PAGE
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
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. [ ]
The aggregate market value of the Common Stock, $.01 par value,
of the registrant held by non-affiliates of the registrant as of
April 17, 1995 was approximately $168,428,000.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest
practicable date: 16,089,829 shares of Common Stock, $.01 par
value, at April 17, 1995.
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 1994,
approximately 61% of net sales of cards were derived from everyday
cards and approximately 39% 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,
----------------------------------
1994 1993 1992
-------- -------- --------
Greeting cards $243,313 $268,952 $243,647
Gift wrap 202,439 192,862 187,965
Other products 102,290 84,351 52,506
-------- -------- --------
Total net sales $548,042 $546,165 $484,118
======== ======== ========
Many of the Company's products incorporate well-known proprietary
characters. Net sales associated with licensed properties accounted
for approximately 17% of overall 1994 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 3% of the Company's revenues in 1994 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 area 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 deep discounters, supermarkets, mass
merchandisers, drug stores and variety stores. During 1994, 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.
PAGE
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,
finished and distributed at the Company's facilities 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."
PAGE
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.
Employees
As of December 31, 1994, the Company employed approximately 4,500
persons on a full-time basis. In addition, as of December 31, 1994,
the Company employed approximately 6,100 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 200 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 decade, 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, in early 1990, the Gibson Card Division (the"Card Division")
converted its card and related products production to water-based
inks. Previously, the Card Division 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. The Company is aware of two contingent environmental
liabilities as discussed below:
PAGE
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. A site investigation and remedial
action alternatives study has been conducted. The study found that
there are no immediate risks posed by the site soils and groundwater,
but recommended that the groundwater be monitored for an additional
five years at which time the risk will be reevaluated. If current
trends which show improvements in groundwater constituents continue,
remediation efforts at the site may be terminated at the end of five
years. The Company has been informed by the PRP Common Counsel that
there are sufficient PRP funds available to cover the costs of ongoing
and planned remediation activities.
Kirk Heathcott Site - 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 by a third party at the site during
the period 1972-1977. At this time, insufficient information is
available to determine the Company's potential liability, although
such liability could exceed $200,000. Originally, the TDEC requested
payment of approximately $13,000 in costs. The state has since
identified twelve other PRPs, and has recently undertaken an
investigation as to each PRP's involvement in the site. The Company
has identified two insurance companies that issued policies to a
predecessor company during the applicable time period. These
companies have been notified of the occurrence. The Company believes
that this insurance may provide coverage for Cleo's potential
liability at this site.
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 25,900
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 86,800
Bloomington, Indiana Distribution 167,700
Memphis, Tennessee Distribution (3 facilities) 796,600
Neenah, Wisconsin Distribution 36,600
---------
Total 4,892,200
=========
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 "Development
Board"), of both taxable and tax-exempt economic development revenue
bonds for the benefit of Cleo. Title to the facility will be held
until 2004 by the Development Board. See Note 6 of Notes to
Consolidated Financial Statements set forth in Item 8 below.
PAGE
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
160 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 overstatement of the Company's previously reported
1993 consolidated net income. See Item 7 hereof.
Immediately following the announcement of the inventory
misstatement at Cleo, five purported class actions were commenced by
certain stockholders against the Company and its Chairman, President
and Chief Executive Officer in the United States District Court for
the Southern District of Ohio. These suits were consolidated and a
Consolidated Amended Class Action Complaint against the Company, its
Chairman, President and Chief Executive Officer, its Chief Financial
Officer and the former President and Chief Executive Officer of Cleo
was filed on October 7, 1994 (In Re Gibson Securities Litigation).
This Complaint alleged violations of the federal securities laws and
sought unspecified damages for an asserted public disclosure of false
information regarding the Company's earnings. The Company intends to
defend the suit vigorously and has filed an Answer denying any
wrongdoing, a Third Party Complaint against its former auditor for
contribution against any judgment adverse to the Company and a motion
to dismiss one count of the Complaint. On December 6, 1994 the Court
ruled that neither of the two named plaintiffs qualified as a class
representative. On March 3, 1995 the Court granted plaintiffs' Motion
for Leave to File An Amended Complaint to name a substitute class
representative.
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 Company's derivative
transactions and the Company's public statements and accounting with
respect thereto. The Company is cooperating in such investigation.
PAGE
In March 1995 the previously reported litigation captioned Rocks
v. Gibson Greetings, et al. was voluntarily dismissed by the plaintiff
with the Court's approval.
On April 10, 1995, two purported class action lawsuits were
commenced against the Company, its Chairman, President and Chief
Executive Officer and its Chief Financial Officer in the United States
District Court for the Southern District of Ohio (Kurtz v. Gibson
Greetings, Inc., et al. and Komine v. Gibson Greetings, Inc., et al.).
The Complaints allege violations of the federal securities law for an
asserted failure to disclose allegedly material information regarding
the Company's financial performance. The Company intends to defend
the suits vigorously.
The litigation described above is in early stages of proceedings.
Accordingly, management is unable to predict their likely effect upon
the Company's results of operations and financial condition.
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
Firemen 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. An 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 were presented in briefs and in appellate oral argument
which was heard on September 14, 1994. A decision is expected in
1995. Management does not believe that an adverse outcome as to this
matter 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.
In addition, the Company is a defendant in certain other
litigation.
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
PART II
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
(loss), stock sales and certain restricted investments. At December
31, 1994, the amount of unrestricted retained earnings available for
dividends (in thousands of dollars) was $20,250. There were
approximately 9,400 stockholders of record on February 28, 1995.
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- --------
1994
- -------------------
Dividends per share
Market price of $0.10 $0.10 $0.10 $0.10 $0.40
common stock (1):
Low 20 7/8 15 5/8 13 3/8 12 3/4 12 3/4
High 23 5/8 21 5/8 17 16 1/8 23 5/8
1993
- -------------------
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
[FN]
(1) Per share prices are based on the closing price as quoted
in the Nasdaq National Market.
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,
1994. Selected financial data should be read in conjunction with the
Consolidated Financial Statements set forth in Item 8 below.
Statement of Operations Data
(Dollars and shares in thousands except per share amounts)
Years Ended December 31,
--------------------------------------------------------
(Unaudited)
---------------------
1994 1993(1) 1992 1991 1990
-------- -------- -------- -------- --------
Revenues:
Net sales $548,042 $546,165 $484,118 $522,166 $511,211
Royalty income 753 761 1,705 2,148 1,985
-------- -------- -------- -------- --------
Total revenues 548,795 546,926 485,823 524,314 513,196
-------- -------- -------- -------- --------
Cost of products
sold 310,039 277,109 247,340 252,217 254,182
Selling,
distribution and
administrative
expenses 276,147 227,863 218,642 194,872 187,282
Interest expense 10,599 7,737 7,803 9,380 8,667
Interest income (765) (949) (1,023) (342) (819)
(Gain) loss on
derivative
transactions/
settlement, net (1,641) 5,689 - - -
-------- -------- -------- -------- --------
Income (loss) before
income taxes and
cumulative effect
of accounting
changes (45,584) 29,477 13,061 68,187 63,884
Income taxes (16,981) 14,209 5,076 26,303 24,084
-------- -------- -------- -------- --------
Income (loss) before
cumulative effect
of accounting
changes (28,603) 15,268 7,985 41,884 39,800
Cumulative effect
of accounting
changes - - (1,449) - -
-------- -------- -------- -------- --------
Net income (loss) $(28,603) $ 15,268 $ 6,536 $ 41,884 $ 39,800
======== ======== ======== ======== ========
Income (loss)
per share
before cumulative
effect of
accounting
changes $ (1.77) $ 0.95 $ 0.50 $ 2.61 $ 2.51
======== ======== ======== ======== ========
Net income (loss)
per share $ (1.77) $ 0.95 $ 0.41 $ 2.61 $ 2.51
======== ======== ======== ======== ========
Dividends
per share $ 0.40 $ 0.40 $ 0.39 $ 0.36 $ 0.34
======== ======== ======== ======== ========
Average common
shares and
equivalents 16,130 16,103 16,104 16,039 15,848
======== ======== ======== ======== ========
Other Financial Data
(Dollars in thousands except per share amounts)
December 31,
--------------------------------------------------------
(Unaudited)
---------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
Working capital $151,128 $209,209 $224,261 $215,011 $128,489
Plant and
equipment, net 119,491 116,900 112,712 110,769 101,996
Total assets 612,195 572,459 501,104 544,261 553,499
Debt due within
one year (2) 117,114 66,187 31,911 71,208 148,302
Long-term debt 63,233 74,365 70,175 71,079 21,755
Excess of fair
value of companies
acquired over
cost, net - - - - 1,430
Stockholders'
equity 277,500 313,097 303,341 300,743 261,402
Equity per share 17.24 19.50 18.92 18.86 16.58
Capital
expenditures 35,396 31,049 30,970 31,736 42,706
[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 $5,689 for 1993. The
aggregate effect of these changes was to reduce net income by $10,584,
and to reduce net income per share by $.66.
(2) Includes the current portion of long-term debt which
consisted of $11,164 in 1994, $3,917 in 1993, $1,811 in 1992, $708 in
1991, and $6,702 in 1990.
PAGE
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
As announced on July 1, 1994, the Company determined that the
inventory of its Cleo, Inc. gift wrap subsidiary (Cleo) had been
overstated, resulting in an overstatement of the Company's previously
reported 1993 consolidated net income. As a result of this
overstatement, as well as the accrual of an unrealized market value
net loss on certain derivative transactions which did not qualify as
hedges, it was necessary for the Company to amend and restate its
consolidated financial statements for the third quarter ended
September 30, 1993, the fourth quarter ended December 31, 1993, the
twelve months ended December 31, 1993 and for the first quarter ended
March 31, 1994. The adjustments made are described in Note 1 to the
Consolidated Financial Statements included in this report and should
be reviewed in conjunction with the discussions of "Results of
Operations" and "Liquidity and Capital Resources" presented below.
Also see Note 13 of Notes to Consolidated Financial Statements set
forth in Item 8 below.
The Company's 1994 results of operations were adversely affected
by charges for inventory adjustments and sales returns and allowances,
highly competitive pricing conditions and high product and
distribution costs at Cleo combined with the bankruptcy filing of F&M
Distributors (F&M), and competitive pricing pressures at the Company's
Greeting Card Division (Card Division). Highly competitive
conditions, with respect to both pricing and other terms of sales,
for both Cleo and the Card Division are expected to continue in 1995.
PAGE
Revenues increased 0.3% to $548.8 million compared to an increase
of 12.6% in 1993 and a decrease of 7.3% in 1992. The slight increase
in revenues was attributable to the Company's retail subsidiary, The
Paper Factory of Wisconsin, Inc. (The Paper Factory), reflecting a
full year of operations by The Paper Factory (acquired in June 1993).
This revenue gain was substantially offset by declines in revenues at
both the Card Division and Cleo. These declines resulted from
increased competitive pressure as well as increased allowances related
to current and prior year sales. Consistent with general industry
practice, the Company allows customers to return for credit certain
seasonal and everyday 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 17.3% in 1994 compared to 13.3%
in 1993 and 15.9% in 1992. The increase in 1994 reflects a charge of
$6.3 million of unamortized long-term sales contracts as a result of
the F&M bankruptcy to returns and allowances. The 1994 increase also
reflects a change in product mix between seasonal and everyday sales
combined with increased customer allowances due to competitive
pressure and costs associated with new customers. Royalty income of
$.8 million was comparable to 1993. Wal-Mart Stores Inc. (Wal-Mart)
recently completed a review which recognizes that Gibson represents a
small percentage of their store greeting card departments and reduces
the number of such departments carrying Gibson cards during 1995.
Wal-Mart has indicated that it intends to progressively phase out
the remaining card departments represented by Gibson beyond 1995;
however, the Company is still in negotiation with Wal-Mart regarding
timing. Approximately 60% of the Company's business with Wal-Mart has
been through Cleo which is not affected by Wal-Mart's action and
continues to be a major supplier of gift wrap and related products to
that customer. The Company believes that the reduction in 1995
revenues resulting from this action will amount to approximately 10%
of its 1994 revenues from Wal-Mart.
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. The revenue gains in 1993
were attributable to The Paper Factory 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. The
decline in 1993 returns and allowances was due to lower returns of
certain seasonal products and lower allowances for certain everyday
products. 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 does not believe that its results were materially
affected by recessionary pressures.
PAGE
Total operating expenses were $586.2 million or 106.8% of total
revenues in 1994 compared to 92.3% in 1993 and 97.3% in 1992. Cost of
products sold was 56.5% of total revenues in 1994 compared to 50.7%
and 50.9% in 1993 and 1992, respectively. The increase in 1994
compared to 1993 reflects continued pricing pressures and increased
customer allowances, primarily at the Company's Card Division and
Cleo. In addition, the increase in 1994 over 1993 reflects a one-time
charge of approximately $8.0 million as a result of extensive review
of inventory at Cleo. The 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 changes in product mix,
pricing pressures and customer discounts, which adversely affected
gross margins from Cleo's sales of gift wrap and paper products.
Selling, distribution and administrative expenses were 50.3% of total
revenues in 1994 compared to 41.7% in 1993 and 45.0% in 1992. The
increase in the 1994 expenses, as a percentage of total revenues,
reflected the write-off of trade receivables and fixtures due to the
F&M bankruptcy of $7.3 million and $2.6 million, respectively and
workforce reduction costs of $1.7 million at the Card Division. In
addition, higher shipping costs ($6.9 million), bad debt expenses
($3.2 million), the full year impact of the acquisition of The Paper
Factory ($12.1 million), and increased selling and marketing costs,
primarily associated with new customers ($10.9 million), contributed
to this increase. The decline in the 1993 expenses, as a percentage
of total revenues, 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 1.5% of total
revenues in 1994 compared to 2.3% and 1.4% in 1993 and 1992,
respectively. During 1994, the Company settled its lawsuit against
Bankers Trust and recorded a gain for the full year of $1.6 million
representing the impact of settling the lawsuit net of previously
recorded gains on these derivative transactions. Higher interest
rates combined with higher average borrowings, largely resulting from
the prior year's acquisition of The Paper Factory, as well as higher
working capital levels, resulted in an increase in interest expense,
net. The Company recorded a net loss on derivative transactions for
1993 of $5.7 million, consisting of the accrual of an unrealized
market value loss of $7.7 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.
Loss before income taxes and cumulative effect of accounting
changes was $45.6 million in 1994 compared to income of $29.4 million
in 1993 and income of $13.1 million in 1992.
PAGE
The effective income tax rate for 1994 was 33.9% compared to
41.7% in 1993 and 38.9% in 1992. See Notes 1 and 7 of Notes to
Consolidated Financial Statements set forth in Item 8 below.
Loss before cumulative effect of accounting changes was $28.6
million in 1994 compared to income of $15.3 million in 1993 and $8.0
million in 1992.
PAGE
During 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 112 - "Employers' Accounting for
Postemployment Benefits" retroactive to January 1, 1994. The charges
associated with the adoption were not material to the Company's
consolidated results and have been included in the 1994 results.
During 1992, the Company adopted 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" in 1992 which resulted in a credit of $1.1 million or $.06 per
share for the cumulative effect of this change.
Net loss was $28.6 million in 1994 compared to net income of
$15.3 million in 1993 and net income of $6.5 million in 1992.
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.
In light of the results reported for 1994, the Company announced
that it would not pay a dividend for the first quarter of 1995.
Liquidity and Capital Resources
Cash flows from operating activities for 1994 were ($6.4)
million, a decline of $38.0 million from 1993, compared to a decline
of $43.3 million in 1993 and an increase of $27.8 million in 1992. The
decline in 1994 was primarily the result of an operating loss for 1994
combined with costs associated with funding long-term customer
agreements and increased working capital requirements. Trade
receivables increased 2.9% largely reflecting increased net sales, and
inventories increased 1.9% resulting from lower than anticipated 1994
sales at the Card Division.
Cash used in investing activities for plant and equipment
purchases totaled $35.4 million in 1994 compared to $31.0 million in
both 1993 and 1992. The Company anticipates that the 1995 expenditure
levels will be consistent with historical trends based upon existing
business conditions.
Cash provided by financing activities in 1994 was $34.1 million
compared to $23.7 million in 1993 and cash used in financing
activities in 1992 of $44.3 million. The 1994 increase in short-term
borrowings reflected higher working capital requirements combined with
payments under customer agreement contracts. Long-term debt decreased
in 1994 reflecting current year debt payments and increased in 1993
due to the issuance of unsecured notes to the former shareholders of
The Paper Factory, payable over four years.
PAGE
In April 1993, the Company consummated a $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
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 $21.5 million to $49.0 million per year for
the next five years, as well as for financing existing operations,
currently projected capital expenditures, anticipated long-term sales
agreements consistent with industry trends and other contingencies.
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 the
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.
Management filed those statements with the lenders within thirty days
of the original deadline which is permissible under the debt
agreements. Also, in connection with certain of the Company's debt
agreements, the Company is required to submit to its lenders, audited
consolidated financial statements within 90 days after the end of the
fiscal year. Since the Company is seeking more complete information
relative to derivative transactions, the Company was unable to provide
those statements for the year ended December 31, 1994 to its lenders
by March 31, 1995 (See Note 13 of Notes to Consolidated Financial
Statements set forth in Item 8 below). 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. If
management is unable to comply, waivers will be requested from the
lenders. 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
(see also Item 3-Legal Proceedings), 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 Operations
Years Ended December 31, 1994, 1993 and 1992
(Dollars in thousands except per share amounts)
(Unaudited)
-----------------------
Restated
1994 1993 1992
--------- --------- ---------
Revenues:
Net sales $ 548,042 $ 546,165 $ 484,118
Royalty income 753 761 1,705
--------- --------- ---------
Total revenues 548,795 546,926 485,823
--------- --------- ---------
Costs and expenses:
Operating expenses:
Cost of products sold 310,039 277,109 247,340
Selling, distribution and
administrative expenses 276,147 227,863 218,642
--------- --------- ---------
Total operating expenses 586,186 504,972 465,982
--------- --------- ---------
Operating income (loss) before financing
and derivative transaction expenses (37,391) 41,954 19,841
Financing and derivative
transaction expenses:
Interest expense, net of
capitalized interest 10,599 7,737 7,803
Interest income (765) (949) (1,023)
(Gain) loss on derivative
transactions/settlement, net (1,641) 5,689 -
--------- --------- ---------
Total financing and derivative
transaction expenses, net 8,193 12,477 6,780
--------- --------- ---------
Income (loss) before income taxes and
cumulative effect of
accounting changes (45,584) 29,477 13,061
Income taxes (16,981) 14,209 5,076
--------- --------- ---------
Income (loss) before cumulative
effect of accounting changes (28,603) 15,268 7,985
--------- --------- ---------
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 (loss) $ (28,603) $ 15,268 $ 6,536
========= ========= =========
Income (loss) per share before
cumulative effect of
accounting changes $ (1.77) $ 0.95 $ 0.50
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 (loss) per share $ (1.77) $ 0.95 $ 0.41
========= ========= =========
[FN]
See accompanying notes to consolidated financial statements.
PAGE
Gibson Greetings, Inc.
Consolidated Balance Sheets
December 31, 1994 and 1993
(Dollars in thousands except per share amounts)
(Unaudited)
---------------------
Restated
1994 1993
--------- ---------
Assets
Current assets:
Cash and equivalents $ 2,000 $ 9,477
Trade receivables, net 197,799 192,163
Inventories 127,460 125,138
Prepaid expenses 5,719 4,207
Deferred income taxes 48,775 36,796
--------- ---------
Total current assets 381,753 367,781
Plant and equipment, net 119,491 116,900
Notes receivable, net 301 -
Deferred income taxes 8,080 854
Other assets, net 102,570 86,924
--------- ---------
$ 612,195 $ 572,459
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Debt due within one year $ 117,114 $ 66,187
Accounts payable 21,779 18,835
Income taxes payable 4,742 13,071
Other current liabilities 86,990 60,479
--------- ---------
Total current liabilities 230,625 158,572
Long-term debt 63,233 74,365
Sales agreement payments due
after one year 21,107 2,839
Other liabilities 19,730 23,586
--------- ---------
Total liabilities 334,695 259,362
--------- ---------
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,
16,579,530 and 16,533,267
shares issued, respectively 166 165
Paid-in capital 45,992 45,209
Retained earnings 238,282 273,320
Foreign currency adjustment (1,000) 291
--------- ---------
283,440 318,985
--------- ---------
Less treasury stock, at cost,
483,701 and 473,344 shares,
respectively 5,940 5,888
--------- ---------
Total stockholders' equity 277,500 313,097
--------- ---------
Commitments and contingencies
(Notes 11 and 12)
$ 612,195 $ 572,459
========= =========
[FN]
See accompanying notes to consolidated financial statements.
PAGE
Gibson Greetings, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 1994, 1993 and 1992
(Dollars in thousands)
(Unaudited)
----------------------
Restated
1994 1993 1992
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ (28,603) $ 15,268 $ 6,536
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and write-down of
display fixtures 26,150 22,688 24,870
Loss on disposal of plant
and equipment 5,957 5,817 3,816
(Gain) loss on derivative
transactions, net (1,641) 5,689 -
Deferred income taxes (19,205) (8,909) (6,708)
Amortization and write-down of
of deferred costs and other
intangibles 31,155 19,547 34,087
Change in assets and liabilities:
(Increase) decrease in trade
receivables, net (5,636) (22,529) 36,422
(Increase) decrease in
inventories (2,322) 1,843 (4,119)
(Increase) decrease in
prepaid expenses (1,512) 286 (182)
Increase in notes receivable, net (301) - -
Increase in other assets,
net of amortization (46,801) (25,999) (23,356)
Increase (decrease) in
accounts payable 2,944 2,579 (524)
Increase (decrease) in
income taxes payable (8,329) 3,014 (9,967)
Increase in other current
liabilities 26,511 6,603 6,169
Increase in other liabilities 16,053 5,696 7,511
All other, net (850) (22) 272
--------- --------- ---------
Total adjustments 22,173 16,303 68,291
--------- --------- ---------
Net cash provided by (used in)
operating activities (6,430) 31,571 74,827
--------- --------- ---------
Cash flows from investing activities:
Purchase of plant and equipment (35,396) (31,049) (30,970)
Proceeds from sale of
plant and equipment 289 550 63
Acquisition of The Paper Factory
of Wisconsin, Inc.,
net of cash acquired - (24,782) -
--------- --------- ---------
Net cash used in investing
activities (35,107) (55,281) (30,907)
--------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in
short-term borrowings 43,680 23,062 40,400
Issuance of long-term debt, net - 8,075 875
Payments on long-term debt (3,917) (1,811) (708)
Issuance of common stock 784 773 2,277
Acquisition of common stock
for treasury (52) - (49)
Dividends paid (6,435) (6,417) (6,251)
--------- --------- ---------
Net cash provided by (used in)
financing activities 34,060 23,682 (44,256)
--------- --------- ---------
Net decrease in cash and equivalents (7,477) (28) (336)
Cash and equivalents at beginning of year 9,477 9,505 9,841
--------- --------- ---------
Cash and equivalents at end of year $ 2,000 $ 9,477 $ 9,505
========= ========= =========
Supplemental disclosure of
cash flow information
Cash paid during the year for:
Interest, net of amounts capitalized $ 9,325 $ 7,544 $ 8,201
Income taxes 10,240 20,243 19,015
[FN]
See accompanying notes to consolidated financial statements.
PAGE
Gibson Greetings, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1994, 1993 and 1992
(Dollars in thousands except per share amounts)
(Unaudited)
----------------------
Restated
1994 1993 1992
--------- --------- ---------
Common stock, par value $.01:
Balance at beginning of year $ 165 $ 165 $ 164
Exercise of stock options 1 - 1
--------- --------- ---------
166 165 165
--------- --------- ---------
Paid-in capital:
Balance at beginning of year 45,209 44,436 42,160
Exercise of stock options 783 773 2,276
--------- --------- ---------
45,992 45,209 44,436
--------- --------- ---------
Retained earnings:
Balance at beginning of year 273,320 264,469 264,184
Net income (loss) (28,603) 15,268 6,536
Cash dividends paid ($.40, $.40,
and $.39 per share in 1994,
1993 and 1992, respectively) (6,435) (6,417) (6,251)
--------- --------- ---------
238,282 273,320 264,469
--------- --------- ---------
Foreign currency translation adjustment:
Balance at beginning of year 291 159 74
Aggregate adjustments resulting
from translation of financial
statements into U.S. dollars (1,291) 132 85
--------- --------- ---------
(1,000) 291 159
--------- --------- ---------
Less treasury stock, at cost:
Balance at beginning of year 5,888 5,888 5,839
Common stock acquired 52 - 49
--------- --------- ---------
5,940 5,888 5,888
--------- --------- ---------
Total stockholders' equity $ 277,500 $ 313,097 $ 303,341
========= ========= =========
[FN]
See accompanying notes to consolidated financial statements.
PAGE
Gibson Greetings, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 1994, 1993, and 1992
(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 material intercompany transactions
have been eliminated.
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 business
risk exists due to the diversity of channels of distribution and
geographic location of its retail customers; however, the Company does
believe it has certain risks related to up-front contract payments.
During the year ended December 31, 1994, the Company's largest
customer accounted for approximately 12% of total revenues and during
the years ended December 31, 1993 and 1992, the same customer
accounted for approximately 12% and 11% of total revenues,
respectively.
Retail Operations
On June 1, 1993, the Company acquired The Paper Factory of
Wisconsin, Inc. (The Paper Factory) for $25,100 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 $26,200. In
connection with the acquisition, the Company assumed liabilities of
approximately $11,600.
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.
PAGE
The activities of these subsidiaries were not material to
consolidated operations in either 1994 or 1993.
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 principally 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. Accumulated goodwill
amortization at December 31, 1994 was $3,926.
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. Investment tax credits are amortized to income over the
lives of the related assets.
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 value. The fair 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.
Postemployment Benefits
Effective January 1, 1994, the Company adopted SFAS No. 112 -
"Employers' Accounting for Postemployment Benefits." This statement
requires accrual accounting for benefits provided to former or
inactive employees after employment but before retirement. The
Company previously accounted for a certain portion of these
postemployment benefits on a pay-as-you-go-basis.
PAGE
Other Postretirement Benefits
Effective January 1, 1992, the Company adopted SFAS No. 106 -
"Employers' Accounting for Postretirement Benefits Other Than
Pensions." 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 (loss) per share
The computation of net income (loss) per share is based upon the
weighted average number of shares of common stock and equivalents
outstanding during the year: 16,130,140 shares for 1994, 16,102,709
shares for 1993, and 16,103,897 shares for 1992.
Restatements and Reclassifications
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 overstatement
of the Company's 1993 consolidated net income. The overstatement of
inventory and income before income taxes was $8,806 and the effect on
net income was $5,346 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. See Note 12.
In addition, the accompanying 1993 Consolidated Financial
Statements have been restated for the reasons set forth in Note 13.
Certain prior year amounts in the consolidated financial
statements have been reclassified to conform to the 1994 presentation.
Note 2--Trade Receivables
Trade receivables at December 31, 1994 and 1993, consist of the
following:
1994 1993
--------- ---------
Trade receivables $ 265,194 $ 245,682
Less reserve for returns,
allowances, cash discounts
and doubtful accounts 67,395 53,519
--------- ---------
$ 197,799 $ 192,163
========= =========
PAGE
Note 3--Inventories
Inventories at December 31, 1994 and 1993, consist of the
following:
1994 1993
--------- ---------
Finished goods $ 73,881 $ 74,268
Work-in-process 15,623 13,147
Raw materials and supplies 37,956 37,723
--------- ---------
$ 127,460 $ 125,138
========= =========
Note 4--Plant and Equipment
Plant and equipment at December 31, 1994 and 1993, consist of
the following:
1994 1993
--------- ---------
Land and buildings $ 36,126 $ 35,936
Machinery and equipment 66,747 60,842
Display fixtures 90,493 84,117
Leasehold improvements 13,003 10,001
Construction in progress 3,578 4,233
--------- ---------
209,947 195,129
Less accumulated depreciation 90,456 78,229
--------- ---------
$ 119,491 $ 116,900
========= =========
Note 5--Other Assets
Other assets at December 31, 1994 and 1993, consist of the
following:
1994 1993
--------- ---------
Deferred and prepaid costs $ 148,150 $ 112,157
Goodwill and other intangibles 29,741 31,601
--------- ---------
177,891 143,758
Less accumulated amortization 75,321 56,834
--------- ---------
$ 102,570 $ 86,924
========= =========
PAGE
Note 6--Debt
Debt at December 31, 1994 and 1993, consists of the following:
1994 1993
--------- ---------
Debt due within one year:
Loans payable to banks
under a revolving credit
agreement bearing interest
at a weighted average rate
of 6.88% and 3.70%,
respectively $ 50,000 $ 10,000
Loans payable to banks under
uncommitted borrowing
facilities bearing interest
at weighted average rates of
6.58% and 3.55%, respectively 55,950 39,250
Commerical papaer bearing
interest at a weighted average
rate of 3.60% - 13,020
--------- ---------
Short term debt 105,950 62,270
--------- ---------
Current portion of long-term debt 11,164 3,917
--------- ---------
$ 117,114 $ 66,187
========= =========
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 $146 and $163 in
1994 and 1993, respectively, to
yield an effective rate of 7.29% 8,699 9,277
Economic development revenue
bonds (taxable) bearing interest
at 9.10%, with annual sinking
fund payments required in 1993
through 2004, less unamortized
discount of $143 and $159 in
1994 and 1993, respectively, to
yield an effective rate of 9.35% 6,072 6,431
Notes payable to former
shareholders of The Paper
Factory of Wisconsin, Inc.
bearing interest at 5.01%,
payable in annual installments
of $2,019 6,056 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 $6,171
and $6,275 at December 31, 1994
and 1993, respectively 2,400 3,000
Urban development action grant
bearing interest at 8.00%,
payable in quarterly
installments, secured by land,
building and equipment with a
carrying value of $15,851 and
$16,183 at December 31, 1994 and
1993, respectively 472 682
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 698 817
--------- ---------
74,397 78,282
Less portion due within one year 11,164 3,917
--------- ---------
$ 63,233 $ 74,365
========= =========
PAGE
In 1993, the Company entered into a 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 Company'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 Company for debt of the same remaining
maturities. The estimated fair value of the Company's gross long-term
debt at December 31, 1994 was $76,716.
The Company periodically has entered into interest rate swap or
derivative transactions with the intent to manage the interest rate
sensitivity of portions of its debt. On March 4, 1994, the Company
felt compelled to enter into two interest rate derivative transactions
to cap its exposure on two prior uncapped interest rate derivative
transactions that had a negative market value in excess of $17,000.
These two new transactions imposed caps on the Company's total
exposure and replaced the previous uncapped positions that were
entered into subsequent to December 31, 1993 in an attempt to limit
the Company's exposure against rising short-term interest rates.
In September 1994, the Company filed suit against Bankers Trust
Company and its affiliate BT Securities (Bankers Trust) alleging that
in connection with the sale of these and earlier derivatives to the
Company, Bankers Trust had breached fiduciary duties, made fraudulent
representations, and failed to make adequate disclosures, in violation
of common law and statutory obligations to the Company. The suit was
settled on November 23, 1994. The Company agreed to pay Bankers Trust
$6,180 which included $3,344 of cash payments made to the Company
which had been recorded as gains with respect to a number of earlier
transactions. In return, the remaining transactions were terminated
with no further liability to the Company. See Note 13.
At December 31, 1994, the Company had two outstanding interest
rate swap positions with a total notional amount of $4,800. These two
agreements, with terms similar to the related bonds, are constituted
as hedges and effectively reduce the Company's interest on $2,400 of
industrial revenue bonds from 9.25% to 6.67% through February 1998.
The annual principal payments due on long-term debt for each of
the years in the five-year period ended December 31, 1999, are
$11,164, $11,269, $11,116, $9,205 and $8,713, respectively.
Capitalized interest for the year ended December 31, 1992 was
$74. No interest was capitalized for the years ended December 31,
1994 and 1993.
The Company's debt agreements contain certain covenants including
limitations on dividends based on a formula related to net income
(loss), stock sales and certain restricted investments. At December
31, 1994, the amount of unrestricted retained earnings available for
dividends was $20,250.
PAGE
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,
1994, 1993 and 1992 consists of the following:
1994 1993 1992
--------- --------- ---------
Federal:
Current $ 1,574 $ 17,903 $ 7,257
Deferred (14,530) (8,450) (4,594)
Alternative minimum tax
credit carryforward (200) - -
Deferred investment
tax credits, net (100) (122) (124)
--------- --------- ---------
(13,256) 9,331 2,539
Change in valuation
allowance (924) 1,600 -
--------- --------- ---------
(14,180) 10,931 2,539
--------- --------- ---------
State and local:
Current 649 4,532 2,093
Deferred (3,239) (1,708) (1,076)
--------- --------- ---------
(2,590) 2,824 1,017
Change in valuation
allowance (211) 365 -
--------- --------- ---------
(2,801) 3,189 1,017
--------- --------- ---------
Foreign:
Current - - -
Deferred - 89 (89)
--------- --------- ---------
- 89 (89)
--------- --------- ---------
$ (16,981) $ 14,209 $ 3,467
========= ========= =========
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
=========
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 $700 recorded in 1993
due to the revaluation of certain deferred tax assets.
The effective income tax rate for the years ended December 31,
1994, 1993 and 1992, varied from the statutory federal income tax rate
as follows:
1994 1993 1992
--------- --------- ---------
Statutory federal
income tax rate 35.0% 35.0% 34.0%
State and local income taxes,
net of federal income tax
benefit 4.0 7.0 6.8
Nondeductible foreign losses (2.6) 2.6 -
Other 0.8 3.6 (1.9)
--------- --------- ---------
37.2% 48.2% 38.9%
========= ========= =========
The above schedule includes the effect of a foreign net operating
loss for which no benefit has been provided.
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.
PAGE
The net deferred taxes are comprised of the following:
1994 1993
--------- ---------
Current deferred taxes:
Gross assets $ 49,708 $ 37,573
Alternative minimum
tax carryforward 200 -
Gross liabilities (1,133) (777)
--------- ---------
48,775 36,796
--------- ---------
Noncurrent deferred taxes:
Gross assets 19,338 14,462
Valuation allowance (830) (1,965)
Gross liabilities (10,126) (11,241)
Deferred investment
tax credits (302) (402)
--------- ---------
8,080 854
--------- ---------
$ 56,855 $ 37,650
========= =========
The Company did not record any valuation allowances against U.S.
deferred tax assets at January 1, 1992 or December 31, 1992, due to
the substantial amounts of taxable income generated over the last
three to five years. The Company has recorded a valuation allowance
with respect to the deferred tax assets reflected in the table below
as a result of recent capital losses and uncertainties with respect to
the amount of taxable capital gain income which will be generated in
future years.
PAGE
The tax balances of significant temporary differences
representing deferred tax assets and liabilities for the years ended
December 31, 1994 and 1993 were as follows:
1994 1993
--------- ---------
Reserve for returns, allowances,
cash discounts and doubtful
accounts $ 29,203 $ 22,279
Reserve for inventories
and related items 8,940 7,655
Postretirement benefits 1,991 1,885
Depreciation of plant
and equipment (9,999) (11,078)
Reserve for display fixtures 1,605 1,644
Accrued compensation and benefits 14,068 10,854
Sales agreement payments due 5,638 1,504
Other accruals and reserves 6,341 5,274
Alternative minimum tax
carryforward 200 -
Deferred investment tax credits (302) (402)
--------- ---------
57,685 39,615
Valuation allowance (830) (1,965)
--------- ---------
$ 56,855 $ 37,650
========= =========
Note 8--Other Current Liabilities
Other current liabilities at December 31, 1994 and 1993, consist
of the following:
1994 1993
--------- ---------
Customer allowances $ 20,495 $ 18,956
Sales agreement payments due
within one year 17,048 3,959
Compensation, payroll taxes
and related withholdings 13,842 14,110
Accrued insurance 9,766 7,454
Property and other taxes 5,322 4,924
Accrued interest 3,935 2,826
Other 16,582 8,250
--------- ---------
$ 86,990 $ 60,479
========= =========
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, December 31, 1994 and September 30,
1993, and a reconciliation of the funded status to the amounts
recognized in the Company's consolidated balance sheets at December
31, 1994 and 1993:
1994 1993
--------- ---------
Actuarial present value of
benefit obligations:
Vested benefit obligation $ 44,558 $ 49,995
========= =========
Accumulated benefit
obligation $ 48,221 $ 54,203
========= =========
Projected benefit
obligation for services
rendered to date $ 60,354 $ 66,183
Plan assets at fair market value 58,465 62,106
--------- ---------
Plan assets less than projected
benefit obligation 1,889 4,077
Unrecognized net asset at
January 1, 1986, being
recognized over 9.9 years 413 873
Unrecognized prior service cost (1,511) (1,852)
Unrecognized net gain resulting
from experience different from
assumed and effects of changes
in assumptions 9,425 4,565
--------- ---------
Accrued pension expense included
in other liabilities $ 10,216 $ 7,663
========= =========
The fair market value of the Retirement Plan's assets at December
31, 1994 and 1993, was $58,235 and $61,559, 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, 1994 and 1993, 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, December 31, 1994
and September 30, 1993, and a reconciliation of those obligations to
the amounts recognized in the Company's consolidated balance sheets at
December 31, 1994 and 1993:
1994 1993
--------- ---------
Actuarial present value of
benefit obligations:
Vested benefit obligation $ 2,829 $ 3,431
========= =========
Accumulated benefit
obligation $ 3,867 $ 4,396
========= =========
Projected benefit
obligation for services
rendered to date $ 4,692 $ 5,321
Plan assets at fair market value - -
--------- ---------
Unfunded projected
benefit obligation 4,692 5,321
Unrecognized prior service cost (1,899) (2,254)
Unrecognized net gain (loss)
resulting from experience
different from assumed and
effects of changes in
assumptions 223 (834)
--------- ---------
Accrued pension expense included
in other liabilities $ 3,016 $ 2,233
========= =========
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
8.5% and 5.0% in 1994 and 7.0% and 5.0% in 1993, respectively. The
assumed long-term rate of return on plan assets used for valuation
purposes was 9.0% for 1994 and 1993.
PAGE
A summary of the components of net pension expense for all of the
Company's defined benefit plans for the years ended December 31, 1994,
1993 and 1992, is as follows:
1994 1993 1992
--------- --------- ---------
Service cost-benefits earned
during the period $ 3,285 $ 2,917 $ 2,834
Interest cost on projected
benefit obligation 5,339 5,092 4,758
Net amortization and deferral 139 128 159
Expected return on plan assets (5,340) (4,941) (4,610)
Curtailments 284 - -
-------- --------- ---------
$ 3,707 $ 3,196 $ 3,141
======== ========= =========
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, 1994, 1993 and 1992, was $409, $451 and $479,
respectively.
During 1994, Cleo offered a voluntary early retirement program to
eligible employees resulting in curtailments of certain employee
benefit plans. Consequently, the Company recognized curtailment
losses of $284 and $68 in a defined benefit plan and medical and life
insurance plan, respectively, for the year ended December 31, 1994.
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, 1994, 1993 and 1992, was $550, $501 and $481,
respectively.
PAGE
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
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, 1994, 1993 and 1992 is as follows:
1994 1993 1992
--------- --------- ---------
Service cost-benefits earned
during the period $ 171 $ 148 $ 139
Interest cost on
accumulated benefits 363 470 343
Net amortization 42 61 -
Curtailments 68 - -
--------- --------- ---------
$ 644 $ 679 $ 482
========= ========= =========
A reconciliation of the accumulated postretirement benefit
obligation (APBO) measured as of December 31, 1994 and September 30,
1993 to the Company's consolidated balance sheets at December 31, 1994
and 1993 is as follows:
1994 1993
--------- ---------
Retirees $ 2,602 $ 3,514
Fully eligible active employees 1,146 1,228
Other active employees 885 1,084
--------- ---------
Accumulated benefit obligation 4,633 5,826
Unrecognized prior service cost (713) (771)
Unrecognized net loss 1,114 (383)
--------- ---------
Accrued APBO included in
other liabilities $ 5,034 $ 4,672
========= =========
PAGE
The accumulated benefit obligation for 1994 and 1993 was
determined using the following assumptions:
1994 1993
---------------- ------------------
Discount rate 8.5% 7%
Health care cost 10% for 1995 11% for 1994
trend rate graded down per graded down 1% per
year to 6% in the year to 5% in the
year 2002, 5.5% year 2000, 5%
thereafter thereafter
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, 1994,
and the net periodic cost for the year then ended by approximately 5%
and 4%, respectively.
Effective January 1, 1994, the Company adopted SFAS No. 112 -
"Employers' Accounting for Postemployment Benefits." The statement
requires accrual accounting for benefits provided to former or
inactive employees after employment but before retirement. The
Company previously accounted for a certain portion of these
postemployment benefits on a pay-as-you-go-basis. Adoption of SFAS
No. 112 did not have a material effect on the consolidated financial
statements of the Company.
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.
PAGE
A summary of stock option activity during the years ended
December 31, 1994, 1993 and 1992, is as follows:
1994 1993 1992
---------- --------- ---------
Number of options to purchase
common stock:
Outstanding at
beginning of year 1,063,042 1,073,470 646,958
Granted 597,500 47,500 534,900
Exercised (46,263) (26,348) (93,021)
Expired (292,660) (31,580) (15,367)
-------- --------- ---------
Outstanding at end of year 1,321,619 1,063,042 1,073,470
========= ========= =========
Exercisable at end of year 1,321,619 666,594 439,641
========= ========= =========
The exercise prices of options granted in 1994 ranged from $13.88
to $21.13. The exercise prices of options granted in 1993 ranged from
$18.88 to $21.25 and the exercise price of options granted in 1992
ranged from $18.38 to $28.63. Options exercised were at prices of
$2.38 to $22.50, in 1994, 1993 and 1992. Options outstanding at
December 31, 1994, 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 1992, 5,000 restricted shares were
purchased at a price of $1.00 per share. No restricted shares were
purchased in 1994 or 1993.
At December 31, 1994, 308,662 shares were available under the
stock option and incentive plans, of which 216,369 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.
PAGE
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.
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, 1994, 1993 and
1992, on all real and personal property, was $24,493, $20,297 and
$15,846, respectively. Minimum future annual rentals under
noncancellable leases for each of the years in the five-year period
ended December 31, 1999 are $20,757, $18,290, $14,712, $11,744 and
$9,835, respectively. After 1999, these commitments aggregate
$17,752.
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, 1999, of $17,048, $6,439, $4,929, $4,724 and
$2,922, respectively. After December 31, 1999, these commitments
aggregate $2,093. All of these amounts have been recorded as other
current liabilities or other liabilities in the accompanying
consolidated balance sheet as of December 31, 1994.
PAGE
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.
Note 12--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 overstatement of the Company's previously reported
1993 consolidated net income. See Note 1.
Immediately following the announcement of the inventory
misstatement at Cleo, five purported class actions were commenced by
certain stockholders against the Company and its Chairman, President
and Chief Executive Officer in the United States District Court for
the Southern District of Ohio. These suits were consolidated and a
Consolidated Amended Class Action Complaint against the Company, its
Chairman, President and Chief Executive Officer, its Chief Financial
Officer and the former President and Chief Executive Officer of Cleo
was filed on October 7, 1994 (In Re Gibson Securities Litigation).
This Complaint alleged violations of the federal securities laws and
sought unspecified damages for an asserted public disclosure of false
information regarding the Company's earnings. The Company intends to
defend the suit vigorously and has filed an Answer denying any
wrongdoing, a Third Party Complaint against its former auditor for
contribution against any judgment adverse to the Company and a motion
to dismiss one count of the Complaint. On December 6, 1994 the Court
ruled that neither of the two named plaintiffs qualified as a class
representative. On March 3, 1995 the Court granted plaintiffs' Motion
for Leave to File An Amended Complaint to name a substitute class
representative.
The SEC 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 discussed in Note 6 and the
Company's public statements and accounting with respect thereto. The
Company is cooperating in such investigation.
PAGE
On September 12, 1994 the Company filed suit against Bankers
Trust Company and its affiliate BT Securities in the United States
District Court for the Southern District of Ohio (Gibson Greetings,
Inc. v. Bankers Trust Company and BT Securities Corporation) alleging
that in connection with the sale of derivatives to the Company they
had breached fiduciary duties, made fraudulent misrepresentations, and
failed to make adequate disclosures, in violation of common law and
statutory obligations to the Company. The suit sought damages and
asked that the court declare the Company's existing derivative
transactions with Bankers Trust to be unenforceable. Bankers Trust
filed an Answer denying the allegations and a counterclaim seeking
enforcement of the existing derivative transactions. On November 23,
1994 the Company settled its claims against Bankers Trust. As part of
the settlement, the Company paid Bankers Trust $6,180, which included
the reimbursement of approximately $3,344 of cash payments previously
made to the Company by Bankers Trust and recorded as income in 1993.
In return, the remaining transactions were terminated with no further
liability to the Company.
In March 1995 the previously reported litigation captioned Rocks
v. Gibson Greetings, et al. was voluntarily dismissed by the plaintiff
with the Court's approval.
On April 10, 1995, two purported class action lawsuits were
commenced against the Company, its Chairman, President and Chief
Executive Officer and its Chief Financial Officer in the United States
District Court for the Southern District of Ohio (Kurtz v. Gibson
Greetings, Inc., et al. and Komine v. Gibson Greetings, Inc., et al.)
The Complaints allege violations of the federal securities law for an
asserted failure to disclose allegedly material information regarding
the Company's financial performance. The Company intends to defend
the suits vigorously.
The litigation described above is in early stages of proceedings.
Accordingly, management is unable to predict their likely effect upon
the Company's results of operations and financial condition.
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
Firemen 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. An 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 were presented in briefs and in appellate oral argument
which was heard on September 14, 1994. A decision is expected in
1995. Management does not believe that an adverse outcome as to this
matter 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
In addition, the Company is a defendant in certain other
litigation.
Note 13--Subsequent Event
As discussed in Note 12, the SEC is investigating the Company's
accounting and reporting of derivative transactions during the year
ended December 31, 1993.
In an institution and settlement of administrative proceedings
dated December 22, 1994 against Bankers Trust (the Bankers Trust
Order), the SEC alleged that Bankers Trust misled the Company about
the value of the Company's derivative positions by providing the
Company with fair values that were significantly different from the
values determined by Bankers Trust's computer model and recorded on
Bankers Trust's financial records, which difference of $4,571 as of
December 31, 1993 resulted in a significant understatement of the
magnitude of the Company's losses. In late March 1995, the SEC
advised the Company that it believed that the Company should restate
its 1993 consolidated financial statements due to the SEC's allegation
that Bankers Trust caused the Company to materially understate its
unrealized losses related to certain derivative transactions during
1993.
The Company has restated the accompanying 1993 year-end
consolidated financial statements to reflect derivative values based
on Bankers Trust's computer model as set forth in the Bankers Trust
Order. Such restatement resulted in a $4,571 reduction in previously
reported 1993 consolidated net income and a corresponding decrease in
1994 consolidated net loss. This restatement, coupled with the
November 23, 1994 settlement between the Company and Bankers Trust, as
discussed in Note 12, resulted in a net gain (loss) on derivative
transactions and settlement in 1994 and 1993 of $1,641 and ($5,689),
respectively, as shown in the accompanying consolidated statements of
operations.
Bankers Trust has yet to provide the Company and its independent
auditors with either support for the $4,571 differential or with the
effects of such net differential on the Company's 1994 and 1993
consolidated quarterly results. Accordingly, the Company has prepared
its 1994 and 1993 annual consolidated financial statements based
solely on the net differential amount contained in the Bankers Trust
Order. The Company has had continuing discussions with the SEC
regarding the Company's ongoing attempts to obtain supporting year-end
and quarterly amounts from Bankers Trust in order to complete the 1994
and 1993 consolidated financial statements so that the Company's
independent auditors can complete their audits of such consolidated
financial statements.
PAGE
Note 14--Quarterly Financial Data (Unaudited)
(Dollars in
thousands except First Second Third Fourth
per share amounts) Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- --------
1994 (1)
- -------------------
Net sales $ 93,187 $ 90,506 $152,881 $211,468 $548,042
Total revenues 93,429 90,648 153,026 211,692 548,795
Cost of products
sold 36,028 43,538 86,480 143,993 310,039
Net income (loss) (1) (28,603)
Net income
(loss) per share (1) (1.77)
1993 (As restated) (1)
- -------------------
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 (loss) (1) 15,268
Net income
(loss) per share (1) 0.95
[FN]
(1) As discussed in Note 13 of the Notes to the Consolidated
Financial Statements, Bankers Trust has not provided
the Company with quarterly fair values of certain
derivative transactions. Such fair values are required
for the Company to determine the quarterly impact of the
restatement described in Note 13.
PAGE
Independent Auditors' Report
The audits of the consolidated financial statements, as restated, for
the years ended December 31, 1994 and 1993 have not been completed due
to matters discussed in Note 13 of the Notes to Consolidated Financial
Statements. Auditors' reports will be filed in an amended Form 10-K
as soon as possible after the Company's independent auditors have
completed their audits of such financial statements.
PAGE
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
The disclosure called for by this item has been previously
reported in the Company's Current Report on Form 8-K, as amended,
dated September 29, 1994.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Board of Directors of the Company (at April 1,1995) are as
follows:
THOMAS M. COONEY, age 69. Mr. Cooney was the Company's Chairman
of the Board from 1986 until 1989 and currently serves as Chairman
Emeritus of the Company and as President of Gibson Foundation, Inc., a
charitable foundation established by the Company. He joined the
Company as its President and Chief Executive Officer in 1978 and
served as President until 1986 and as Chief Executive Officer until
1987. He is also a director of Genovese Drug Stores, Inc. Mr. Cooney
has been a director of the Company since 1982 and a member of the
Nominating Committee since 1990.
CHARLES D. LINDBERG, age 66. Mr. Lindberg has been a partner in
the law firm of Taft, Stettinius & Hollister, counsel to the Company,
for more than the past five years and currently serves as Managing
Partner. He has been a director of the Company since May 1991 and has
been a member of the Audit Committee since 1994.
ALBERT R. PEZZILLO, age 66. Mr. Pezzillo is currently a business
consultant. He retired in 1990 from his position as Senior Vice
President of American Home Products Corporation, a manufacturer and
marketer of ethical pharmaceuticals, medical supplies and hospital,
consumer health care, food and household products. Prior to joining
American Home Products in 1981, he held a variety of executive
positions with Warner Lambert Company and Colgate Palmolive Company.
Mr. Pezzillo became a director of the Company in April 1990. He has
been a member of the Audit Committee since 1990 and a member of the
Compensation Committee since 1994.
CHARLOTTE A. ST. MARTIN, age 49. Ms. St. Martin has been
Executive Vice President of Loews Hotels and President and Chief
Executive Officer of Loews Anatole Hotel, Dallas, Texas, since 1989.
Previously she served Loews Hotels in a variety of other executive
capacities. Loews Hotels owns and operates fourteen hotels nationally
and internationally. Ms. St. Martin is also a former President of the
Dallas Convention and Visitors' Bureau. She has been a director of
the Company since August 1993 and a member of the Compensation
Committee since 1994.
PAGE
BENJAMIN J. SOTTILE, age 57. Mr. Sottile has been the Company's
Chairman of the Board since 1989, its Chief Executive Officer since
1987 and its President since 1986. From 1986 to 1987 he was the
Company's Chief Operating Officer. Mr. Sottile was President of Group
I, Revlon Beauty Group, Revlon Corp., a manufacturer of cosmetic and
beauty supplies, from 1984 to 1986. From 1981 to 1984 he was a Senior
Vice President of Warner Communications, Inc., where he was chiefly
responsible for the operating activities of consumer product companies
including The Franklin Mint, Warner Cosmetics and Fragrances and
Knickerbocker Toy Company. He became a director of the Company in
January 1987 and has been a member of the Nominating Committee since
1989.
FRANK STANTON, age 65. Until his retirement in 1990, Mr. Stanton
had served as Chairman and Chief Executive Officer of MRB Group, Inc.,
a world-wide media and marketing research organization, which he
founded in 1987. From 1974 until 1989 he was President and Chief
Executive Officer of Simmons Market Research Bureau, a leading rating
service for the magazine industry and now a subsidiary of MRB Group,
Inc. He has been a director of the Company since June 1985. He has
been a member of the Audit and Compensation Committees since 1986.
ROGER T. STAUBACH, age 53. Mr. Staubach has been Chairman of the
Board and Chief Executive Officer of The Staubach Company, a Dallas,
Texas-based integrated real estate service company, since 1990. He
was President of that company from 1981 until 1990 and was active in
other real estate brokerage businesses prior to 1981. From 1969
through 1979 he was a member of The Dallas Cowboys professional
football team. He is also a director of Brinker International, Inc.,
Columbus Realty Trust, First USA, Inc., Halliburton Company and Life
Partner's Group, Inc. Mr. Staubach became a director of the Company
in January 1992. He has been a member of the Nominating Committee
since 1994.
C. ANTHONY WAINWRIGHT, age 61. Mr. Wainwright has been Chairman
of Compton Partners, Saatchi & Saatchi (formerly
Campbell-Mithun-Esty), a national advertising agency, since May 1994.
He had served as Vice Chairman of that company since 1989. From 1980
until 1989 he was President, Chief Operating Officer and a director of
The Bloom Companies, Inc., a holding company for a national
advertising agency group. Prior to 1980, Mr. Wainwright held various
executive positions with companies in the advertising and marketing
industries. He is also a director of American Woodmark Corporation,
Del Webb Corp. and Specialty Retail Group, Inc. He has been a
director of the Company since March 1988 and has been a member of the
Compensation Committee since 1993 and a member of the Nominating
Committee since 1991.
PAGE
The Executive Officers of the Company (at April 1,1995) are as
follows:
Name Age Title
------------------- --- ----------------------------
Benjamin J. Sottile 57 Chairman of the Board,
President and
Chief Executive Officer
William L. Flaherty 47 Vice President, Finance and
Chief Financial Officer
Nelson J. Rohrbach 54 Vice President
Stephen M. Sweeney 58 Vice President, Human
Resources
Information about Mr. Sottile is given above.
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).
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) , a factory outlet chain
acquired by the Company in 1993. Mr. Rohrbach continues to serve as
The Paper Factory's Chief Executive Officer. From 1980 to 1989 he
served as President of CPS/Artfaire, a manufacturer of personal
expression products.
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.
Compliance with Section 16(a) of the Securities and Exchange Act of
1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who
beneficially own more than ten percent of the Company's equity
securities, to file reports of security ownership and changes in such
ownership with the SEC. These persons also are required by SEC
regulations to furnish the Company with copies of all Section 16(a)
forms they file.
PAGE
Based upon a review of such forms and written representations
from its executive officers and directors, the Company believes that
all Section 16(a) filing requirements were complied with on a timely
basis during and for 1994 except that a 1993 stock option grant was
not timely reported by Mr. William L. Flaherty and Form 3 was filed
after its due date by Mr. Anthony L. Forcellini.
Item 11. Executive Compensation
Summary Information. The following table sets forth, for each of
the three years in the period ending December 31, 1994, amounts of
cash and certain other compensation paid by the Company in respect of
the year to (i) Mr. Sottile, (ii) each of the three other executive
officers of the Company who were serving as executive officers at the
end of 1994 and whose 1994 salary and bonus exceeded $100,000, and
(iii) Ralph J. Olson, an executive officer of the Company until
November 1994. Mr. Sottile and these other persons are sometimes
referred to hereafter as the "named executive officers."
Long Term
Compensation
Annual Compensation Awards
------------------------------ ------------------
Secur-
Other ities All
Annual Restricted Under- Other
Compen- Stock lying Compen-
Name and Principal Salary Bonus sation Award(s) Options sation
Position Year ($) ($) ($)(1) ($)(2) (#) ($)(3)
- ----------------------- ---- -------- -------- ------- ------- -------- --------
Benjamin J. Sottile 1994 $462,900 --- --- --- 30,000 $ 53,025
Chief Executive Officer
1993 $427,400 $260,000 --- --- --- $ 53,669
1992 $414,675 $200,000 --- --- 45,000 $ 15,196
William L. Flaherty (4) 1994 $179,375 --- $24,353 --- 12,000 $ 52,781
Vice President
1993 $ 20,641 $ 50,000 --- --- 15,000 $ 6,300
Nelson J. Rohrbach (4) 1994 $228,702 $103,125 9,402 --- 45,000 $ 28,319
Vice President
1993 $108,173 $ 30,000 --- --- --- $ 1,440
Stephen M. Sweeney 1994 $154,000 --- --- --- 12,000 $ 5,283
Vice President
1993 $142,875 $ 85,000 --- --- --- $ 5,378
1992 $140,771 $ 60,000 --- --- 15,000 $ 5,505
Ralph J. Olson 1994 $272,582 --- --- --- 15,000 $749,437
Vice President
1993 $264,900 $230,000 --- --- --- $ 13,699
1992 $254,783 $105,000 --- --- 21,000 $ 3,051
[FN]
- --------------------------
(1) For 1994, perquisites did not exceed the lesser of $50,000 or 10%
of salary and bonus for any named executive officer.
(2) At December 31, 1994, Mr. Sottile held 5,000 shares of restricted
stock having an aggregate award value (based upon the closing
price of $14.75 per share on that date for the Company's common
stock less the consideration paid) of $68,750.
(3) For 1994, includes the following: (i) matching contributions to
the Company's Matched PaySaver (401(k)) Plan on behalf of each of
Messrs. Sottile ($1,125), Flaherty ($0), Rohrbach ($900), Sweeney
($1,125) and Olson ($0) in respect of their 1994 contributions to
the Plan; (ii) group term life insurance payments for Mr. Sottile
($5,400), Mr. Flaherty ($1,827), Mr. Rohrbach ($3,245), Mr.
Sweeney ($4,158) and Mr. Olson ($3,456); (iii) whole-life
insurance premiums of $46,500 for the benefit of Mr. Sottile;
(iv) reimbursement of temporary living and travel expenses of
$49,556 for Mr. Flaherty and $24,174 for Mr. Rohrbach; (v)
miscellaneous insurance-related compensation of $1,398 for Mr.
Flaherty; and (vi) termination costs of $745,981 for Mr. Olson.
(4) Mr. Flaherty and Mr. Rohrbach were first employed by the Company
in 1993.
PAGE
Stock Options. The Company has six existing plans pursuant to
which options for shares of common stock may be granted to key
employees. These are the 1982, 1983, 1985 and 1987 Stock Option Plans
and the 1989 and 1991 Stock Incentive Plans (together, the "Plans").
None of the Plans provides for the grant of stock appreciation rights ("SARs").
The following table contains information concerning stock option
grants under the Plans to the named executive officers during the year
ended December 31, 1994.
Individual Grants (1)
----------------------------------------------------
% of Exercise Grant
Total Options or Date
Options Granted to Base Present
Granted Employees in Price Expiration Value
Name (#) Fiscal Year ($/SH) Date $ (2)
- ------------------- ------- ------------- --------- ---------- --------
Benjamin J. Sottile 30,000 5.2% $17.125 6/14/04 $170,998
William L. Flaherty 12,000 2.1% $17.125 6/14/04 $ 68,399
Nelson J. Rohrbach 30,000 5.2% $21.125 4/10/04 $210,940
15,000 2.6% $17.125 6/14/04 $ 85,499
Stephen M. Sweeney 12,000 2.1% $17.125 6/14/04 $ 68,399
Ralph J. Olson (3) 15,000 2.6% $17.125 6/14/04 $ 85,499
[FN]
(1) All options vest at an annual rate of one-third per year
commencing (i) April 11, 1995 for Mr. Rohrbach's options that
expire April 10, 2004 and (ii) June 15, 1995 for all other
options. The exercise price of all options may be paid in cash
or, if permitted by the Stock Option Committee, by the transfer
of shares of the Company's common stock valued at their fair
market value on the date of exercise. Each option becomes
exercisable in full (i) if any person becomes, or commences a
tender offer which could result in the person becoming, the
beneficial owner of more than 50% of the outstanding shares of
the Company's common stock or (ii) unless the survivor or
transferee corporation agrees to continue the option, in the
event of the execution of an agreement of merger, consolidation
or reorganization pursuant to which the Company is not to be the
surviving corporation or the execution of an agreement of sale or
transfer of all or substantially all of the assets of the
Company.
(2) In accordance with Securities and Exchange Commission rules, the
Black-Scholes option pricing model was used to estimate the grant
date present value of the options shown. The Company's use of
this model should not be construed as an endorsement of its
accuracy at valuing options. All stock option valuation models,
including the Black-Scholes model, require a prediction about the
future movement of the stock price. The real value of an option,
if any, depends upon the actual performance of the Company's
stock during the applicable period.
(3) The options granted to Mr. Olson terminated unexercised as a
result of his termination of employment with the Company.
PAGE
With respect to each named executive officer, the following table
sets forth information concerning unexercised options held at December
31, 1994. No named executive officer exercised options during 1994.
Number of
Securities
Value Underlying Value of
Realized ($) Unexercised Unexercised
(Market Options In-the-Money
Price on at FY-End Options at
Shares Exercise (#) FY-End
Acquired Less ($)
on Exercise Exercise Exercisable/ Exercisable/
Name (#) Price) Unexercisable Unexercisable
- ------------------- ----------- ----------- -------------- -------------
Benjamin J. Sottile --- --- 205,400/45,000 $84,375/---
William L. Flaherty --- --- 5,000/22,000 ---/---
Nelson J. Rohrbach --- --- 10,000/35,000 ---/---
Stephen M. Sweeney --- --- 19,500/17,000 $6,750/---
Ralph J. Olson (1) --- --- --- ---/---
[FN]
(1) All options terminated unexercised prior to fiscal year-end as a
result of Mr. Olson's termination of employment with the Company.
Pension Plans. The Pension Plan Table set forth below shows
estimated annual pension benefits payable to a covered participant
under the Company's Retirement Income Plan (the "Retirement Plan"), a
qualified defined benefit pension plan, and under the Gibson
Greetings, Inc. ERISA Makeup Plan (the "Makeup Plan"), a nonqualified
supplemental pension plan providing benefits that would otherwise be
denied participants because of certain Internal Revenue Code
limitations on qualified plan benefits. Benefits shown are computed
as a straight life annuity for an employee retiring at age 65 in 1994
with no offsets.
PAGE
Pension Plan Table
Years of Service
-------------------------------------------------------------------------------
Remuneration 5 10 15 20 25 30 35
- ------------ ------- -------- -------- -------- -------- -------- --------
$ 200,000 $14,190 $ 28,380 $ 42,570 $ 56,760 $ 70,950 $ 85,140 $ 99,330
300,000 21,690 43,380 65,070 86,760 108,450 130,140 151,830
400,000 29,190 58,380 87,570 116,760 145,950 175,140 204,330
500,000 36,690 73,380 110,070 146,760 183,450 220,140 256,830
600,000 44,190 88,380 132,570 176,760 220,950 265,140 309,330
700,000 51,690 103,380 155,070 206,760 258,450 310,140 361,830
800,000 59,190 118,380 177,570 236,760 295,950 355,140 414,330
900,000 66,690 133,380 200,070 266,760 333,450 400,140 466,830
1,000,000 74,190 148,380 222,570 296,760 370,950 445,140 519,330
Benefits under the Retirement and Makeup Plans are based upon the
highest average sixty consecutive months' salary and bonus (as shown
on the Summary Compensation Table) during the 120 months immediately
preceding retirement. Compensation covered by the Plans at the end of
1994 for each named executive officer is as follows: Mr. Sottile,
$840,378; Mr. Flaherty, $301,991; Mr. Rohrbach, $216,205; and Mr.
Sweeney, $223,940. For the purpose of computing a benefit under the
table above, on December 31, 1994, Mr. Sottile had 8 years of credited
service, Mr. Flaherty, 1 year, Mr. Rohrbach, 1 year, and Mr. Sweeney,
7 years. Covered compensation amounts differ from amounts shown on
the Summary Compensation Table due to differences in the recognition
of pensionable earnings.
In addition to the Retirement Plan and the Makeup Plan, certain
executives designated by the Compensation Committee are eligible for
benefits under the Company's Supplemental Executive Retirement Plan
(the "SERP"), which was adopted to attract and retain highly qualified
executives by providing retirement benefits at levels which the
Company believes to be competitive. A participant in the SERP who
retires at age 65 is entitled to receive supplemental retirement
benefits equal to the difference between (i) that percentage of the
participant's final monthly average earnings (as defined in the
Retirement Plan without regard to certain limitations imposed by the
Internal Revenue Code on qualified plans) determined by crediting 2%,
1-2/3% and 1-1/3% per year, respectively, for each of the first 10,
next 10 and next 10 years of credited service, up to a maximum of 30
years of credited service (the "SERP percentage") and (ii) the
aggregate of the participant's monthly benefits from the Retirement
Plan and the Makeup Plan plus supplemental retirement benefits under
any individual agreement with the Company. The SERP provides for
adjustments to the basic benefit formula in the event of a
participant's early retirement, disability retirement, death or other
termination of employment. At the normal retirement age each named
executive officer's years of credited service and SERP percentage will
be as follows: Mr. Sottile, 16 years and 30%; Mr. Flaherty, 19 years
and 36%; Mr. Rohrbach, 12 years and 21%; and Mr. Sweeney, 14 years and
26%.
PAGE
At the time of his termination of employment with the Company,
Mr. Olson had no vested benefits under any of the Company's retirement
plans.
Employment Contracts. Each of the named executive officers has
or had an employment agreement with the Company. Mr. Sottile's
agreement runs from April 1, 1993 until March 31, 1998, and renews
automatically from year to year thereafter unless notice is given by
either party. The agreement sets a minimum annual base salary of
$430,000, subject to increase from time to time, and provides for an
annual incentive bonus based upon a plan to be approved annually by
the Company's Compensation Committee. Mr. Sottile's agreement further
provides that if any person gains control of 50% or more of the voting
power of the Company's securities and thereafter his employment
terminates, he is entitled under specified circumstances to be paid
$1.5 million; such amount is to be increased by an additional amount
related to the excise tax which would be imposed by the Internal
Revenue Code upon excess "parachute" payments.
Mr. Flaherty's employment agreement currently expires on November
17, 1996. If not terminated prior to November 17, 1995, it will
continue indefinitely until terminated by the Company upon one year's
advance written notice or as otherwise provided therein. The
agreement provides for an annual salary of $175,000 (subject to
increase by the Company from time to time) and participation in the
Company's incentive bonus plan. It also provides for severance pay
equal to six months' salary in the event that the Company elects not
to extend the initial term or in the event of death and for severance
pay equal to one year's salary (subject to certain offsets) in the
event of a change in control of the Company.
Mr. Rohrbach's employment agreement is for a three-year term,
expiring May 31, 1997; thereafter, it extends indefinitely until
terminated by Cleo upon one year's advance written notice. The
agreement provides for an annual salary of $240,000, subject to review
from time to time, and for participation in the Company's incentive
bonus plan. Mr. Rohrbach previously was President of The Paper
Factory, which was acquired by the Company in June 1993, and currently
serves as President and Chief Executive Officer of Cleo. His
agreement provides for a 1994 minimum bonus amount equal to that which
he would have received pursuant to The Paper Factory's bonus plan had
he remained as President of The Paper Factory throughout 1994. The
employment agreement also provides for a payment equal to six months'
salary in the event of death.
Mr. Sweeney's employment agreement provides for a base annual
salary of $136,000, subject to increase by the Company from time to
time, and for participation in the Company's incentive bonus plan.
The agreement is subject to termination by the Company upon one year's
advance written notice and as is otherwise provided therein. Mr.
Sweeney's agreement also provides that he is entitled to one year's
salary (subject to offset under certain circumstances) if he is not
retained in substantially the same capacity and salary for at least
six months after any person becomes the beneficial owner of 50% or
more of the Company's securities.
The Company's employment agreements also generally provide
additional miscellaneous compensation in the form of some combination
of perquisites such as club membership fees, use of automobiles,
insurance benefits and tax and estate planning services.
PAGE
Mr. Olson had an employment agreement with the Company,
originally entered into in 1991, providing for an annual salary of
$288,000, subject to adjustment from time to time, and for
participation in the Company's annual incentive bonus plan. In
connection with his termination of employment with the Company, Mr.
Olson received a payment pursuant to the agreement of $702,000, being
1-1/2 times total salary and bonus for the previous 12 months,
outplacement services and continuation of medical, dental and life
insurance coverage for the lesser of six months or his obtaining of
other employment.
In connection with his termination, in February 1994, as an
officer and director of the Company, Mr. Michael A. Pietrangelo's
employment agreement with the Company, which was due to expire on May
31, 1995, was terminated. Mr. Pietrangelo will receive severance pay
aggregating $550,000 during the period from March 1994 through
February 1996. In addition, he will receive, under certain
circumstances, continuation of health insurance coverage for this same
period.
Mr. Cooney is entitled, under the terms of his prior employment
agreements with the Company, to receive periodic payments aggregating
$1,005,000; these payments began in 1991 and will continue through
2000.
Compensation of Directors. Since January 1, 1993, directors have
been entitled to receive fees of $900 for each Board of Directors (the
"Board") meeting attended and $650 for each committee meeting
attended, plus reimbursement of expenses. In addition to these fees,
the Company pays an annual fee of $13,500 for services of directors
who are not employees of the Company and an annual fee of $2,500 per
chairmanship to each committee chairman. Pursuant to the Company's
1989 Stock Option Plan for Nonemployee Directors (the "Directors
Plan") each nonemployee director of the Company, at the close of
business on the day of the Annual Meeting of Stockholders, receives an
option to purchase 1,000 shares of common stock.
PAGE
In order to continue to attract and retain outstanding
individuals to serve as nonemployee directors of the Company ("Outside
Directors"), the Company also has a Retirement Plan for Outside
Directors (the "Directors Retirement Plan"). Outside Directors are
defined by the Directors Retirement Plan as directors not employed by
the Company or a subsidiary and include former or retired employees if
they are not vested under any other Company retirement plan. In order
to qualify for benefits under the Directors Retirement Plan, an
Outside Director must have served the Company as such for at least
nine years. An Outside Director who does qualify for benefits under
the Directors Retirement Plan will receive an annual benefit, payable
quarterly for life, equal to the amount of the Company's annual fee
(not including payments for serving as chairman of a Board committee)
paid to Outside Directors on the date on which the Outside Director's
service to the Company ceases (the "Annual Retainer"). Benefits under
the Directors Retirement Plan commence upon termination of service for
directors who have attained age 65 and are payable beginning at age 65
to those whose services terminate prior to that age. Should an
Outside Director who has qualified for benefits under the Plan die
before receiving any benefits, the Outside Director's designated
beneficiary or estate will be entitled to receive a payment equal to
five times the Annual Retainer; should an Outside Director die after
the commencement of benefits but prior to having received them for
five years, the beneficiary or estate will receive an amount equal to
five times the Annual Retainer less any benefits already paid.
Compensation Committee Interlocks and Insider Participation. The
Board has a Compensation Committee, currently composed of Mr.
Wainwright, Chairman, Mr. Pezzillo, Ms. St. Martin and Mr. Stanton.
The Compensation Committee sets cash compensation for the Company's
executive officers and certain other key employees, approves terms and
conditions of employment contracts for certain key executives and
establishes terms and conditions of the Company's bonus and retirement
plans. The Committee also administers all of the Company's Stock
Option and Incentive Plans (except the Directors Plan, which is
administered by the full Board), selects the persons to whom awards
will be made under those Plans and, subject to the limitations imposed
by the Plans, establishes the terms and conditions of each award. The
Compensation Committee held two meetings in 1994.
During 1994 Mr. Pezzillo received fees of $36,456 for consulting
services performed for the Company.
PAGE
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth certain information with regard to
the beneficial ownership of the Company's common stock by (i) each of
the Company's stockholders known to hold more than 5% of the
outstanding shares of common stock, (ii) except as noted, each
director and nominee and each executive officer named on the Summary
Compensation Table, individually, and (iii) all directors and
executive officers as a group. Information relating to the Company's
directors and executive officers is as of February 28, 1995.
Information on 5% stockholders is as reported by them to the Company
subsequent to December 31, 1994.
Beneficial Ownership (1)(2)
---------------------------
Number of
Name Position Shares Percent
- ------------------ ------------------------ --------- -------
GSB Investment
Management, Inc.
301 Commerce Street,
Suite 1501
Ft. Worth, Texas 76102 1,430,031 8.6%
John Hancock Mutual
Life Insurance Company
and subsidiaries,
John Hancock Place
P.O.Box 111
Boston, Massachusetts 02177 1,331,151 8.0%
The Prudential
Insurance Company
of America
Prudential Plaza
Newark, New Jersey 07102 2,071,996 12.5%
Thomas M. Cooney Chairman of the 12,592
Board, Emeritus
Benjamin J. Sottile Chairman of the
Board, President &
Chief Executive Officer 230,000 1.4%
Charles D. Lindberg Director 3,600
Albert R. Pezzillo Director 6,700
Charlotte A. St. Martin Director 1,000
Frank Stanton Director 11,300
Roger T. Staubach Director 3,000
C. Anthony Wainwright Director 6,100
William Flaherty Vice President - Finance 5,000
Nelson J. Rohrbach Vice President 10,000
Stephen M. Sweeney Vice President - Human Resources 24,500
All directors and executive
officers as a group
(12 persons) 313,792 1.9%
[FN]
(1) Except as indicated, the percentage of shares held by each person
is less than 1%. Includes shares which may be purchased upon
exercise of presently exercisable options and options exercisable
within 60 days after February 28, 1995, in the following amounts:
Mr. Cooney, 2,000 shares; Mr. Sottile, 205,000 shares;
Messrs. Stanton and Wainwright, 6,000 shares each; Mr. Pezzillo,
5,000 shares; Messrs. Lindberg and Staubach, 3,000 shares each;
Ms. St. Martin, 1,000 shares; Mr. Flaherty, 5,000 shares; Mr.
Rohrbach, 10,000 shares; Mr. Sweeney, 19,500 shares; and all
directors and executive officers as a group, 265,500 shares. No
information is presented for Mr. Olson whose employment with the
Company terminated prior to February 28, 1995.
(2) Includes the following numbers of shares as to which beneficial
ownership is disclaimed: 300 shares held by the wife of Mr.
Stanton and 100 shares held by the wife of Mr. Wainwright.
(3) The Company has also been advised by two institutional investors,
Heartland Advisors, Incorporated and Hughes Investment Management
Company, that each is the beneficial owner of in excess of 5% of
the Company's outstanding shares of Common Stock. However, neither
of these institutional investors has at this time filed a formal
report of ownership, and the Company is not aware of the exact number
of shares of which each claims beneficial ownership.
PAGE
Item 13. Certain Relationships and Related Transactions
Certain Transactions. The Staubach Company, of which Mr.
Staubach is Chairman and Chief Executive Officer, has been retained to
sell certain property owned by the Company. If the property is sold
in 1995, The Staubach Company anticipates receiving a net commission
in excess of $60,000. During 1994, The Staubach Company received a
$20,000 advance from the Company for expenses in connection with this
project and also received fees of $26,487 from the Company for its
representation of the Company in a lease transaction.
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:
Financial Statements:
1.
Page
Herein Financial Statement
------ ---------------------------------------------
12 Consolidated Statements of Operations for the
years ended December 31, 1994, 1993 and 1992
13 Consolidated Balance Sheets as of December 31,
1994 and 1993
14 Consolidated Statements of Cash Flows for the
years ended December 31, 1994, 1993 and 1992
15 Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1994, 1993
and 1992
16 Notes to Consolidated Financial Statements
29 Independent Auditors' Report
2. Exhibits: See Index of Exhibits (page 41) for a listing of
all exhibits filed with this annual report on Form 10-K
b) Reports on Form 8-K: The Company filed a Form 8-K with the Securities and
Exchange Commission on October 4, 1994 (date of
report: September 29, 1994) reporting a change in the
Company's independent auditors.
The Company filed a Form 8-K/A (Amendment No. 1) with
the Securities and Exchange Commission on October 10,
1994 (date of report: September 29, 1994) further
relating to the change in the Company's independent
auditors.
The Company filed a Form 8-K with the Securities and
Exchange Commission on November 23, 1994 (date of
report: November 23, 1994) attaching the Company's
press release dated November 23, 1994.
The Company filed a Form 8-K with the Securities and
Exchange Commission on December 7, 1994 (date of
report: December 7, 1994) attaching the Company's
press release dated December 7, 1994.
No financial statements were required to be filed
in connection with any of the foregoing reports.
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 17th day of April 1995.
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 17th day of
April 1995.
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
-------------------------
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
Index of Exhibits
Exhibit
Number Description
------- -----------------------------------------------------------------
3(a) Restated Certificate of Incorporation as amended (*1)
3(b) Bylaws (*2)
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 (*3)
10(a) Lease Agreement dated January 25, 1982 between
Corporate Property Associates 2 and Corporate Property
Associates 3 and Gibson Greeting Cards, Inc. (*4)
10(b) Sublease Agreement dated January 1, 1977 between B.F.
Goodrich and Cleo Wrap Division of Gibson Greetings Card, Inc.
(*4)
10(c) Amendment and Extension of Term of Sublease dated June
26, 1983, between B.F. Goodrich Company and Gibson Greeting
Cards, Inc. (*5)
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. (*6)
10(e) Lease and Agreement dated March 7, 1986 between
Associated Warehouses, Inc. and Cleo Wrap Division of Gibson
Greetings, Inc. (*6)
10(f) Commercial Paper Issuing Agent Agreement dated as of
July 11, 1986, between Gibson Greetings, Inc. and Irving Trust
Corporation (*7)
10(g) Commercial Paper Dealer Agreement dated July 16, 1986,
between Gibson Greetings, Inc. and The First Boston Corporation
(*7)
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 (*8)
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 (*9)
10(j) Executive Compensation Plans and Arrangements
(i) 1982 Stock Option Plan (*2)
(ii) 1983 Stock Option Plan (*2)
(iii) 1985 Stock Option Plan (*2)
(iv) 1987 Stock Option Plan (*2)
(v) 1989 Stock Option Plan (*2)
(vi) 1989 Stock Option Plan for Nonemployee Directors (*2)
(vii) 1991 Stock Option Plan (*2)
(viii) Employment Agreement with Mr. Cooney (*10)
(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 (*8)
(xi) ERISA Makeup Plan (*12)
(xii) Supplemental Executive Retirement Plan (*12)
(xiii) Agreements dated January 2, 1991 and December 10, 1993
between Gibson Greetings, Inc. and Stephen M. Sweeney (*2)
(xiv) Agreement dated November 18, 1993 between Gibson
Greetings, Inc. and William L. Flaherty (*2)
(xv) Agreement dated February 22, 1994 between Gibson
Greetings, Inc. and Michael A. Pietrangelo
(xvi) Agreement dated May 28, 1993 between Gibson
Greetings, Inc. and Nelson J. Rohrbach (*12)
(xvii) Agreement dated June 24, 1994 between Gibson
Greetings, Inc. and Ralph J. Olson (*13)
(xviii) Agreement dated December 21, 1994 between Gibson
Greetings, Inc. and Ralph J. Olson
(xix) Agreement dated November 21, 1994 between Gibson
Greetings, Inc. and Nelson J. Rohrbach
11 Computation of Income per Share
21 Subsidiaries of the Registrant
- ----------------------
* 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 10-K/A (Amendment No. 1)
for the year ended December 31, 1993.
(3) The Company's Report on Form 8-K dated December 28, 1987,
filed January 4, 1988.
(4) The Company's Registration Statement on Form S-8 (No.
2-82990).
(5) The Company's Registration Statement on Form S-8 (No.
2-96396).
(6) The Company's Report on Form 10-K for the year ended
December 31, 1985.
(7) The Company's Report on Form 10-Q for the quarter ended
September 30, 1986.
(8) The Company's Report on Form 10-Q for the quarter ended
June 30, 1993.
(9) The Company's Report on Form 10-Q for the quarter ended
June 30, 1991.
(10) The Company's Report on Form 10-K for the year ended
December 31, 1986.
(11) The Company's Report on Form 10-K for the year ended
December 31, 1992.
(12) The Company's Report of Form 10-Q/A (Amendment No.1)
for the quarter ended March 31, 1994.
(13) The Company's Report on Form 10-Q for the quarter ended
September 30, 1994.
- ----------------------
The Company will furnish to the Commission upon request its
long-term debt instruments not listed above.
PAGE