
Operating costs were $505.0 million or 92.3% of total revenues in 1993
compared to 97.3% in 1992 and 87.0% in 1991. Cost of products sold was 50.7%
of total revenues in 1993 compared to 50.9% and 48.1% in 1992 and 1991,
respectively. The slight percentage decline in 1993 compared to 1992 was due
to higher revenues and product sales mix improvements resulting from the
acquisition of The Paper Factory offset by the change in product mix, pricing
pressures and customer discounts, which adversely affected gross margins from
Cleo's sales of gift wrap and paper products. As a result of this, Cleo
operated at a loss in 1993. The Company expects that these conditions
adversely affecting Cleo's results will continue in 1994 and that Cleo will
incur a loss for 1994. In addition, the Company has recently completed an
extensive review of Cleo's inventory and anticipates that it will record,
in the second quarter of 1994, obsolescence charges against the book value
of certain of Cleo's inventory. The percentage increase in cost of products
sold in 1992 compared to 1991 was due to lower revenues and product sales
mix. Selling, distribution and administrative expenses were 41.7% of total
revenues in 1993 compared to 45.0% in 1992 and 37.2% in 1991. The decline
in these expenses, as a percentage, reflected higher revenues, partially
offset by acquisition costs associated with The Paper Factory and start-up
costs for international operations. Additionally, 1992 expenses included
Phar-Mor related items including write-offs of accounts receivable of $5.9
million and card display fixtures of $5.1 million. Expenses associated with
international operations as well as domestic restructuring charges also
adversely impacted 1992.
Financing and derivative transaction expenses were 1.4% of total
revenues in 1993 compared to 1.4% and 1.7% in 1992 and 1991, respectively.
The Company recorded a net loss on derivative transactions with a financial
institution for 1993 of $1.1 million, consisting of the accrual of an
unrealized market value loss of $3.1 million on two derivative transactions
outstanding at December 31, 1993, which did not qualify as hedges, and the
recognition of a $2.0 million gain from certain derivative transactions
entered into and/or terminated during 1993 which also did not qualify as
hedges. The market value of derivative transactions outstanding at
December 31, 1993 was determined by a financial institution's valuation model
based on the projected future value of the transactions at maturity. Lower
interest rates were partially offset by higher average borrowings, largely
resulting from the acquisition of The Paper Factory as well as higher working
capital requirements. The decrease in the 1992 percentage versus 1991 was
attributable to lower average borrowing levels combined with lower interest
rates. Also included in 1991 were a $.5 million prepayment penalty on the
Company's 13.625% senior notes which were retired and increased interest
expense associated with debt incurred to finance a new manufacturing and
distribution center.
Income before income taxes and cumulative effect of accounting changes
was $34.0 million, an increase of $21.0 million over 1992 compared to a
decrease in 1992 of $55.1 million from 1991 and an increase of $4.3 million in
1991 over 1990. This represented 6.2% of total revenues in 1993 compared to
2.7% and 13.0% in 1992 and 1991, respectively.
The effective income tax rate for 1993 was 41.7% compared to 38.9% in
1992 and 38.6% in 1991. See Notes 1 and 7 of Notes to Consolidated Financial
Statements set forth in Item 8 below.
Income before cumulative effect of accounting changes was $19.8 million
in 1993 compared to $8.0 million in 1992 and $41.9 million in 1991, and
represented 3.6% of total revenues compared to 1.6% and 8.0% in 1992 and
1991, respectively.
During 1992, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 106 - "Employer's Accounting for Postretirement Benefits
Other Than Pensions" retroactive to January 1, 1992. Upon adoption , the
Company incurred a one-time charge of $2.5 million, net of income taxes of
$1.6 million, attributable to the cumulative effect of the adoption of this
accounting change. The impact on net income per share was $.15. In addition,
the Company adopted SFAS No. 109 - "Accounting for Income Taxes" which
resulted in a credit of $1.1 million or $.06 per share for the cumulative
effect of this change.
Net income of $19.8 million in 1993 increased $13.3 million compared to
a decrease in 1992 of $35.3 million and an increase of $2.1 million in 1991,
and represented 3.6% of total revenues compared to 1.3% and 8.0% in 1992 and
1991, respectively.
The Company attempts to minimize the impact of inflation by controlling
its cost of raw materials, labor and other expenses, and pricing its products
in light of general economic conditions.
Liquidity and Capital Resources
Cash flows from operating activities for 1993 provided $31.6 million in
cash compared to $74.8 million in 1992 and $47.0 million in 1991. The decline
in 1993 of $43.2 million was primarily the result of decreased amortization of
deferred costs and other intangibles of $14.5 million combined with higher
working capital requirements. Trade receivables increased 13.3% largely
reflecting increased revenues. Inventories increased 5.4% resulting from
increases associated with the acquisition of The Paper Factory. The increase
in other assets, excluding amortization, primarily reflects additional
commitments made for long-term customer agreements combined with goodwill
associated with the acquisition of The Paper Factory.
Cash used in investing activities for plant and equipment purchases
totaled $31.0 million in both 1993 and 1992 compared to $31.7 million in 1991.
The Company anticipates that the 1994 expenditure levels will be in line with
historical trends based upon existing business conditions.
Cash provided by financing activities in 1993 was $23.7 million compared
to cash used in financing activities in 1992 and 1991 of $44.3 million and
$30.4 million, respectively. The 1993 increase in short-term borrowings
reflected higher working capital requirements combined with funds used to
acquire The Paper Factory. Long-term debt increased in 1993 due to the
issuance of unsecured notes to the former shareholders of The Paper Factory,
payable over the next four years. During 1991, the Company prepaid $6.0
million of its 13.625% senior notes and privately placed $50.0 million of
9.33% senior notes. Proceeds from the private placements were used to reduce
short-term debt.
In April 1993, the Company consummated a new $210 million, three-year
revolving credit facility, replacing a similar existing facility. The
facility will provide funds for general corporate purposes and future growth.
PAGE
The Company periodically entered into interest rate swap or derivative
transactions with a financial institution to manage the interest rate
sensitivity of a portion of its debt. Certain of the derivative transactions
executed during 1993 did not qualify as effective interest rate hedges and,
accordingly, the proceeds realized from such transactions (approximately $2.0
million) have been recognized as a component of the loss on derivative
transactions, net in the accompanying 1993 Consolidated Statement of Income.
Additionally, the estimated current market value of two derivative
transactions outstanding at December 31, 1993, which likewise did not qualify
as effective interest rate hedges, was a loss of $3.1 million which was
accrued in the accompanying 1993 consolidated financial statements. The
market value of the derivative transactions at December 31, 1993 was
determined by a financial institution's valuation model based on the projected
future value of the transactions at maturity.
On March 4, 1994, the Company announced that, based on trading of
swap/derivative positions subsequent to year-end, the Company had entered into
two new transactions with a financial institution which will result in a
minimum loss of $3.0 million and a maximum potential loss of $27.575 million.
These two transactions have caps on the Company's total exposure and replace
previous uncapped positions. The new transactions, which mature in June and
August 1995, may be liquidated at any time prior to maturity and had an
estimated cost of termination of approximately $17.5 million at March 4, 1994.
As these positions do not constitute effective hedges, they will be reported
at their current fair market value until they mature or are closed out, and
fluctuations in such value will affect earnings in future periods. The
combined effect of these two transactions is that the Company's losses on
these transactions will be between $3.0 million and $27.575 million. The
Company's losses would be minimized at $3.0 million if the six-month LIBOR
rate is at or below 3.90% on June 7, 1995 and the basis point spread for
interest rate swaps (the "swap spread") relative to the 10.75% U.S. Treasury
Note maturing August 15, 2005 is at or above 33.5 basis points on August 15,
1995. On the other hand, its losses would be maximized at $27.575 million if
the six-month LIBOR rate equals or exceeds 5.90% on June 7, 1995 and the swap
spread is 20 basis points or less on August 15, 1995. The Company may elect
to liquidate the transactions at any time prior to maturity based on market
conditions prevailing at the time. As of June 30, 1994, the six-month LIBOR
rate was 5.25% and the swap spread was 25.2 basis points. These transactions
are still held by the Company and at June 30, 1994 had an estimated net cost
of termination of approximately $23.0 million.
Management believes that its cash flows from operations and credit
sources will provide adequate funds, both on a short-term and on a long-term
basis, for currently foreseeable debt payments, lease commitments and payments
under existing customer agreements, all of which total approximately $51
million in 1994 and $23 million to $33 million per year for the next four
years, as well as for financing existing operations, currently projected
capital expenditures, anticipated long-term sales agreements consistent with
industry trends and other contingencies.
PAGE
In connection with certain of the Company's debt agreements, the Company
is required to submit to its lenders, interim condensed consolidated financial
statements within 45 days after the end of each quarter. Since the Company
was seeking a more complete valuation of its derivative transactions prior to
its restatement of prior period results, the Company was unable to provide
those statements for the period ended June 30, 1994 to its lenders by August
15, 1994. It is management's intent to file those statements with the lenders
within thirty days of the original deadline which is permissible under the
debt agreements. Additionally, these agreements contain covenants related to
material adverse changes and material litigation. Management believes that
the Company is not in violation of these covenants.
Management does not believe that there are any trends, events,
commitments or uncertainties, except for previously disclosed items, and aside
from normal seasonal fluctuations and general industry competitive conditions,
that should be expected to have a material effect on the results of
operations, financial condition, liquidity, or capital resources of the
Company.
For additional financial information see Consolidated Financial
Statements and Notes to Consolidated Financial Statements set forth in Item 8
below.
PAGE
Item 8. Financial Statements and Supplementary Data
Gibson Greetings, Inc.
Consolidated Statements of Income
Years Ended December 31, 1993, 1992 and 1991
(Dollars in thousands except per share amounts)
1993 1992 1991
--------- --------- ---------
Revenues:
Net sales $ 546,165 $ 484,118 $ 522,166
Royalty income 761 1,705 2,148
--------- --------- ---------
Total revenues 546,926 485,823 524,314
--------- --------- ---------
Costs and expenses:
Operating expenses:
Cost of products sold 277,109 247,340 252,217
Selling, distribution and
administrative expenses 227,863 218,642 194,872
--------- --------- ---------
Total operating expenses 504,972 465,982 447,089
--------- --------- ---------
Operating income before financing
and derivative transaction expenses 41,954 19,841 77,225
Financing and derivative
transaction expenses:
Interest expense, net of
capitalized interest 7,737 7,803 9,380
Interest income (949) (1,023) (342)
Loss on derivative transactions, net 1,118 - -
--------- --------- ---------
Total financing and derivative
transactions, net 7,906 6,780 9,038
--------- --------- ---------
Income before income taxes and
cumulative effect of
accounting changes 34,048 13,061 68,187
Income taxes 14,209 5,076 26,303
--------- --------- ---------
Income before cumulative effect
of accounting changes 19,839 7,985 41,884
--------- --------- ---------
Cumulative effect of change in
accounting for postretirement
benefits other than pensions,
net of income taxes of $1,609 - (2,487) -
Cumulative effect of change in
accounting for income taxes - 1,038 -
--------- --------- ---------
Net income $ 19,839 $ 6,536 $ 41,884
========= ========= =========
Income per share before
cumulative effect of
accounting changes $ 1.23 $ 0.50 $ 2.61
Cumulative effect per share
of change in accounting for
postretirement benefits
other than pensions, net of
income taxes - (0.15) -
Cumulative effect per share of
change in accounting for
income taxes - 0.06 -
--------- --------- ---------
Net income per share $ 1.23 $ 0.41 $ 2.61
========= ========= =========
[FN]
See accompanying notes to consolidated financial statements.
PAGE
Gibson Greetings, Inc.
Consolidated Balance Sheets
December 31, 1993 and 1992
(Dollars in thousands except per share amounts)
1993 1992
--------- ---------
Assets
Current assets:
Cash and equivalents $ 9,477 $ 9,505
Trade receivables, net 192,163 169,605
Inventories 125,138 118,758
Prepaid expenses 4,207 4,301
Deferred income taxes 36,796 31,947
--------- ---------
Total current assets 367,781 334,116
Plant and equipment, net 116,900 112,712
Other assets, net 86,924 54,276
--------- ---------
$ 571,605 $ 501,104
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Debt due within one year $ 66,187 $ 31,911
Accounts payable 18,835 14,738
Income taxes payable 13,071 9,931
Other current liabilities 60,479 53,275
--------- ---------
Total current liabilities 158,572 109,855
Deferred income taxes (854) 2,693
Long-term debt 74,365 70,175
Other liabilities 21,854 15,040
--------- ---------
Total liabilities 253,937 197,763
--------- ---------
Stockholders' Equity:
Preferred stock, par value $1.00;
5,000,000 shares authorized,
none issued - -
Preferred stock, Series A, par
value $1.00; 300,000 shares
authorized, none issued - -
Common stock, par value $.01;
50,000,000 shares authorized,
16,533,267 and 16,506,919
shares issued, respectively 165 165
Paid-in capital 45,209 44,436
Retained earnings 277,891 264,469
Foreign currency adjustment 291 159
--------- ---------
323,556 309,229
--------- ---------
Less treasury stock, at cost,
473,344 and 473,344 shares,
respectively 5,888 5,888
--------- ---------
Total stockholders' equity 317,668 303,341
--------- ---------
Commitments and contingencies
(Notes 11 and 12)
$ 571,605 $ 501,104
========= =========
[FN]
See accompanying notes to consolidated financial statements.
PAGE
Gibson Greetings, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 1993, 1992 and 1991
(Dollars in thousands)
1993 1992 1991
--------- --------- ---------
Cash flows from operating activities:
Net income $ 19,839 $ 6,536 $ 41,884
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and write-down of
display fixtures 22,688 24,870 18,495
Loss on disposal of plant
and equipment 5,817 3,816 4,441
Loss on derivative transactions, net 1,118 - -
Deferred income taxes (8,909) (6,708) (3,246)
Amortization of excess of fair value
of companies acquired over cost - - (1,430)
Amortization and write-down of
deferred costs and
other intangibles 19,547 34,087 15,822
Change in assets and liabilities:
(Increase) decrease in trade
receivables, net (22,529) 36,422 (5,466)
(Increase) decrease in
inventories 1,843 (4,119) (29)
(Increase) decrease in
prepaid expenses 286 (182) 3,898
Increase in other assets,
net of amortization (25,999) (23,356) (8,085)
Increase (decrease) in
accounts payable 2,579 (524) 386
Increase (decrease) in
income taxes payable 3,014 (9,967) 4,456
Increase (decrease) in other
current liabilities 6,603 6,169 (24,544)
Increase in other liabilities 5,696 7,511 457
All other, net (22) 272 (89)
--------- --------- ---------
Total adjustments 11,732 68,291 5,066
--------- --------- ---------
Net cash provided by
operating activities 31,571 74,827 46,950
--------- --------- ---------
Cash flows from investing activities:
Purchase of plant and equipment (31,049) (30,970) (31,736)
Proceeds from sale of
plant and equipment 550 63 27
Acquisition of The Paper Factory
of Wisconsin, Inc.,
net of cash acquired (24,782) - -
--------- --------- ---------
Net cash used in investing
activities (55,281) (30,907) (31,709)
--------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in
short-term borrowings 23,062 (40,400) (71,100)
Issuance of long-term debt, net 8,075 875 50,000
Payments on long-term debt (1,811) (708) (6,702)
Issuance of common stock 773 2,277 3,243
Acquisition of common stock
for treasury - (49) (222)
Dividends paid (6,417) (6,251) (5,638)
--------- --------- ---------
Net cash provided by (used in)
financing activities 23,682 (44,256) (30,419)
--------- --------- ---------
Net decrease in cash and equivalents (28) (336) (15,178)
Cash and equivalents at beginning of year 9,505 9,841 25,019
--------- --------- ---------
Cash and equivalents at end of year $ 9,477 $ 9,505 $ 9,841
========= ========= =========
Supplemental disclosure of
cash flow information
Cash paid during the year for:
Interest, net of amounts capitalized $ 7,544 $ 8,201 $ 9,264
Income taxes 20,243 19,015 24,851
[FN]
See accompanying notes to consolidated financial statements.
PAGE
Gibson Greetings, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1993, 1992 and 1991
(Dollars in thousands except per share amounts)
1993 1992 1991
--------- --------- ---------
Common stock, par value $.01:
Balance at beginning of year $ 165 $ 164 $ 162
Exercise of stock options - 1 2
--------- --------- ---------
165 165 164
--------- --------- ---------
Paid-in capital:
Balance at beginning of year 44,436 42,160 38,919
Exercise of stock options 773 2,276 3,241
--------- --------- ---------
45,209 44,436 42,160
--------- --------- ---------
Retained earnings:
Balance at beginning of year 264,469 264,184 227,938
Net income 19,839 6,536 41,884
Cash dividends paid ($.40, $.39,
and $.36 per share in 1993,
1992 and 1991, respectively) (6,417) (6,251) (5,638)
--------- --------- ---------
277,891 264,469 264,184
--------- --------- ---------
Foreign currency translation adjustment:
Balance at beginning of year 159 74 -
Aggregate adjustments resulting
from translation of financial
statements into U.S. dollars 132 85 74
--------- --------- ---------
291 159 74
--------- --------- ---------
Less treasury stock, at cost:
Balance at beginning of year 5,888 5,839 5,617
Common stock acquired - 49 222
--------- --------- ---------
5,888 5,888 5,839
--------- --------- ---------
Total stockholders' equity $ 317,668 $ 303,341 $ 300,743
========= ========= =========
[FN]
See accompanying notes to consolidated financial statements.
PAGE
Gibson Greetings, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 1993, 1992 and 1991
(Dollars in thousands except per share amounts)
Note 1--Nature of Business and Statement of Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of Gibson
Greetings, Inc. and its wholly-owned and majority-owned subsidiaries (the
Company). All intercompany transactions have been eliminated.
Introduction
On July 1, 1994, the Company announced that it had determined that the
inventory of Cleo, Inc. (Cleo), a wholly-owned subsidiary, at December 31,
1993 had been overstated, resulting in an approximate 20% overstatement of the
Company's previously reported 1993 consolidated net income. The Company
believes such overstatement resulted from a deliberate attempt by one or more
Cleo personnel to overstate Cleo's income before income taxes. The
overstatement of inventory and income before income taxes was $8,806 at
December 31, 1993 and for the year then ended. The accompanying 1993
Consolidated Financial Statements have been amended and restated to reflect
the correction of such overstatement as well as the accrual of an unrealized
market value loss of $3,100 on two derivative transactions outstanding at
December 31, 1993, which did not qualify as hedges, and the recognition of a
$1,982 previously deferred gain from certain derivative transactions entered
into and/or terminated during 1993 which also did not qualify as hedges. The
net effect of these two derivative adjustments, a loss of $1,118, was
recognized in the accompanying Consolidated Financial Statements as these
adjustments became significant in light of the reduction in the Company's net
income resulting from the restatement of Cleo inventory. The above
changes reduced 1993 net income and net income per share from amounts
previously reported by $6,013 and $.38, respectively.
Nature of business
The Company operates in a single industry segment: the design,
manufacture and sale of greeting cards, gift wrap and related products. The
Company sells to customers in several channels of the retail trade principally
located in the United States. The Company recognizes sales at the time of
shipment from its facilities. Provisions for sales returns are recorded at the
time of the sale, based upon current conditions and the Company's historic
experience. The Company conducts business based upon periodic credit
evaluations of its customers' financial condition and generally does not
require collateral. The Company does not believe a concentration of risk
exists due to the diversity of channels of distribution and geographic
location of its retail customers. During the year ended December 31, 1993,
the Company's largest customer accounted for approximately 12% of total
revenues and during the year ended December 31, 1992, the same customer
accounted for approximately 11% of total revenues. During the year ended
December 31, 1991, a different customer accounted for approximately 13% of
total revenues.
International Operations
During 1992, the Company formed Gibson de Mexico, S.A. de C.V. (Gibson
de Mexico) to purchase certain assets and assume certain liabilities of Pagina
Once, S.A. de C.V. (Pagina Once). Pagina Once was primarily engaged in the
manufacturing and marketing of greeting cards. Minority stockholders of Gibson
de Mexico are principal officers of Gibson de Mexico. The total cost of the
acquisition exceeded the fair value of the net assets by $583.
During 1991, the Company formed Gibson Greetings International Limited
(Gibson International) to market the Company's products primarily in the
United Kingdom and other European countries. The minority stockholders of
Gibson International are principal officers of Gibson International.
The activities of these subsidiaries were not material to consolidated
operations in either 1993 or 1992.
Retail Operations
On June 1, 1993, the Company acquired The Paper Factory of Wisconsin,
Inc. (The Paper Factory) for $25.1 million in a business combination
accounted for as a purchase. The Paper Factory operates retail stores located
primarily in manufacturers' outlet shopping centers. The results of The Paper
Factory are not material and are included in the consolidated financial
statements since the date of acquisition. The total cost of the acquisition
exceeded the fair value of the net assets of The Paper Factory by $26.2
million. In connection with the acquisition, the Company assumed liabilities
of approximately $11.6 million. Accumulated goodwill amortization at December
31, 1993 was $792.
Cash and equivalents
Cash and equivalents are stated at cost. Cash equivalents include time
deposits, money market instruments and short-term debt obligations with
original maturities of three months or less. The carrying amount
approximates fair value because of the short maturity of these instruments.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Plant and equipment
Plant and equipment are stated at cost. Plant and equipment, except for
leasehold improvements, are depreciated over their related estimated useful
lives, using the straight-line method. Leasehold improvements are amortized
over the terms of the respective leases, using the straight-line method.
Expenditures for maintenance and repairs are charged to operations currently;
renewals and betterments are capitalized.
Other assets
Other assets include deferred and prepaid costs, goodwill and other
intangibles. Deferred and prepaid costs represent costs incurred relating to
long-term customer sales agreements. Deferred and prepaid costs are amortized
ratably over the terms of the agreements, generally three to six years.
Goodwill and other intangibles are amortized over periods ranging from three
to twenty years, using the straight-line method.
Income taxes
Effective January 1, 1992, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109 - "Accounting for Income Taxes." This
Statement utilizes the liability method of accounting for income taxes.
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of currently enacted tax laws. Prior to
1992, the Company accounted for income taxes using Accounting Principles Board
Opinion No. 11. Investment tax credits are amortized to income over the lives
of the related assets.
PAGE
Excess of fair value of companies acquired over cost
The excess of fair value of companies acquired over cost was amortized
to income over ten years, using the straight-line method. Amortization was
complete in 1991. Accumulated amortization at December 31, 1993 and 1992 was
$14,480.
Interest rate swap agreements
The difference between the amount of interest to be paid and the amount
of interest to be received under interest rate swap agreements (used for
hedging purposes) due to changing interest rates is charged or credited to
interest expense over the life of the agreements. Interest rate swap and
derivative transactions that do not qualify as hedges are recorded at their
fair market value. The fair market value of interest rate swaps and
derivative transactions is the estimated amount that the Company would receive
or pay to terminate the swap agreements at the reporting date as determined by
a financial institution's valuation model based on the projected value of the
transactions at maturity.
Other Postretirement Benefits
Effective January 1, 1992, the Company adopted SFAS No. 106 -
"Employers' Accounting for Postretirement Benefits Other Than Pensions"
(OPEB). This Statement requires that the cost of these benefits be recognized
in the financial statements during the employee's active working career.
Computation of net income per share
The computation of net income per share is based upon the weighted
average number of shares of common stock and equivalents outstanding during
the year: 16,102,709 shares for 1993, 16,103,897 shares for 1992, and
16,039,259 shares for 1991.
Reclassifications
Certain prior year amounts in the consolidated financial statements have
been reclassified to conform to the 1993 presentation.
Note 2--Trade Receivables
Trade receivables at December 31, 1993 and 1992, consist of the
following:
1993 1992
--------- ---------
Trade receivables $ 245,682 $ 223,022
Less reserve for returns,
allowances, cash discounts
and doubtful accounts 53,519 53,417
--------- ---------
$ 192,163 $ 169,605
========= =========
PAGE
Note 3--Inventories
Inventories at December 31, 1993 and 1992, consist of the
following:
1993 1992
--------- ---------
Finished goods $ 74,268 $ 67,736
Work-in-process 13,147 12,867
Raw materials and supplies 37,723 38,155
--------- ---------
$ 125,138 $ 118,758
========= =========
Note 4--Plant and Equipment
Plant and equipment at December 31, 1993 and 1992, consist of
the following:
1993 1992
--------- ---------
Land and buildings $ 35,936 $ 32,807
Machinery and equipment 60,842 54,010
Display fixtures 84,117 84,334
Leasehold improvements 10,001 9,164
Construction in progress 4,233 3,761
--------- ---------
195,129 184,076
Less accumulated depreciation 78,229 71,364
--------- ---------
$ 116,900 $ 112,712
========= =========
Note 5--Other Assets
Other assets at December 31, 1993 and 1992, consist of the
following:
1993 1992
--------- ---------
Deferred and prepaid costs $ 112,157 $ 87,895
Goodwill and other intangibles 31,601 5,384
--------- ---------
143,758 93,279
Less accumulated amortization 56,834 39,003
--------- ---------
$ 86,924 $ 54,276
========= =========
PAGE
Note 6--Debt
Debt at December 31, 1993 and 1992, consists of the following:
1993 1992
--------- ---------
Debt due within one year:
Commercial paper bearing
interest at a weighted
average rate of 3.60% $ 13,020 $ -
Loans payable to banks
under a revolving credit
agreement bearing interest
at a weighted average rate
of 3.70% 10,000 -
Loans payable to banks under
uncommitted borrowing
facilities bearing interest
at weighted average rates of
3.55% and 3.58%, respectively 39,250 30,100
Current portion of long-term debt 3,917 1,811
--------- ---------
$ 66,187 $ 31,911
========= =========
Long-term debt:
Senior notes bearing interest
at 9.33%, with annual serial
maturities from 1995 through
2001 $ 50,000 $ 50,000
Economic development revenue
bonds (tax-exempt) bearing
interest at a weighted average
rate of 7.17%, with annual
serial maturities from 1993
through 1999 and a term maturity
in 2004, less unamortized
discount of $163 and $179 in
1993 and 1992, respectively, to
yield an effective rate of 7.29% 9,277 9,821
Economic development revenue
bonds (taxable) bearing interest
at 9.10%, with annual sinking
fund payments required in 1993
through 2004, less unamortized
discount of $159 and $175 in
1993 and 1992, respectively, to
yield an effective rate of 9.35% 6,431 6,760
Notes payable to former
shareholders of The Paper
Factory of Wisconsin, Inc.
bearing interest at 5.01%,
payable in annual installments
of $2,019 8,075 -
Industrial revenue bonds bearing
interest at 9.25%, payable in
semi-annual installments of $300,
secured by plant and equipment
with a carrying value of $6,275
and $6,792 at December 31, 1993
and 1992, respectively 3,000 3,600
Urban development action grant
bearing interest at 8.00%,
payable in quarterly
installments, secured by land,
building and equipment with a
carrying value of $16,183 and
$16,262 at December 31, 1993 and
1992, respectively 682 875
Other notes bearing interest at a
weighted average rate of 5.20%,
payable in quarterly
installments, secured by the same
assets securing the industrial
revenue bonds 817 930
--------- ---------
78,282 71,986
Less portion due within one year 3,917 1,811
--------- ---------
$ 74,365 $ 70,175
========= =========
PAGE
In 1991, the Company privately placed $50,000 in long-term senior notes
with proceeds being used for general corporate purposes.
In 1993, the Company entered into a new three-year revolving credit
agreement, replacing a similar existing facility, which expires April 26,
1996. The amount which can be borrowed under this agreement is $210,000.
The fair value of the Corporation's long-term debt is estimated based on
the quoted market prices for the same or similar issues or on the current
rates offered to the Corporation for debt of the same remaining maturities.
The estimated fair value of the Company's gross long-term debt at December 31,
1993 was $83,992.
The Company periodically enters into interest rate swap or derivative
transactions with the intent to manage the interest rate sensitivity of
portions of its debt. At December 31, 1993, the Company had four outstanding
interest rate swap/derivative positions with a total notional amount of
$96,000. Two agreements, with terms similar to the related bonds, are
constituted as hedges and effectively change the Company's interest rate on
$3,000 of industrial revenue bonds to 6.67% through February 1998 and have a
positive market value of $140 at December 31, 1993. The other two agreements
do not qualify as hedges. The first attempts to limit the Company's exposure
against rising short-term rates on a notional amount of $60,000 through 1995.
The last position provides the Company with a maximum 1.0% annuity on $30,000
through August 1994 predicated on short-term rates remaining in a specified
range. The estimated current market value of the two derivative transactions
which did not qualify as hedges was a loss of $3,100 at December 31, 1993 and
was accrued in the accompanying consolidated financial statements. The
Company received proceeds of approximately $1,982 relating to certain
derivative transactions, which also did not qualify as hedges and which
were either entered into or terminated during 1993. Such proceeds have been
reflected in the accompanying 1993 Consolidated Statement of Income as a
component of "Loss on derivative transactions, net."
On March 4, 1994, the Company announced that, based on trading of
swap/derivative positions subsequent to year-end, the Company entered into two
new transactions which will result in a minimum loss of $3,000 and a maximum
potential loss of $27,575. The new transactions, which mature in June and
August 1995, may be liquidated at any time prior to maturity and had an
estimated cost of termination of approximately $17,500 at March 4, 1994.
These positions will continue to be reported at current fair market value
until they mature or are closed out, and fluctuations in such value will
affect earnings in future periods. The combined effect of these two
transactions is that the Company's losses will be between $3,000 and $27,575.
The Company's losses would be minimized at $3,000 if the six-month LIBOR rate
is at or below 3.90% on June 7, 1995 and the basis point spread for interest
rate swaps (the "swap spread") relative to the 10.75% U.S. Treasury Note
maturing August 15, 2005 is at or above 33.5 basis points on August 15, 1995.
On the other hand, its losses would be maximized at $27,575 if the six-month
LIBOR rate equals or exceeds 5.90% on June 7, 1995 and the swap spread is 20
basis points or less on August 15, 1995. The Company may elect to liquidate
the transactions at any time prior to maturity based on market conditions
prevailing at the time. As of June 30, 1994, the six-month LIBOR rate was
5.25% and the swap spread was 25.2 basis points. These transactions are still
held by the Company and, at June 30, 1994, had an estimated net cost of
termination of $22,995.
PAGE
The annual principal payments due on long-term debt for each of the
years in the five-year period ended December 31, 1998, are $3,917, $11,164,
$11,269, $11,116 and $9,205, respectively.
Capitalized interest for the years ended December 31, 1993, 1992 and
1991 were $0, $74 and $322, respectively.
The Company's debt agreements contain certain covenants including
limitations on dividends based on a formula related to net income, stock sales
and certain restricted investments. At December 31, 1993, the amount of
unrestricted retained earnings available for dividends was $47,152.
Note 7--Income Taxes
The Company adopted the provisions of SFAS No. 109 effective
January 1, 1992, and recorded a credit of $1,038 and increased
net income per share by $.06 for the cumulative effect of this
change in accounting principle. There was no effect on income
before income taxes for the year ended December 31, 1992,
resulting from the adoption of SFAS No. 109.
The provision for income taxes for the years ended December 31,
1993, 1992 and 1991, consists of the following:
1993 1992 1991
--------- --------- ---------
Federal:
Current $ 17,903 $ 7,257 $ 23,915
Deferred (6,850) (4,594) (2,617)
Deferred investment
tax credits, net (122) (124) (195)
--------- --------- ---------
10,931 2,539 21,103
--------- --------- ---------
State and local:
Current 4,532 2,093 5,829
Deferred (1,343) (1,076) (629)
--------- --------- ---------
3,189 1,017 5,200
--------- --------- ---------
Foreign:
Current - - -
Deferred 89 (89) -
--------- --------- ---------
89 (89) -
--------- --------- ---------
$ 14,209 $ 3,467 $ 26,303
========= ========= =========
PAGE
For the year ended December 31, 1992, provision for income
taxes was included in the financial statements as follows:
1992
---------
Continuing operations $ 5,076
Transition effect of change in
accounting for postretirement
benefits other than pensions (1,609)
---------
$ 3,467
=========
Recently enacted tax laws raised the statutory tax rate for
corporations from 34% to 35%, retroactive to January 1, 1993.
Partially offsetting the adverse impact of the 1% increase in
effective tax rates in 1993 and future periods is the favorable
adjustment of $.7 million recorded in 1993 due to the
revaluation of certain deferred tax assets.
The effective income tax rate for the years ended December 31,
1993, 1992 and 1991, varied from the statutory federal income
tax rate as follows:
1993 1992 1991
--------- --------- ---------
Statutory federal
income tax rate 35.0% 34.0% 34.0%
State and local income taxes,
net of federal income tax
benefit 6.1 6.8 5.0
Nondeductible foreign losses 2.2 - -
Other (1.6) (1.9) (0.4)
--------- --------- ---------
41.7% 38.9% 38.6%
========= ========= =========
PAGE
The tax effect of significant temporary differences
representing deferred tax assets and liabilities is as follows
for the year ended December 31, 1991:
1991
---------
Reserve for returns, allowances, cash
discounts and doubtful accounts $ (2,780)
Reserve for inventories and related items 616
Depreciation of plant and equipment 617
Reserve for display fixtures (500)
Accrued compensation and benefits (1,479)
Other 280
---------
$ (3,246)
=========
Deferred taxes are determined based on the estimated future tax
effects of differences between the financial statement and tax
bases of assets and liabilities given the provisions of
currently enacted tax laws.
The net deferred taxes are comprised of the following:
1993 1992
--------- ---------
Current deferred taxes:
Gross assets $ 37,573 $ 32,646
Gross liabilities (777) (699)
--------- ---------
36,796 31,947
--------- ---------
Noncurrent deferred taxes:
Gross assets 12,497 8,180
Gross liabilities (11,241) (10,350)
Deferred investment
tax credits (402) (523)
--------- ---------
854 (2,693)
--------- ---------
$ 37,650 $ 29,254
========= =========
The Company did not record any valuation allowances against
U.S. deferred tax assets at January 1, 1992, December 31, 1992 or
December 31, 1993, due to the substantial amounts of taxable
income generated over the last three to five years.
PAGE
The tax balances of significant temporary differences
representing deferred tax assets and liabilities for the years
ended December 31, 1993 and 1992 were as follows:
1993 1992
--------- ---------
Reserve for returns, allowances,
cash discounts and doubtful
accounts $ 22,279 $ 21,828
Reserve for inventories
and related items 7,655 4,959
Postretirement benefits 1,885 1,851
Depreciation of plant
and equipment (11,078) (10,294)
Reserve for display fixtures 1,644 1,476
Accrued compensation and benefits 10,854 7,700
Other accruals and reserves 4,813 2,257
Deferred investment tax credits
benefits other than pensions (402) (523)
--------- ---------
$ 37,650 $ 29,254
========= =========
Note 8--Other Current Liabilities
Other current liabilities at December 31, 1993 and 1992,
consist of the following:
1993 1992
--------- ---------
Compensation, payroll taxes and
related withholdings $ 14,110 $ 10,626
Sales, service and
advertising costs 22,915 23,157
Other 23,454 19,492
--------- ---------
$ 60,479 $ 53,275
========= =========
PAGE
Note 9--Postretirement Benefits
The Company sponsors a defined benefit pension plan (the
Retirement Plan) covering substantially all employees who meet
certain eligibility requirements. Benefits are based upon years
of service and average compensation levels. The Company's
general funding policy is to contribute amounts deductible for
federal income tax purposes. Contributions are intended to
provide not only for benefits earned to date, but also for
benefits expected to be earned in the future.
The following table sets forth the Retirement Plan's funded
status on the measurement dates, September 30, 1993 and 1992,
and a reconciliation of the funded status to the amounts
recognized in the Company's consolidated balance sheets at
December 31, 1993 and 1992:
1993 1992
--------- ---------
Actuarial present value of
benefit obligations:
Vested benefit obligation $ 49,995 $ 42,871
========= =========
Accumulated benefit
obligation $ 54,203 $ 46,296
========= =========
Projected benefit
obligation for services
rendered to date $ 66,183 $ 59,329
Plan assets at fair market value 62,106 56,457
--------- ---------
Plan assets less than projected
benefit obligation (4,077) (2,872)
Unrecognized net asset at
January 1, 1986, being
recognized over 9.9 years (873) (1,332)
Unrecognized prior service cost 1,852 2,553
Unrecognized net gain resulting
from experience different from
assumed and effects of changes
in assumptions (4,565) (3,639)
--------- ---------
Accrued pension expense included
in other liabilities $ (7,663) $ (5,290)
========= =========
The fair market value of the Retirement Plan's assets at
December 31, 1993 and 1992, was $61,559 and $58,474,
respectively. The changes in asset values relative to the
measurement dates are primarily due to fluctuations in the
market value of the plan's equity investments.
PAGE
In 1990, the Company established a nonqualified defined benefit
plan for employees whose benefits under the Retirement Plan are
limited by provisions of the Internal Revenue Code.
Additionally in 1990, the Company established a nonqualified
defined benefit plan to provide supplemental retirement benefits
for selected executives in addition to benefits provided under
other Company plans. A nonqualified plan was also established
to provide retirement benefits for members of the Company's
Board of Directors who are not covered under any of the
Company's other plans. All plans established in 1990 were
unfunded at December 31, 1993 and 1992, although assets for
those plans are held in certain grantor tax trusts known as
"Rabbi" trusts. These assets are subject to claims of the
Company's creditors but otherwise must be used only for purposes
of providing benefits under the plans.
The following table sets forth the nonqualified defined benefit
plans' benefit obligations on the measurement dates, September
30, 1993 and 1992, and a reconciliation of those obligations to
the amounts recognized in the Company's consolidated balance
sheets at December 31, 1993 and 1992:
1993 1992
--------- ---------
Actuarial present value of
benefit obligations:
Vested benefit obligation $ 3,431 $ 2,402
========= =========
Accumulated benefit
obligation $ 4,396 $ 3,206
========= =========
Projected benefit
obligation for services
rendered to date $ 5,321 $ 3,870
Plan assets at fair market value - -
--------- ---------
Unfunded projected
benefit obligation (5,321) (3,870)
Unrecognized prior service cost 2,254 2,163
Unrecognized net loss resulting
from experience different from
assumed and effects of changes
in assumptions 834 169
--------- ---------
Accrued pension expense included
in other liabilities $ (2,233) $ (1,538)
========= =========
PAGE
The assumed weighted average discount rate and rate of increase
in future compensation levels used in determining the actuarial
present value of the projected benefit obligation for the plans
was 7.0% and 5.0% in 1993 and 8.0% and 6.0% in 1992,
respectively. The assumed long-term rate of return on plan
assets used for valuation purposes was 9.0% for 1993 and 1992.
A summary of the components of net pension expense for all of
the Company's defined benefit plans for the years ended December
31, 1993, 1992 and 1991, is as follows:
1993 1992 1991
--------- --------- ---------
Service cost-benefits earned
during the period $ 2,917 $ 2,834 $ 2,529
Interest cost on projected
benefit obligation 5,092 4,758 4,323
Net amortization and deferral
income tax benefit 128 159 6,923
Expected return on plan assets (4,941) (4,610) (11,064)
-------- --------- ---------
$ 3,196 $ 3,141 $ 2,711
======== ========= =========
The Company has a defined contribution pension plan for
employees who are members of a collective bargaining unit.
Benefits under this plan are determined based upon years of
service and an hourly contribution rate. Pension expense for
this plan for the years ended December 31, 1993, 1992 and 1991,
was $451, $479 and $410, respectively.
The Company has two defined contribution plans pursuant to
Section 401(k) of the Internal Revenue Code. The plans provide
that employees meeting certain eligibility requirements may
defer a portion of their salary subject to certain limitations.
The Company pays certain administrative costs of the plans and
contributes to the plans based upon a percentage of the
employee's salary deferral and an annual additional contribution
at the discretion of the Board of Directors. The total expense
for these plans for the years ended December 31, 1993, 1992 and
1991, was $501, $481 and $511, respectively.
In addition to providing pension benefits, the Company provides
medical and life insurance benefits for certain eligible
employees upon retirement from the Company. Substantially all
employees may become eligible for such benefits upon retiring
from active employment of the Company. Medical and life
insurance benefits for employees and retirees are paid by a
combination of company and employee or retiree contributions.
Retiree insurance benefits are provided by insurance companies
whose premiums are based on claims paid during the year. The
PAGE
Company adopted the provisions of SFAS No. 106 effective January
1, 1992. This standard requires companies to accrue an
actuarially determined charge for postretirement benefits during
the period in which active employees become eligible, under
existing plan agreements, for such future benefits. The
cumulative effect of this change resulted in a charge to net
income of $2,487 or $.15 per share, after taxes of $1,609. Prior
to January 1, 1992, the Company recognized these costs, which
were not significant to operations, on a cash basis.
Net periodic cost of these benefits for the years ended
December 31, 1993 and 1992 is as follows:
1993 1992
--------- ---------
Service cost-benefits earned
during the period $ 148 $ 139
Interest cost on
accumulated benefits 470 343
Net amortization 61 -
--------- ---------
$ 679 $ 482
========= =========
A reconciliation of the accumulated postretirement benefit
obligation (APBO) measured as of September 30, 1993 and 1992 to
the Company's consolidated balance sheets at December 31, 1993
and 1992 was as follows:
1993 1992
--------- ---------
Retirees $ 3,514 $ 2,681
Fully eligible active employees 1,228 1,257
Other active employees 1,084 479
--------- ---------
Accumulated benefit obligation 5,826 4,417
Unrecognized prior service cost (771) -
Unrecognized net loss (383) -
--------- ---------
Accrued APBO included in
other liabilities $ 4,672 $ 4,417
========= =========
PAGE
The accumulated benefit obligation for 1993 and 1992 was
determined using the following assumptions:
1993 1992
----------------------- -----------------------
Discount rate 7% 8%
Health care cost
trend rate 11% for 1994 graded down 16% for 1993 and 1994,
1% per year to 5% in the gradually declining to
year 2000, 5% thereafter a rate of 6% by 2003
The health care cost trend rate assumption does not have a
significant effect on the amounts reported. For example, a 1%
increase in the health care cost trend rate would increase the
accumulated postretirement benefit obligation as of December 31,
1993, and the net periodic cost for the year then ended by
approximately 5% and 4%, respectively.
Note 10--Stockholders' Equity
Employee stock plans
Under various stock option and incentive plans, the Company may
grant incentive and nonqualified stock options to purchase its
common stock. All incentive options are granted at the fair
market value on the date of grant. Incentive stock options
generally become exercisable one year after the date granted and
expire ten years after the date granted, if not earlier expired
due to termination of employment. Nonqualified stock options
become exercisable according to a vesting schedule determined at
the date granted and expire on the date set forth in the option
agreement, if not earlier expired due to termination of
employment.
A summary of stock option activity during the years ended
December 31, 1993, 1992 and 1991, is as follows:
1993 1992 1991
--------- --------- ---------
Number of options to purchase
common stock:
Outstanding at
beginning of year 1,073,470 646,958 782,529
Granted 47,500 534,900 37,000
Exercised (26,348) (93,021) (151,338)
Expired (31,580) (15,367) (21,233)
--------- --------- --------
Outstanding at end of year 1,063,042 1,073,470 646,958
========= ========= ========
Exercisable at end of year 666,594 439,641 408,294
========= ========= ========
The exercise prices of options granted in 1993 ranged from
$18.88 to $21.25. The exercise prices of options granted in
1992 ranged from $18.38 to $28.63 and the exercise price of
options granted in 1991 ranged from $24.75 to $28.00. Options
exercised were at prices of $2.38 to $23.50, in 1993, 1992 and
1991. Options outstanding at December 31, 1993, are at prices
ranging from $11.38 to $28.63.
Under certain stock incentive plans, the Company may grant the
right to purchase restricted shares of its common stock. Such
shares are subject to restriction on transfer and to repurchase
by the Company. The purchase price of restricted shares is
determined by the Company and may be nominal. In 1993, 1992 and
1991, 0, 5,000 and 38,500 restricted shares, respectively, were
purchased at a price of $1.00 per share.
At December 31, 1993, 621,192 shares were available under the
stock option and incentive plans, of which 563,166 shares could
be issued as restricted shares.
Stock rights
On December 4, 1987, the Company's Board of Directors declared
a dividend distribution of one right for each outstanding share
of the Company's common stock to stockholders of record on
December 21, 1987. Each right entitles the holder to purchase,
for the exercise price of $40 per share, 1/100th of a share of
Series A Preferred Stock. Until exercisable, the rights are
attached to all shares of the Company's common stock outstanding.
The rights are exercisable only in the event that a person or
group of persons (i) acquires 20% or more of the Company's
common stock and there is a public announcement to that effect,
(ii) announces an intention to commence or commences a tender or
exchange offer which would result in that person or group owning
30% or more of the Company's common stock, or (iii) beneficially
owns a substantial amount (at least 15%) of the Company's common
stock and is declared to be an Adverse Person (as defined in the
Rights Agreement) by the Company's Board of Directors. Upon a
merger or other business combination transaction, each right may
entitle the holder to purchase common stock of the acquiring
company worth two times the exercise price of the right. Under
certain other circumstances (defined in the Rights Agreement)
each right may entitle the holder (with certain exceptions) to
purchase common stock, or in certain circumstances, cash,
property or other securities of the Company, having a value
worth two times the exercise price of the right.
The rights are redeemable at one cent per right at anytime
prior to 20 days after the public announcement that a person or
group has acquired 20% of the Company's common stock. Unless
exercised or redeemed earlier by the Company, the rights expire
on December 28, 1997.
PAGE
Note 11--Commitments
Lease commitments
The Company has a long-term lease agreement for certain of its principal
facilities. The initial lease term runs through January 31, 2002, with two
five-year renewal options available. The basic rent under the lease is
subject to adjustment based on changes in the Consumer Price Index for the
preceding five years, effective March 1, 1987, and every five years thereafter
including renewal periods. The lease provides a purchase option exercisable
in 2002. The option price is the higher of $35,400 or the fair market value
on the date of exercise. As a condition of the lease, all property taxes,
insurance costs and operating expenses are to be paid by the Company.
The Company also leases additional manufacturing, distribution and
administrative facilities, sales offices and personal property under
noncancellable leases which expire on various dates through 2003. Certain of
these leases contain renewal and escalating rental payment provisions.
Rental expense for the years ended December 31, 1993, 1992 and 1991, on
all real and personal property, was $20,297, $15,846 and $13,777,
respectively. Minimum future annual rentals under noncancellable leases for
each of the years in the five-year period ended December 31, 1998 are $17,444,
$16,242, $14,190, $12,759 and $9,842, respectively. After 1998, these
commitments aggregate $25,364.
Contract commitments
The Company has several long-term customer sales agreements which
require payments and credits for each of the years in the five-year period
ended December 31, 1998, of $3,959, $1,347, $707, $443 and $242, respectively.
After December 31, 1998, these commitments aggregate $100. All of these
amounts have been recorded as other current liabilities or other liabilities
in the accompanying balance sheet as of December 31, 1993. Subsequent to
December 31, 1993, the Company entered into additional long-term customer
sales agreements which require total payments and credits of $45,301 of which
$25,836 and $3,838 will be paid in 1994 and 1995, respectively.
Employment agreements
The Company has employment agreements with certain executives which
provide for, among other things, minimum annual salaries adjusted for cost-of-
living changes, continued payment of salaries in certain circumstances and
incentive bonuses. Certain agreements further provide for signing bonuses,
deferred compensation payable upon expiration of the agreements and employment
termination payments, including payments contingent upon any person becoming
the beneficial owner of 50% or greater of the Company's outstanding stock.
PAGE
Note 12--Legal Proceedings
In 1990, a complaint was issued against the Company alleging certain
unfair labor practices in connection with a strike at one of its facilities.
On December 18, 1991, an Administrative Law Judge of the National Labor
Relations Board ("NLRB") issued a recommended order, which included
reinstatement and back pay affecting approximately 160 strikers, based on
findings that the Company had violated certain provisions of the National
Labor Relations Act. On May 7, 1993, the NLRB upheld the Administrative Law
Judge's decision in some respects, and enlarged the number of strikers
entitled to back pay to approximately 240. A prompt notice of appeal was
filed in the United States Court of Appeals for the District of Columbia
Circuit. The Company believes it has substantial defenses to the charges, and
these defenses have been presented in briefs in the Company's appeal. The
appeal is scheduled to be heard on September 14, 1994. A decision is expected
later in 1994 or early in 1995.
On July 1, 1994, the Company announced that it had determined that the
inventory of Cleo at December 31, 1993 had been overstated, resulting in an
approximate 20% overstatement of the Company's previously reported 1993
consolidated net income. See Note 1.
In early July, 1994, five purported class actions were commenced by
certain stockholders (the "Suits") against the Company and its Chairman,
President and Chief Executive Officer in the United States District Court for
the Southern District of Ohio, each alleging violations of the federal
securities laws and, in the case of two of the Suits, breach of common law
duties and seeking unspecified damages for an asserted public disclosure of
false information regarding the Company's earnings. Each of the Suits points
to the inventory valuation issue at Cleo as the basis for its claims. The
Company intends to vigorously defend the Suits.
The Securities and Exchange Commission is conducting a private
investigation to determine whether the Company or any of its officers,
directors and employees have engaged in conduct in violation of certain
provisions of the Securities Exchange Act of 1934 and the rules and
regulations thereunder. The Company believes that such investigation is
focused principally on the derivative transactions and the overstatement of
the Cleo inventory discussed in Note 1 and the Company's public statements and
accounting systems with respect thereto. The Company is cooperating in such
investigation.
In addition, the Company is a defendant in certain other litigation.
Management does not believe that an adverse outcome as to any or all of
these matters would have a material adverse effect on the Company's net worth
or total cash flows; however, the impact on the statement of operations in a
given year could be material.
PAGE
Report of Independent Public Accountants
To Gibson Greetings, Inc.:
We have audited the accompanying consolidated balance sheets of
Gibson Greetings, Inc. (a Delaware corporation) and its
subsidiaries as of December 31, 1993 and 1992, and the related
consolidated statements of income, cash flows and changes in
stockholders' equity for each of the three years in the period
ended December 31, 1993. These financial statements and the
schedules referred to below are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements and schedules 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 Gibson Greetings, Inc. and its subsidiaries as of December
31, 1993 and 1992, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 1993 in conformity with generally accepted
accounting principles.
As discussed in notes to consolidated financial statements,
effective January 1, 1992, the Company changed its methods of
accounting for postretirement benefits other than pensions and
income taxes.
Our audits were made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The schedules
listed in the index of financial statements are presented for
purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial
statements. These schedules have been subjected to the auditing
procedures applied in the audits of the basic financial
statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
Cincinnati, Ohio,
July 27, 1994.
PAGE
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
PART III
Except as set forth below, the information required by this Part
is included in the Company's definitive Proxy Statement, filed
with the Securities and Exchange Commission in connection with
the Company's 1994 Annual Meeting of Stockholders, and is
incorporated by reference herein.
Item 10. Directors and Executive Officers of the Registrant
The Executive Officers of the Company (at August 1, 1994) are
as follows:
Name Age Title
------------------- --- ----------------------------
Benjamin J. Sottile 56 Chairman of the Board,
President and
Chief Executive Officer
William L. Flaherty 46 Vice President, Finance and
Chief Financial Officer
Ralph J. Olson 49 Vice President
Nelson J. Rohrbach 53 Vice President
Stephen M. Sweeney 57 Vice President, Human
Resources
Information about Mr. Sottile is incorporated by reference from the Company's
definitive Proxy Statement for the 1994 Annual Meeting of Stockholders.
WILLIAM L. FLAHERTY. Mr. Flaherty has been Vice President, Finance and
Chief Financial Officer of the Company since November 1993. Prior to that
time, he served as Vice President and Corporate Treasurer of FMR Corp., the
parent company of Fidelity Investments Group, a mutual fund management and
discount stock brokerage firm (1989 - 1992) and as Vice President and
Treasurer of James River Corporation, an integrated manufacturer of pulp,
paper and converted paper and plastic products (1987 - 1989).
RALPH J. OLSON. Mr. Olson is a Vice President of the Company and is
President and Chief Operating Officer of the Company's Gibson Card Division,
positions he has held since 1991. From 1989 until 1991, he was President of
the E-Z Go Division of Textron, Inc., a manufacturer of golf and utility
vehicles. During the period from 1984 until 1989, he was President of the
Material Handling Division of Interlake Corp., specializing in material
handling, automation and storage systems.
PAGE
NELSON J. ROHRBACH. Mr. Rohrbach has been a Vice President of the
Company since April 21, 1994 and President and Chief Executive Officer of
Cleo, Inc. since April 12, 1994. Prior to that time, he served as the
President and Chief Executive Officer of The Paper Factory of Wisconsin, Inc.
(1989 - 1994) , the Company's wholly-owned factory outlet chain, and continues
to serve as its Chief Executive Officer. Prior to that time, he served as
President of CPS/Artfaire, a manufacturer of personal expression products
(1980 - 1989).
STEPHEN M. SWEENEY. Mr. Sweeney joined the Company as Vice President,
Human Resources in 1987. He held similar positions with Coca Cola
Enterprises, Inc. from 1985 until 1987, the Tribune Company from 1983 until
1985 and Contel, Inc. from 1976 to 1983.
Officers serve with the approval of the Board of Directors.
PAGE
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
a) The following documents are filed as part of this report:
1. Financial Statements:
Page
Herein Financial Statement
------ -----------------------------------------------------
12 Consolidated Statements of Income for the years ended
December 31, 1993, 1992 and 1991
13 Consolidated Balance Sheets as of December 31, 1993
and 1992
14 Consolidated Statements of Cash Flows for the years
ended December 31, 1993, 1992 and 1991
15 Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1993, 1992
and 1991
16 Notes to Consolidated Financial Statements
28 Report of Independent Public Accountants
2. Financial Statement Schedules required to be filed by Item 8
of this Form 10-K:
Schedules Filed:
Page
Herein Schedule
------ -----------------------------------------------------
32 II Amounts Receivable from Related Parties
33 VIII Valuation and Qualifying Accounts
34 IX Short-term Borrowings
35 X Supplementary Income Statement Information
All other schedules are omitted because of the absence of
conditions under which they are required or because the information
is shown in the financial statements or notes thereto.
3. Exhibits: See Index of Exhibits (page 36) for a listing of
all exhibits filed with this annual report on Form 10-K
b) Reports on Form 8-K: None.
PAGE
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized as
of the 29th day of August 1994.
Gibson Greetings, Inc.
By /s/ Benjamin J. Sottile
-----------------------
Benjamin J. Sottile
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of
the registrant and in the capacities indicated as of the 29th day of
August 1994.
Signature Title
---------- -----
Chairman of the Board,
/s/ Benjamin J. Sottile President and Chief Executive Officer
-------------------------
Benjamin J. Sottile (principal executive officer)
Vice President, Finance
/s/ William L. Flaherty Chief Financial Officer
-------------------------
William L. Flaherty (principal financial and
accounting officer)
/s/ Thomas M. Cooney
-------------------------
Thomas M. Cooney Director
/s/ Charles D. Lindberg
-------------------------
Charles D. Lindberg Director
/s/ Albert R. Pezzillo
-------------------------
Albert R. Pezzillo Director
/s/ Frank Stanton
-------------------------
Frank Stanton Director
/s/ Charlotte St. Martin
-------------------------
Charlotte St. Martin Director
/s/ Roger T. Staubach
-------------------------
Roger T. Staubach Director
/s/ C. Anthony Wainwright
-------------------------
C. Anthony Wainwright Director
PAGE
GIBSON GREETINGS, INC.
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES
(Thousands of dollars)
Column A Column B Column C Column D Column E
- - ----------------------- ---------- --------- ------------------------- -----------------------
Deductions Balance at End of Period
Balance at ------------------------- ------------------------
Beginning Amounts Amounts
Name of Debtor of Period Additions Collected Written Off Current Noncurrent
- - ----------------------- ---------- --------- --------- ----------- --------- ----------
M. Sillence,
Operations Director,
Gibson Greetings
International Limited:
Twelve months
ended 12/31/93 $ 249 $ - $ 249 $ - $ - $ -
Twelve months
ended 12/31/92 322 (72) (A) - - 249 -
Twelve months
ended 12/31/91 - 322 (B) - - 322 -
P.M. Osman,
Managing Director,
Gibson Greetings
International Limited:
Twelve months
ended 12/31/93 - - - - - -
Twelve months
ended 12/31/92 99 45 (A) 144 - - -
Twelve months
ended 12/31/91 - 99 (C) - - 99 -
S. Kosmalski,
Senior Vice President
Sales:
Twelve months
ended 12/31/93 - - - - - -
Twelve months
ended 12/31/92 - 120 (D) 120 - - -
Twelve months
ended 12/31/91 - - - - - -
[FN]
- - -----------------------
(A) Includes foreign currency translation adjustments.
(B) Real estate assistance loan, secured, bearing interest at 12%
if note not repaid by May 12, 1993 or upon sale of principal
residence, whichever occurs first.
(C) Real estate assistance loan, secured, bearing interest at 12%
if note not repaid by November 14, 1992 or upon sale of
principal residence, whichever occurs first.
(D) Real estate assistance loan, secured, bearing interest at 12%
if note not repaid by September 15, 1992 or upon sale of
principal residence, whichever occurs first.
PAGE
GIBSON GREETINGS, INC.
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
(Thousands of dollars)
Column A Column B Column C Column D Column E
- - -------------------- ---------- ------------------------- ---------- ----------
Additions
-------------------------
Balance at Charged to Charged to Balance at
Beginnng Costs and Other End of
Description of Period Expenses Accounts Deductions Period
- - -------------------- ---------- ---------- ---------- ---------- ----------
Deducted from
trade receivables
Allowance for
doubtful accounts:
Twelve months
ended 12/31/93 $ 7,515 $ 4,188 $ - $ 1,102 (A) $ 10,601
Twelve months
ended 12/31/92 8,950 11,549 - 12,984 (A) 7,515
Twelve months
ended 12/31/91 6,850 4,094 - 1,994 (A) 8,950
Allowance for sales
returns, allowances
and cash discounts:
Twelve months
ended 12/31/93 45,902 89,987 - 92,971 (B) 42,918
Twelve months
ended 12/31/92 45,490 100,813 - 100,401 (B) 45,902
Twelve months
ended 12/31/91 41,020 116,414 - 111,944 (B) 45,490
[FN]
- - --------------------
(A) Accounts that were judged to be uncollectible and charged to the
reserve, net of recoveries.
(B) Includes actual cash discounts taken by customers and sales returns
and allowances that were granted to customers, all of which were
charged to the reserve.
PAGE
GIBSON GREETINGS, INC.
SCHEDULE IX - SHORT-TERM BORROWINGS
(Thousands of dollars)
Column A Column B Column C Column D Column E
- - ---------------------- ---------- -------------------------- ----------- ----------
Weighted
Maximum Average Average
Weighted Amount Amount Interest
Balance at Average Outstanding Outstanding Rate
Category of Aggregrate End of Interest During the During the During the
Short-Term Borrowings Period Rate Period Period Period
- - ---------------------- ---------- ---------- ----------- ----------- ----------
Bank Debt (D):
Twelve months
ended 12/31/93 $ 49,250 3.58 % $ 59,250 $ 17,133 3.55 %
Twelve months
ended 12/31/92 30,100 3.58 51,000 16,129 4.21
Twelve months
ended 12/31/91 70,500 6.10 99,200 60,603 6.59
Commercial Paper (D):
Twelve months
ended 12/31/93 13,020 3.60 20,000 1,609 3.36
Twelve months
ended 12/31/92 - - 49,000 4,589 3.63
Twelve months
ended 12/31/91 - - 7,000 2,333 7.14
[FN]
- - ----------------------
(A) The maximum amount outstanding during the period was
determined as of month-end.
(B) The average amount outstanding during the period was
computed based on the average daily outstanding balance.
(C) The weighted average interest rate during the period
was computed by dividing actual short-term interest expense
by the average amount outstanding during the period.
(D) See Note 6 of Notes to fiscal year 1993 and 1992
Consolidated Financial Statements and Note 8 of
Notes to fiscal year 1991 Consolidated Financial
Statements, each Note contained in or incorporated by
reference into the Company's annual report on Form 10-K
for that year, for information on short-term borrowing
facilities.
PAGE
GIBSON GREETINGS, INC.
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
(Thousands of dollars)
Column A Column B
- - ---------------------- ----------------------------------------
Twelve Months Ended December 31,
----------------------------------------
Item 1993 1992 1991
- - ---------------------- ---------- ---------- ----------
Royalty expense $ 7,086 $ 6,191 $ 6,419
PAGE
Index of Exhibits
Exhibit
Number Description
------- -----------------------------------------------------------------
3(a) Restated Certificate of Incorporation as amended (*1)
3(b) Bylaws
4(a) Article 4.01 of Restated Certificate of Incorporation
(included in Exhibit 3(a))
4(b) Rights Agreement dated as of December 4, 1987, between
Gibson Greetings, Inc. and The First National Bank of Boston,
Rights Agent, including Certificate of Designation, Preferences
and Rights of Series A Preferred Stock (*2)
10(a) Lease Agreement dated January 25, 1982 between
Corporate Property Associates 2 and Corporate Property
Associates 3 and Gibson Greeting Cards, Inc. (*3)
10(b) Sublease Agreement dated January 1, 1977 between B.F.
Goodrich and Cleo Wrap Division of Gibson Greetings Card, Inc.
(*3)
10(c) Amendment and Extension of Term of Sublease dated June
26, 1983, between B.F. Goodrich Company and Gibson Greeting
Cards, Inc. (*4)
10(d) Amendment dated June 25, 1985, to Lease Agreement,
dated January 25, 1982, by and between Corporate Property
Associates 2 and Corporate Property Associates 3 and Gibson
Greeting Cards, Inc. (*5)
10(e) Lease and Agreement dated March 7, 1986 between
Associated Warehouses, Inc. and Cleo Wrap Division of Gibson
Greetings, Inc. (*5)
10(f) Commercial Paper Issuing Agent Agreement dated as of
July 11, 1986, between Gibson Greetings, Inc. and Irving Trust
Corporation (*6)
10(g) Commercial Paper Dealer Agreement dated July 16, 1986,
between Gibson Greetings, Inc. and The First Boston Corporation
(*6)
10(h) Credit Agreement, dated as of April 26, 1993, by and
among Gibson Greetings, Inc.; Bankers Trust Company; The Bank of
New York; Mellon Bank, N.A.; The Fifth Third Bank; Harris Trust
and Savings Bank; NBD Bank, N.A.; Royal Bank of Canada; The
Sanwa Bank, Ltd.; Society National Bank; Union Bank of
Switzerland; Wachovia Bank of Georgia, N.A.; and Bankers Trust
Company, as agent (*7)
10(i) Form of Note Agreement between Gibson Greetings, Inc.
and Connecticut Mutual Life, The Minnesota Mutual Life Insurance
Company, The Reliable Life Insurance Company, Federated Life
Insurance Company, The Variable Annuity Life Insurance Company
and Nationwide Life Insurance Company, dated May 15, 1991 (*8)
10(j) Executive Compensation Plans and Arrangements
(i) 1982 Stock Option Plan
(ii) 1983 Stock Option Plan
(iii) 1985 Stock Option Plan
(iv) 1987 Stock Option Plan
(v) 1989 Stock Option Plan
(vi) 1989 Stock Option Plan for Nonemployee Directors
(vii) 1991 Stock Option Plan
(viii) Employment Agreement with Mr. Cooney (*9)
(ix) Form of Second Amendment to Employment Agreement with
Mr. Cooney (*1)
PAGE
Exhibit
Number Description
------- -----------------------------------------------------------------
(x) Employment Agreement between Gibson Greetings, Inc.
and Benjamin J. Sottile, dated April 1, 1993 (*7)
(xi) Compensatory agreements (*10)
(xii) ERISA Makeup Plan (*11)
(xiii) Supplemental Executive Retirement Plan (*11)
(xiv) Agreements dated January 2, 1991 and December 10, 1993
between Gibson Greetings, Inc. and Stephen M. Sweeney
(xv) Agreement dated November 18, 1993 between Gibson
Greetings, Inc. and William L. Flaherty
(xvi) Agreement dated February 22, 1994 between Gibson
Greetings, Inc. and Michael A. Pietrangelo
11 Computation of Income per Share
21 Subsidiaries of the Registrant
23 Consent of Independent Public Accountants
- - ----------------------
* Filed as an Exhibit to the document indicated and
incorporated herein by reference:
(1) The Company's Report on Form 10-K for the year ended
December 31, 1988.
(2) The Company's Report on Form 8-K dated December 28, 1987,
filed January 4, 1988.
(3) The Company's Registration Statement on Form S-8 (No.
2-82990).
(4) The Company's Registration Statement on Form S-8 (No.
2-96396).
(5) The Company's Report on Form 10-K for the year ended
December 31, 1985.
(6) The Company's Report on Form 10-Q for the quarter ended
September 30, 1986.
(7) The Company's Report on Form 10-Q for the quarter ended
June 30, 1993.
(8) The Company's Report on Form 10-Q for the quarter ended
June 30, 1991.
(9) The Company's Report on Form 10-K for the year ended
December 31, 1986.
(10) The Company's Report on Form 10-K for the year ended
December 31, 1991.
(11) The Company's Report on Form 10-K for the year ended
December 31, 1992.
- - ----------------------
The Company will furnish to the Commission upon request its
long-term debt instruments not listed above.