1
Exhibit 99.1
GIBSON GREETINGS, INC.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Gibson Greetings, Inc.
Covington, Kentucky
We have audited the accompanying consolidated balance sheets of Gibson
Greetings, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 17, on March 9, 2000, American Greetings Corporation
completed its merger with the Company by acquiring 97.4% of the outstanding
common shares of the Company for a cash price of $10.25 per share.
/s/ Deloitte & Touche LLP
- -------------------------
March 3, 2000, except for Note 17,
as to which the date is March 30, 2000
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GIBSON GREETINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1999 1998 1997
--------- --------- ---------
REVENUES:
Net sales $ 294,721 $ 407,933 $ 397,115
Royalty income 1,484 597 602
--------- --------- ---------
Total revenues 296,205 408,530 397,717
--------- --------- ---------
COSTS AND EXPENSES:
Operating expenses:
Cost of products sold 168,713 179,903 159,648
Selling, distribution and administrative expenses 189,117 202,466 202,109
Restructuring charge, net -- 23,055 --
--------- --------- ---------
Total operating expenses 357,830 405,424 361,757
--------- --------- ---------
OPERATING (LOSS) INCOME (61,625) 3,106 35,960
--------- --------- ---------
Financing expenses:
Interest expense, net of capitalized interest 1,230 3,410 5,432
Interest income (894) (4,864) (5,776)
--------- --------- ---------
Total financing expenses, net 336 (1,454) (344)
--------- --------- ---------
(LOSS) INCOME BEFORE INCOME TAXES (61,961) 4,560 36,304
INCOME TAX (BENEFIT) PROVISION (26,228) 2,377 14,706
--------- --------- ---------
NET (LOSS) INCOME $ (35,733) $ 2,183 $ 21,598
========= ========= =========
NET (LOSS) INCOME PER SHARE:
Basic $ (2.26) $ 0.13 $ 1.32
========= ========= =========
Diluted $ (2.26) $ 0.13 $ 1.27
========= ========= =========
See accompanying notes to consolidated financial statements.
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GIBSON GREETINGS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 4,674 $ 44,267
Marketable securities 68,579 --
Trade receivables, net 66,936 71,438
Inventories 50,474 84,489
Income taxes receivable 15,351 --
Deferred income taxes 15,338 39,897
Other current assets 14,271 4,958
-------- --------
Total current assets 235,623 245,049
Plant and equipment, net 87,497 75,906
Deferred income taxes 36,300 28,445
Other assets, net 71,255 88,051
-------- --------
$430,675 $437,451
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debt due within one year $ 31,943 $ 155
Accounts payable 20,761 32,990
Income taxes payable -- 13,415
Other current liabilities 59,714 61,494
-------- --------
Total current liabilities 112,418 108,054
Long-term debt 9,389 10,384
Other liabilities 46,431 47,535
-------- --------
Total liabilities 168,238 165,973
-------- --------
Commitments and contingencies (Notes 14 and 15)
Stockholders' Equity:
Preferred stock, par value $1.00; 5,100,000 shares
authorized, none issued -- --
Preferred stock, Series B, par value $1.00; 200,000 shares
authorized, none issued -- --
Common stock, par value $.01; 50,000,000 shares authorized,
17,138,264 and 17,123,498 shares issued, respectively 171 171
Paid-in capital 54,986 54,926
Retained earnings 201,803 237,536
Accumulated other comprehensive income 27,476 844
-------- --------
284,436 293,477
Less treasury stock, at cost, 1,291,601 shares 21,999 21,999
-------- --------
Total stockholders' equity 262,437 271,478
-------- --------
$430,675 $437,451
======== ========
See accompanying notes to consolidated financial statements.
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GIBSON GREETINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (35,733) $ 2,183 $ 21,598
--------- --------- ---------
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation including write-down of display fixtures 25,128 22,120 22,948
Impairment of plant and equipment 558 12,967 --
Loss on disposal of plant and equipment 1,274 1,091 1,339
Deferred income taxes (1,684) (9,577) 1,267
Amortization of deferred costs and goodwill 32,939 22,903 22,206
Change in assets and liabilities, net of effects of
acquistion and divestiture:
Trade receivables, net 4,146 (39,807) 12,098
Inventories 34,015 (39,462) 5,645
Income taxes receivable (15,351) -- --
Other current assets (9,313) (2,027) (1,477)
Other assets, net of amortization (22,838) (23,453) (18,519)
Accounts payable (12,229) 19,585 (1,610)
Income taxes payable (13,415) (1,221) (1,314)
Other current liabilities (2,592) (7,757) (12,995)
Other liabilities (1,459) 720 (995)
All other, net 708 163 44
--------- --------- ---------
Total adjustments 19,887 (43,755) 28,637
--------- --------- ---------
Net cash (used in) provided by operating activities (15,846) (41,572) 50,235
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment (37,755) (38,404) (17,677)
Proceeds from sale of plant and equipment 2,473 1,987 481
Investment in Internet Companies (15,336) (2,700) (4,144)
Acquisition of The Ink Group Companies -- (1,000) --
Proceeds from sale of The Paper Factory of Wisconsin, Inc. -- 36,216 --
Acquisition of Gibson Greetings International Limited
minority interest (1,046) -- --
--------- --------- ---------
Net cash used in investing activities (51,664) (3,901) (21,340)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings 30,984 -- --
Payments on long-term debt, net (3,127) (11,967) (16,751)
Issuance of common stock 60 2,055 5,401
Acquisition of common stock for treasury -- (14,615) (1,433)
--------- --------- ---------
Net cash (used in) provided by financing activities 27,917 (24,527) (12,783)
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (39,593) (70,000) 16,112
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 44,267 114,267 98,155
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,674 $ 44,267 $ 114,267
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash investing and financing activities:
Fair value adjustment to available-for-sale investments $ 46,121 $ -- $ --
Purchase of plant and equipment through capital lease obligations 2,936 -- --
See accompanying notes to consolidated financial statements.
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GIBSON GREETINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
ACCUMULATED
OTHER TOTAL TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS' COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME STOCK EQUITY INCOME (LOSS)
DECEMBER 31, 1996 $ 167 $ 47,474 $ 213,755 $ 871 $ (5,951) $ 256,316
----- -------- --------- -------- --------- ----------
Net income 21,598 21,598 $ 21,598
Other comprehensive income -
Currency translation, net (138) (138) (138)
Exercise of stock options 3 5,344 5,347
Purchase of treasury stock (1,433) (1,433)
Other 54 54
----- -------- --------- -------- --------- ---------- --------
DECEMBER 31, 1997 170 52,872 235,353 733 (7,384) 281,744 $ 21,460
----- -------- --------- -------- --------- ---------- ========
Net income 2,183 2,183 $ 2,183
Other comprehensive income -
Currency translation, net 111 111 111
Exercise of stock options 1 1,994 1,995
Purchase of treasury stock (14,615) (14,615)
Other 60 60
----- -------- --------- -------- --------- ---------- --------
DECEMBER 31, 1998 171 54,926 237,536 844 (21,999) 271,478 $ 2,294
----- -------- --------- -------- --------- ---------- ========
Net loss (35,733) (35,733) $ (35,733)
Other comprehensive income:
Currency translation, net (722) (722) (722)
Unrealized gains on
securities, net 27,625 27,625 27,625
Minimum pension liability
adjustment, net (271) (271) (271)
Other 60 60
----- -------- --------- -------- --------- ---------- --------
DECEMBER 31, 1999 $ 171 $ 54,986 $ 201,803 $ 27,476 $ (21,999) $ 262,437 $ (9,101)
===== ======== ========= ======== ========= ========== ========
See accompanying notes to consolidated financial statements.
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GIBSON GREETINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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 and sale of greeting cards, paper partywares, gift wrap and
related specialty relationship-fostering products. The Company sells to
customers in several channels of the retail trade principally located in
the United States. The Company conducts business based upon periodic
credit evaluations of its customers' financial condition and generally
does not require collateral. Sales are recognized at the time of shipment
from the Company's facilities. Provisions for sales returns are recorded
at the time of the sale, based upon current conditions and the Company's
historic experience.
Consistent with general industry practice, the Company has entered into
long-term sales agreements with certain retailers. These sales agreements
typically have terms ranging from three to five years, and generally
specify a minimum sales volume commitment. In certain of these sales
agreements, negotiated cash payments or credits constitute advance
discounts against future sales. These payments are capitalized and
amortized over the initial term of the sales agreement. In the event of
default by a retailer, such as bankruptcy or liquidation, a sales
agreement may be deemed impaired and unamortized amounts may be charged
against operations immediately following the default. Business risk is
also inherent in the Company's industry due to the salability of products
being dependent upon the ability to anticipate and respond promptly to
changing trends and consumer tastes. Certain of the Company's product
lines are particularly susceptible to these risks. However, management
believes that business risks are somewhat mitigated by the diversity of
the Company's products and distribution channels and by the geographic
location of its customers.
Through August 1998, The Paper Factory of Wisconsin, Inc. (The Paper
Factory) was a wholly-owned subsidiary of the Company (see Note 16) which
operated retail stores located primarily in manufacturers' outlet shopping
centers. The Paper Factory offered broad product assortments of nationally
recognized brand gift wrap, greeting cards, paper decorations, wedding
supplies and other paper products.
During the years ended December 31, 1999, 1998 and 1997, Winn-Dixie
Stores, Inc. accounted for approximately 14%, 13% and 15% of net sales,
respectively, and the geographic distribution of the Company's net sales,
based upon customer location, was as follows:
1999 1998 1997
United States $241,084 $362,625 $370,581
United Kingdom 34,107 32,219 21,043
Other foreign countries 19,530 13,089 5,491
-------- -------- --------
$294,721 $407,933 $397,115
======== ======== ========
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INTERNATIONAL OPERATIONS - International operations are conducted by the
Company's subsidiaries Gibson Greetings International Limited (Gibson
International) and The Ink Group Companies (The Ink Group) (see Note 16).
Gibson International markets the Company's products primarily in the
United Kingdom and other European countries, and The Ink Group is a
leading publisher of alternative cards, calendars, address books and
diaries in Australia, with additional operations in New Zealand and the
United Kingdom. Gibson International was wholly-owned by the Company at
December 31, 1999. At December 31, 1998, the minority stockholders of
Gibson International were principal officers of Gibson International. The
minority stockholders of The Ink Group's operations in Australia and New
Zealand are principal officers of The Ink Group.
The assets and liabilities of the international operations are translated
at the exchange rates in effect as of the balance sheet date and results
of operations are translated at average exchange rates prevailing during
the period. Translation adjustments are recorded within the accumulated
other comprehensive income component of stockholders' equity. Gains and
losses from foreign currency transactions are included as a component of
selling, distribution and administrative expenses within the Consolidated
Statements of Operations. For the years ended December 31, 1999, 1998 and
1997, net foreign currency losses totaled $317, $103 and $519,
respectively.
The Company's foreign-located long-lived assets at December 31, 1999, 1998
and 1997 were not material to the consolidated total of such assets.
CASH AND CASH EQUIVALENTS - Cash and cash 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. The effect of exchange rate changes on cash
and cash equivalents is not material.
MARKETABLE SECURITIES - At December 31, 1999, marketable securities is
comprised of the Company's investment in common shares of Egreetings
Network (Egreetings), a pioneer in providing digital greetings through the
Internet, and warrants to purchase shares in the future. The Company's
holdings in Egreetings, with a cost to the Company of $21,780, represent a
less-than-20% ownership interest and are categorized as
available-for-sale. The investment is recorded at fair value, which is
based on Egreetings' market price per common share as quoted in the Nasdaq
National Market. See Note 17.
OTHER CURRENT ASSETS - At December 31, 1999, other current assets is
comprised of prepaid expenses and assets held in a grantor tax trust,
known as a "Rabbi" trust, which was established in connection with the
Company's proposed merger with American Greetings Corporation (see Notes 2
and 17) for the purpose of providing employee retention incentives. At
December 31, 1998, other current assets consists solely of prepaid
expenses. Assets held in the Rabbi trust are recorded at fair value and
are subject to claims of the Company's creditors, but otherwise must be
used only for the purpose of providing employee retention incentives. The
trust is classified as current due to management's expectation that
incentive payments sufficient to exhaust the trust will be made during the
upcoming year. The $10,086 carrying amount approximates fair value at
December 31, 1999 due to the trust holding primarily cash and cash
equivalents.
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. Generally,
buildings are depreciated over 40 years; machinery and equipment are
depreciated over three to 11 years; and display fixtures are depreciated
over three to five years. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the terms of the
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respective leases (see Note 14), using the straight-line method, and
property acquired under capital leases is amortized over the terms of the
respective leases, using the straight-line method. Expenditures for
maintenance and repairs are charged to operations in the period incurred;
renewals and betterments are capitalized.
OTHER ASSETS - Other assets include deferred and prepaid costs,
investments and goodwill. 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 five years.
At December 31, 1999, investments consist primarily of assets held in
Rabbi trusts for certain of the Company's retirement plans. At December
31, 1998, investments consist of the Rabbi trusts and the Company's
investments in Egreetings. Assets held in the Rabbi trusts are recorded at
fair value and are subject to claims of the Company's creditors, but
otherwise must be used only for purposes of providing benefits under the
retirement plans. The cost and market value of the Rabbi trusts were
$6,237 and $5,633, respectively, at December 31, 1999 and $5,692 and
$5,766, respectively, at December 31, 1998. The market value of the
Company's investments in Egreetings at December 31, 1998, which
represented a less-than-20% ownership interest, was not readily
determinable and the investments were recorded at cost.
Goodwill, which represents the excess of cost over fair value of net
assets acquired, relates to both Gibson International and The Ink Group as
of December 31, 1999 and only The Ink Group as of December 31, 1998.
Goodwill is amortized over 20 years, using the straight-line method.
Accumulated goodwill amortization at December 31, 1999 and 1998 was $738
and $280, respectively. The realizability of goodwill is evaluated
periodically as events or circumstances indicate a possible inability to
recover its carrying amount.
ACCOUNTING FOR LONG-LIVED ASSETS - Impairment losses are recorded on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. In connection with a
1999 customer bankruptcy and the Company's 1998 restructuring plan, the
carrying values of certain plant and equipment were written-down to their
estimated future cash flows (see Note 3).
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.
FINANCIAL INSTRUMENTS - The Company's financial instruments consist
primarily of investments in cash and cash equivalents, holdings in
Egreetings, trade receivables and certain other assets, including
long-term customer sales agreements and investments, as well as
obligations under accounts payable, short- and long-term debt and
liabilities for payments on sales agreements. The carrying values of these
financial instruments, with the exception of the holdings in Egreetings
and the retirement plans' Rabbi trusts (see "Marketable Securities" and
"Other Assets" above), approximate fair value.
COMPUTATION OF NET INCOME PER SHARE - The following table reconciles basic
weighted average shares outstanding to diluted weighted average shares
outstanding for the years ended December 31, 1999, 1998 and 1997. There
are no adjustments to net income for the basic or diluted earnings per
share (EPS) computations.
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1999 1998 1997
Basic weighted average shares outstanding 15,837,075 16,205,383 16,379,250
Effect of dilutive stock options -- 263,803 560,791
---------- ---------- ----------
Diluted weighted average shares outstanding 15,837,075 16,469,186 16,940,041
========== ========== ==========
Options to purchase 2,355,804, 815,898 and 91,014 shares for the years
ended December 31, 1999, 1998 and 1997, respectively, were not included in
the computation of diluted EPS due to their having an anti-dilutive
effect.
STOCK OPTIONS - The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123), and continues to apply
Accounting Principles Board Opinion No. 25 and related interpretations in
the accounting for its stock option plans. See Note 13 for discussion of
stock options and the disclosures required by SFAS No. 123.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In June 1998, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS No. 133). In general, SFAS No. 133 requires that
all derivatives be recognized as either assets or liabilities in the
balance sheet at their fair value, and sets forth the manner in which
gains or losses thereon are to be recorded. The treatment of such gains
and losses depends on the intended use of the derivative and the resulting
designation. In June 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133." Based on the new effective date, the Company will adopt the
provisions of this statement in the first quarter of the fiscal year
ending December 31, 2001. Although the Company has not fully evaluated the
effects of SFAS No. 133 on its consolidated financial statements, its
adoption is not expected to have a significant impact.
USE OF ESTIMATES - The preparation of the financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts could differ from those estimates.
RECLASSIFICATIONS - Certain reclassifications have been made to the prior
years' consolidated financial statements to conform with the current year
presentation.
2. AGREEMENT WITH AMERICAN GREETINGS
On November 2, 1999, the Company entered into a definitive Agreement and
Plan of Merger (Merger Agreement) with American Greetings Corporation
(American Greetings) and a subsidiary of American Greetings under which
the subsidiary has offered to purchase all outstanding shares of the
Company's common stock (and associated Rights) for $10.25 per share.
Closing of the tender offer is subject to the satisfaction of certain
conditions, including regulatory approval, the absence of any injunction
and the tender of a majority of the outstanding shares of common stock.
Subsequent to the consummation of the tender offer, the subsidiary will be
merged into the Company and each remaining share of outstanding common
stock of the Company (other than shares held by American Greetings and
dissenting shares) will be exchanged for a right to receive $10.25 in
cash. The transaction is subject to termination under certain conditions,
including if the transaction has not closed on or before 18 months
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from the date of the Merger Agreement. Upon closing of the transaction, an
additional $800 will be owed by the Company to certain of its third-party
financial advisors, with no such amount being due in the event the
transaction is terminated. In the event of a termination, one of two
Termination Fees would be due among the parties to the Merger Agreement,
depending upon the circumstances of the termination - either $20,000 would
be owed by American Greetings to the Company, or $7,000 would be owed by
the Company to American Greetings. See Note 17.
Simultaneously with approving this transaction, the Company's Board of
Directors amended the Common Stock Rights Agreement (see Note 13) to
exempt the transaction from the provisions of the Agreement.
3. RESTRUCTURING AND OTHER ITEMS
CUSTOMER BANKRUPTCY - On October 12, 1999, one of the Company's major
customers, Jitney-Jungle Stores of America, Inc. (Jitney-Jungle), filed
for Chapter 11 bankruptcy protection. Due to the uncertainty surrounding
the financial stability of Jitney-Jungle, during the quarter ended
September 30, 1999, the Company recorded a pretax charge totaling $7,864
to write down the assets considered to be impaired as a result of the
bankruptcy filing as follows: write-off of the unamortized balance of
deferred sales agreement costs ($5,100), doubtful accounts provision for
the outstanding trade receivable balance ($1,500) and write-off of the net
book value of greeting card fixtures ($1,264). These expenses are included
as components of net sales ($5,100) and selling, distribution and
administrative expenses ($2,764) within the Consolidated Statement of
Operations for the year ended December 31, 1999.
SILLY SLAMMERS CHARGES - In June 1999, the Company made the decision to
seek a buyer for its Silly Slammers business. With the Company's focus on
its core card line, alternative card business and its expanding role as a
provider of creative content to the Internet, the Company believes the
Silly Slammers brand can best be marketed outside of Gibson. However, at
the present time, no transaction is anticipated and pretax charges of
$2,000 and $21,152 were recorded in the quarters ended September 30, 1999
and June 30, 1999, respectively, to write down inventory and related
assets. The charges are included as a component of cost of products sold
within the Consolidated Statement of Operations for the year ended
December 31, 1999.
RESTRUCTURING CHARGE - During 1998, the Company recorded asset write-downs
and other charges of $26,100 in connection with a restructuring plan (the
Plan) announced March 31, 1998 under which the Company outsourced its
principal manufacturing operations formerly performed at its Cincinnati,
Ohio headquarters. The costs related to the Plan, which were recognized as
a separate component of operating expenses in the first quarter of 1998,
included approximately $17,100 related to the facility, $5,800 related to
involuntary severance of approximately 480 employees and $3,200 in other
costs.
The facility costs of $17,100 included an adjustment of $12,967 to write
off the capitalized lease asset, leasehold improvements and certain
machinery and equipment (included in plant and equipment) associated with
the Cincinnati operations, and a reserve of $4,133 included in other
liabilities representing the amount by which total future lease
commitments and related operating costs of the Cincinnati facility exceed
the recorded lease obligation and estimated sublease income over the
remaining term of the lease. The recorded lease obligation of $12,040,
representing the portion of the capital lease obligation associated with
the Cincinnati facility, was reclassified from debt to other liabilities
(see Notes 8 and 11). Involuntary employee severance costs and other costs
were included in other current liabilities.
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During 1999, certain events occurred that required the Company to reassess
the adequacy of the restructuring-related asset write-downs and remaining
reserve balances. Most notable of these events were the Company's delay in
vacating its Cincinnati, Ohio headquarters and the planned disposal of
certain property and equipment for proceeds lower than originally
anticipated. While the reassessment indicated that the total cost of the
asset write-downs and other charges connected with the Plan remained
$26,100, the components of the total cost and the activity therein through
December 31, 1999 were as follows:
Reserve for
Write-down -------------------------------------
Property and Excess Lease Involuntary Other
Equipment Commitments Severance Costs Total
Restructuring charges - original $ 12,967 $ 4,133 $ 5,800 $ 3,200 $ 26,100
Reclassification of capital lease
obligation from debt to other
liabilities -- 12,040 -- -- 12,040
-------- -------- -------- -------- --------
12,967 16,173 5,800 3,200 38,140
Less 1998 usage:
Non-cash write-downs (12,967) (1,200) (14,167)
Payment of termination benefits (3,421) (3,421)
Other payments, net -- (447) -- (909) (1,356)
-------- -------- -------- -------- --------
Balance at December 31, 1998 -- 15,726 2,379 1,091 19,196
Effect of 1999 reassessment 558 1,024 (782) (800) --
Less 1999 usage:
Non-cash write-downs (558) (558)
Payment of termination benefits (247) (247)
Other payments, net -- (924) -- (64) (988)
-------- -------- -------- -------- --------
Balance at December 31, 1999 $ -- $ 15,826 $ 1,350 $ 227 $ 17,403
======== ======== ======== ======== ========
As of December 31, 1999, the Company had completed the outsourcing of
manufacturing operations and had eliminated approximately 400 employee
positions.
The termination of employees in connection with the Plan resulted in a
curtailment of a defined benefit pension plan, and a curtailment gain of
$3,045 before income taxes was recognized as a restructuring gain in the
third quarter of 1998 (see Note 12), resulting in a net pretax
restructuring charge of $23,055.
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4. TRADE RECEIVABLES
Trade receivables at December 31, 1999 and 1998, consisted of the
following:
1999 1998
Trade receivables $123,169 $128,136
Less reserves for returns, allowances, cash discounts
and doubtful accounts 56,233 56,698
-------- --------
$ 66,936 $ 71,438
======== ========
5. INVENTORIES
Inventories at December 31, 1999 and 1998, consisted of the following:
1999 1998
Finished goods $34,655 $54,523
Work-in-process 12,067 27,498
Raw materials and supplies 3,752 2,468
------- -------
$50,474 $84,489
======= =======
6. PLANT AND EQUIPMENT
Plant and equipment at December 31, 1999 and 1998, consisted of the
following:
1999 1998
Land and buildings $ 10,493 $ 12,939
Land and buildings under capital lease, net
of restructuring charge (see Note 3) 7,654 7,654
Machinery and equipment 31,211 26,924
Machinery and equipment under capital leases 2,936 --
Display fixtures 75,360 88,614
Leasehold improvements 4,718 2,829
Construction in progress, principally management information
systems (see Note 14) 28,365 14,600
-------- --------
160,737 153,560
Less accumulated depreciation 73,240 77,654
-------- --------
$ 87,497 $ 75,906
======== ========
At December 31, 1999 and 1998, accumulated depreciation included depreciation on
assets acquired under capital lease obligations of $2,232 and $1,323,
respectively.
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7. OTHER ASSETS
Other assets at December 31, 1999 and 1998, consisted of the following:
1999 1998
Deferred and prepaid costs $147,858 $140,476
Investments 6,033 12,205
Goodwill 9,762 10,495
Other 7,174 6,900
-------- --------
170,827 170,076
Less accumulated amortization 99,572 82,025
-------- --------
$ 71,255 $ 88,051
======== ========
8. DEBT
Debt at December 31, 1999 and 1998, consisted of the following:
1999 1998
Secured Credit Agreement bearing variable interest (7.80%
at December 31, 1999) $18,114 $ --
Financing Arrangement bearing variable interest (weighted
average rate of 6.39% at December 31, 1999) 3,761 2,449
American Greetings note, including accrued interest at 8.10%,
payable January 19, 2000 9,109 --
Other notes bearing interest at a weighted average rate of
5.20%, payable in quarterly installments -- 155
------- -------
30,984 2,604
Land and building capital lease obligation payable in monthly
installments through 2013, net of $12,288 and $12,040 included
in other liabilities at December 31, 1999 and 1998, respectively
(see Note 3) 8,192 7,935
Equipment capital lease obligations payable in monthly
installments through 2001 2,156 --
------- -------
41,332 10,539
Less debt due within one year 31,943 155
------- -------
$ 9,389 $10,384
======= =======
As a result of the Silly Slammers charge during the quarter ended June 30,
1999, the Company no longer met the conditions for borrowings under its
364-day $30,000 revolving credit agreement (Credit Agreement) entered into
on May 11, 1999, an agreement which replaced a similar $30,000 facility
expiring in April 1999. Accordingly, beginning July 27, 1999, the Company
and its lenders entered into a series of amendments to the Credit
Agreement, each of which included a commitment of funds to the Company for
approximately 30 days, with any borrowings secured by the Company's trade
receivables and inventory. The Credit Agreement was terminated and
replaced with the Secured Credit Agreement on November 30, 1999. During
1999, the average interest rate for borrowings outstanding under the
Credit Agreement was 8.20%; no borrowings were outstanding throughout
1998.
On November 30, 1999, the Company entered into the Secured Credit
Agreement, under which up to $50,000 is available to the Company during
the next three years for general corporate purposes. The exact amount of
funds available is determined by the Company's level of qualifying assets
(trade receivables and inventory). Outstanding borrowings are secured by
substantially all of the Company's assets and bear interest at prevailing
commercial
C-13
14
paper rates plus 175 to 275 basis points, depending upon the Company's
level of earnings as defined in the Secured Credit Agreement. During 1999,
the average interest rate for borrowings outstanding under the Secured
Credit Agreement was 7.79%. In addition, the Company pays a standby letter
of credit fee and a commitment fee, both of which are determined at
fluctuating rates depending upon the Company's level of earnings. During
1999, the average standby letter of credit fee was 2.00% of the balance of
such instruments outstanding and the commitment fee was 0.375% of the
unused portion of funds available.
In November 1998, the Company replaced The Ink Group's existing debt with
an Australian-Dollar-denominated multi-option financing arrangement
(Financing Arrangement) which expired January 31, 2000. At December 31,
1999, the maximum amount available under the Financing Arrangement was
approximately $4,265. Depending upon the financing option elected,
borrowings under the Financing Arrangement bear interest at varying rates,
which are based upon prevailing rates. During 1999, the average interest
rates for borrowings under the Financing Arrangement were 6.15%. As a
result of the January 31, 2000 expiration of the Financing Arrangement and
the Company's subsequent renegotiation efforts, borrowings under the
Financing Arrangement have been classified as short-term debt as of
December 31, 1999. As of December 31, 1998, such borrowings were
classified as long-term debt.
In connection with the exercise of warrants to purchase Egreetings common
stock, on December 20, 1999, the Company entered into a 30-day $9,087
promissory note with American Greetings. On January 19, 2000, the note
principal was repaid in full, along with interest accrued at 8.10%.
The fair value of the Company's long-term debt (excluding capital lease
obligations) 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 approximated its carrying value at December
31, 1999 and 1998 given the nature of then-outstanding debt.
Interest payments, net of the amount capitalized, for the years ended
December 31, 1999, 1998 and 1997 totaled $3,654, $5,269 and $5,930,
respectively. Capitalized interest for each of these years totaled $852,
$198 and $0, respectively.
The Company's debt agreements contain customary covenants and events of
default including, among other things, provisions which require the
maintenance of minimum amounts of earnings and net worth and of certain
financial ratios, limit the amount of capital expenditures, payments made
in connection with customer sales agreements and dividend payments. The
Company was not in compliance with certain of these provisions as of
December 31, 1999. See Note 17.
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9. INCOME TAXES
The income tax (benefit) provision for the years ended December 31, 1999,
1998 and 1997, consisted of the following:
1999 1998 1997
Federal:
Current $(19,778) $ 8,917 $ 10,942
Deferred 5,501 (11,122) 1,038
Valuation allowance (4,692) 4,260 --
Deferred investment tax credits, net -- (64) (64)
-------- -------- --------
(18,969) 1,991 11,916
-------- -------- --------
State and local:
Current (4,749) 1,952 2,497
Deferred (1,438) (2,540) 293
Valuation allowance (1,072) 974 --
-------- -------- --------
(7,259) 386 2,790
-------- -------- --------
$(26,228) $ 2,377 $ 14,706
======== ======== ========
The effective income tax rate for the years ended December 31, 1999, 1998
and 1997, varied from the statutory federal income tax rate as follows:
1999 1998 1997
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal
income tax benefit 7.6 7.5 4.9
Nondeductible goodwill amortization (0.2) 7.7 1.2
Other (0.1) 1.9 (0.6)
------ ------ ------
42.3% 52.1% 40.5%
====== ====== ======
The net deferred taxes at December 31, 1999 and 1998, consisted of the
following:
1999 1998
Current deferred taxes:
Gross assets $ 37,533 $ 40,126
Gross liabilities (22,195) (229)
-------- --------
15,338 39,897
-------- --------
Noncurrent deferred taxes:
Gross assets 38,583 37,997
Valuation allowance (300) (6,064)
Gross liabilities (1,983) (3,488)
-------- --------
36,300 28,445
-------- --------
$ 51,638 $ 68,342
======== ========
Included within the net deferred taxes at December 31, 1999 and 1998 were
net deferred tax liabilities totaling $18,479 and $74, respectively,
recorded in connection with the Other Comprehensive Income items reflected
in the Consolidated Statements of Changes in Stockholders' Equity. In
addition, the Company has recorded valuation allowances with respect to
the deferred tax assets as a result of recent capital losses and
uncertainties with respect to
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the amount of taxable capital gain income which will be generated in
future years. Capital loss carryforwards of $45 will expire in 2001 and
$255 will expire in 2003.
The tax balances of significant temporary differences representing
deferred tax assets and liabilities at December 31, 1999 and 1998,
consisted of the following:
1999 1998
Marketable securities fair value adjustment $(18,571) $ --
Reserves for returns, allowances, cash discounts and
doubtful accounts 21,867 21,734
Reserve for inventories and related items 5,766 7,925
Depreciation of plant and equipment (1,621) (3,275)
Reserve for display fixtures 5,368 2,391
Accrued compensation and benefits 10,029 14,011
Postretirement benefits 2,301 2,317
Sales agreement payments due 11,410 8,139
Restructuring-related reserves 8,725 8,396
Capital losses 300 6,064
State net operating losses 2,209 --
Alternative minimum tax credit 247 --
Other accruals and reserves, net 3,908 6,704
-------- --------
51,938 74,406
Valuation allowance (300) (6,064)
-------- --------
$ 51,638 $ 68,342
======== ========
Income tax payments, net of refunds received, for the years ended December
31, 1999, 1998 and 1997 totaled $3,865, $12,222 and $14,753, respectively.
10. OTHER CURRENT LIABILITIES
Other current liabilities at December 31, 1999 and 1998, consisted of the
following:
1999 1998
Compensation, payroll taxes and related withholdings $16,600 $ 7,878
Customer allowances 7,904 8,240
Accrued insurance 6,163 10,749
Sales agreement payments due within one year 5,964 8,349
Accrued interest 4,975 6,476
Property and other taxes 4,731 4,796
Restructuring-related reserves (see Note 3) 1,577 3,470
Other 11,800 11,536
------- -------
$59,714 $61,494
======= =======
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11. OTHER LIABILITIES
Other liabilities at December 31, 1999 and 1998, consisted of the
following:
1999 1998
Accrued pension and postretirement expense (see
Note 12) $21,421 $21,580
Restructuring-related reserves (see Note 3) 15,826 15,726
Sales agreement payments due after one year 6,485 7,778
Other 2,699 2,451
------- -------
$46,431 $47,535
======= =======
12. RETIREMENT AND POSTRETIREMENT BENEFIT PLANS
RETIREMENT PLANS - The Company combined its two defined contribution plans
during 1997. The combined plan incorporates the provisions of the former
plans which, pursuant to Section 401(k) of the Internal Revenue Code,
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 plan and makes contributions based
upon a percentage of the employee's salary deferral and an annual
additional contribution at the discretion of the Board of Directors
consistent with the terms of the former plans. For the years ended
December 31, 1999, 1998 and 1997, the expense for these plans totaled
$194, $287 and $385, respectively.
The Company also 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.
In addition to the Retirement Plan, the Company has established the
following plans (collectively, the Nonqualified Plans): a nonqualified
defined benefit plan for employees whose benefits under the Retirement
Plan are limited by provisions of the Internal Revenue Code; a
nonqualified defined benefit plan to provide supplemental retirement
benefits for selected executives in addition to benefits provided under
other Company plans; and a nonqualified plan 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. These plans were unfunded
at December 31, 1999 and 1998, although assets for these plans totaling
$5,633 and $5,766, respectively, were held in Rabbi trusts.
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The following table sets forth summarized information on the Company's
defined benefit pension plans for the years ended December 31, 1999 and
1998:
RETIREMENT PLAN NONQUALIFIED PLANS
1999 1998 1999 1998
Change in projected benefit obligation:
Projected benefit obligation at beginning of year $ 91,300 $ 79,306 $ 7,418 $ 6,613
Service cost 1,888 2,063 270 256
Interest cost 5,739 5,927 446 480
Actuarial (gain) loss (13,902) 13,070 (1,221) 516
Curtailment (1,052) (3,088) -- --
Benefit payments (5,292) (5,978) (490) (447)
-------- -------- -------- --------
Projected benefit obligation at end of year $ 78,681 $ 91,300 $ 6,423 $ 7,418
======== ======== ======== ========
Change in plan assets:
Fair value of plan assets at beginning of year $ 86,194 $ 87,709 $ -- $ --
Actual return on plan assets 6,773 4,463 -- --
Employer contributions -- -- 490 447
Benefit payments (5,292) (5,978) (490) (447)
-------- -------- -------- --------
Fair value of plan assets at end of year $ 87,675 $ 86,194 $ -- $ --
======== ======== ======== ========
Funded status:
Funded status at end of year - assets over (under)
projected benefit obligation $ 8,994 $ (5,106) $ (6,423) $ (7,418)
Unrecognized net actuarial (gain) loss (18,533) (6,206) 161 1,200
Unrecognized prior service cost 34 178 509 1,091
-------- -------- -------- --------
Net amount recognized $ (9,505) $(11,134) $ (5,753) $ (5,127)
======== ======== ======== ========
Accrued benefit liability included in other liabilities $ (9,505) $(11,134) $ (6,564) $ (5,127)
Intangible asset included in other assets -- -- 359 --
Accumulated other comprehensive income, pretax -- -- 452 --
-------- -------- -------- --------
Net amount recognized $ (9,505) $(11,134) $ (5,753) $ (5,127)
======== ======== ======== ========
Weighted average assumptions:
Discount rate 7.50% 6.50% 7.50% 6.50%
Expected return on plan assets 9.00% 9.00% 9.00% 9.00%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
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A summary of the components of net periodic pension (income) expense for
all of the Company's defined benefit plans for the years ended December
31, 1999, 1998 and 1997, is as follows:
RETIREMENT PLAN NONQUALIFIED PLANS
--------------------------------- -------------------------------
1999 1998 1997 1999 1998 1997
Components of net periodic benefit
(income) expense:
Service cost $ 1,888 $ 2,063 $ 2,001 $ 270 $ 256 $ 169
Interest cost 5,739 5,927 5,555 446 480 466
Expected return on plan assets (7,112) (6,707) (6,246) -- -- --
Amortization of:
Prior service cost 105 258 337 262 284 278
Actuarial (gain) loss (228) -- (512) 6 32 26
Curtailment (gain) loss (2,022) (3,024) -- 130 -- --
------- ------- ------- ------- ------- -------
Net periodic benefit (income) expense $(1,630) $(1,483) $ 1,135 $ 1,114 $ 1,052 $ 939
======= ======= ======= ======= ======= =======
The increase in the discount rate from 6.50% to 7.50% in 1999 increased
the actuarial gain component of the Retirement Plan's and the Nonqualified
Plans' projected benefit obligation by $10,009 and $592, respectively;
while the decrease in the discount rate from 7.25% to 6.50% in 1998
increased the actuarial loss component of the respective plans' projected
benefit obligation by $8,441 and $551, respectively. In addition,
headcount reductions and subsidiary dispositions resulted in curtailments
of the Retirement Plan and the Nonqualified Plans, the effects of which
are reflected in the preceding tables as well as the following tables
related to the Company's postretirement benefits.
POSTRETIREMENT BENEFITS - In addition to providing pension benefits, the
Company provides medical and life insurance benefits for 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.
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The following table sets forth summarized information on the Company's
postretirement benefits for the years ended December 31, 1999 and 1998:
1999 1998
Change in projected benefit obligation:
Projected benefit obligation at beginning of year $ 3,944 $ 3,587
Service cost 157 155
Interest cost 202 248
Participants' contributions 268 261
Actuarial (gain) loss (1,100) 428
Curtailment -- (319)
Benefit payments (437) (416)
------- -------
Projected benefit obligation at end of year $ 3,034 $ 3,944
======= =======
Change in plan assets:
Fair value of plan assets at beginning of year $ -- $ --
Employer contributions 169 155
Participants' contributions 268 261
Benefit payments (437) (416)
------- -------
Fair value of plan assets at end of year $ -- $ --
======= =======
Funded status:
Funded status at end of year - assets under projected benefit
obligation $(3,034) $(3,944)
Unrecognized net actuarial gain (2,279) (1,328)
Unrecognized prior service cost (39) (47)
------- -------
Accrued benefit liability included in other liabilities $(5,352) $(5,319)
======= =======
Weighted average assumptions:
Discount rate 7.50% 6.50%
Health care cost trend rates: *
- through age 65 7.50% 8.00%
- over age 65 5.50% 6.00%
* Trend rates assumed to decrease 0.5% annually to 5.5% in the year 2003
(4.5% in 2001 for over age 65 coverage), and remaining level thereafter.
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Net periodic expense of the Company's postretirement benefits for the
years ended December 31, 1999, 1998 and 1997, was as follows:
1999 1998 1997
Components of net periodic benefit expense:
Service cost $ 157 $ 155 $ 146
Interest cost 202 248 248
Amortization of:
Prior service cost (8) (10) (11)
Actuarial gain (149) (86) (112)
Curtailment gain -- (21) --
----- ----- -----
Net periodic benefit expense $ 202 $ 286 $ 271
===== ===== =====
The health care cost trend rate assumption does not have a significant
effect on the amounts reported. For example, a 1% change in the health
care cost trend rate would have the following effects:
INCREASE DECREASE
Effect on total of service and interest cost components $ 21 $ (19)
Effect on postretirement benefit obligation 148 (133)
13. STOCKHOLDERS' EQUITY
EMPLOYEE STOCK PLANS - Under various stock option and incentive plans, the
Company may grant incentive and nonqualified stock options to purchase up
to 5,565,500 shares of common stock. All incentive options are granted at
the fair market value on the date of grant. Incentive stock options become
exercisable equally over three years beginning one year after the date
granted and expire ten years after the date granted. 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.
Nonqualified stock options were granted in 1999, 1998 and 1997 at exercise
prices at least equal to the fair market value of the common stock on the
date of grant. Of these, nonqualified stock options for 30,000 shares of
common stock in 1997 and 300,000 shares of common stock in 1996 were
granted to certain of the Company's officers contingent on stockholder
approval of an increase in the number of shares authorized for issuance
under one of the Company's employee stock plans. For financial reporting
purposes, these 330,000 options were deemed to have been granted on April
24, 1997, the date stockholder approval was obtained. At that date, the
exercise prices were less than the market price of the common stock. As a
result, the contingent options are reported as having been granted at
exercise prices below the fair market value of the common stock.
Under certain employee stock plans, the Company may grant the right to
purchase restricted shares of its common stock. No restricted shares were
granted in 1999, 1998 or 1997.
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A summary of stock option activity during the years ended December 31, 1999,
1998 and 1997, is as follows:
1999 1998 1997
------------------------- -------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning of year 2,416,917 $ 18.99 1,995,256 $ 16.80 1,424,273 $ 13.29
Granted - exercise price on date
of grant:
Equal to market price of stock 28,000 6.09 228,667 21.27 623,500 22.62
Greater than market price of
stock - - 333,333 29.00 22,000 20.19
Less than market price of stock - - - - 330,000 16.67
Exercised - - (97,870) 13.12 (312,481) 12.59
Forfeited (301,832) 20.97 (42,469) 20.38 (92,036) 16.01
--------- ------- --------- ------- --------- -------
Outstanding at end of year 2,143,085 $ 18.55 2,416,917 $ 18.99 1,995,256 $ 16.80
========= ======= ========= ======= ========= =======
Exercisable at end of year 1,803,737 $ 17.36 1,582,885 $ 15.85 860,516 $ 13.76
========= ======= ========= ======= ========= =======
The range of exercise prices on shares outstanding as of December 31, 1999, was
as follows:
OUTSTANDING EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED AVERAGE WEIGHTED
----------------
REMAINING AVERAGE
RANGE OF EXERCISE CONTRACTUAL EXERCISE
EXERCISE PRICES SHARES PRICE LIFE IN YEARS SHARES PRICE
$ 4.06 18,000 $4.06 9.65 -- $ --
9.75-14.38 528,285 12.08 6.48 518,285 12.13
14.50-20.75 886,467 16.76 7.05 861,468 16.68
22.00-30.00 710,333 25.94 8.15 423,984 25.15
For the years ended December 31, 1999, 1998 and 1997, compensation expense
recognized under stock-based employee compensation plans was not material.
At December 31, 1999, 1,072,273 shares were available under the stock option and
incentive plans, all of which were available to be issued as restricted shares.
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If the Company had adopted the expense recognition provisions of SFAS No. 123
for purposes of determining compensation expense related to stock options
granted during the years ended December 31, 1999, 1998 and 1997, net (loss)
income and net (loss) income per share would have been changed to the following
pro forma amounts:
1999 1998 1997
Pro forma net (loss) income $ (36,900) $ 77 $ 19,822
========== ==== ==========
Pro forma net (loss) income per share:
Basic $ (2.33) $ - $ 1.21
========== ==== ==========
Diluted $ (2.33) $ - $ 1.17
========== ==== ==========
Compensation expense reflected in the pro forma disclosures is not indicative of
future amounts when the SFAS No. 123 prescribed method will apply to all
outstanding nonvested awards.
The weighted average fair values at date of grant for options granted during
1999, 1998 and 1997 were $3.08, $5.71 and $7.23 per option, respectively. The
fair values were determined using the Black-Scholes option-pricing model with
the following assumptions for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997
Expected life in years 5 5 5
Interest rate 5.47 % 5.35 % 5.90 %
Volatility 52.14 % 27.91 % 36.81 %
Dividend yield -- -- 0.30 %
STOCK REPURCHASE PROGRAM - On August 12, 1998, the Company announced that its
July 30, 1997 stock repurchase program had been extended until July 31, 1999.
This program provided for the repurchase of up to one million shares of common
stock. The repurchases were to be made on the open market or in private
negotiated transactions at prevailing market prices, with the dates and amount
of repurchases determined by market conditions. The common stock acquired is
held as treasury stock and used in the Company's employee stock plans and for
general corporate purposes. As of its expiration, the Company had repurchased
795,000 shares of its common stock under this program.
On October 8, 1998, the Company announced a second stock repurchase program,
providing for the purchase of up to an additional one million shares of common
stock over the 12-month period ending October 6, 1999 at terms similar to the
July 30, 1997 stock repurchase program. No shares were repurchased under this
program.
COMMON STOCK RIGHTS - On August 26, 1999, 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 September 8, 1999. Each
Right entitles the holder to purchase, at the price of $25 per share, 1/100th of
a share of Series B Preferred Stock. Until exercisable, the Rights are attached
to all outstanding shares of the Company's common stock.
The Rights are exercisable only in the event that a person or group of persons
(i) acquires 15% or more of the Company's common stock and there is a public
announcement to that effect (25% in the case of a person or group of persons
which was a 15% stockholder on August 26, 1999), or (ii) announces an intention
to commence or commences a tender or exchange offer which would result in that
person or group beneficially owning 15% or more of the Company's common stock.
If the Rights become exercisable, upon a subsequent 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
C-23
24
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 any time prior to 20 days
after the public announcement that a person or group has acquired 15% of the
Company's common stock. Unless exercised or redeemed earlier by the Company, the
Rights expire on August 31, 2009. The Company's Board of Directors retains the
right to amend the terms of the Rights Agreement, subject to certain
restrictions. See Note 2.
ACCUMULATED OTHER COMPREHENSIVE INCOME - The components of accumulated other
comprehensive income, net of tax, at December 31, 1999 were: currency
translation, $122; unrealized gains on securities, $27,625; and minimum pension
liability adjustment, $(271). Currency translation, net, was the only component
of accumulated other comprehensive income at December 31, 1998.
14. COMMITMENTS
LEASE COMMITMENTS - In August 1998, the Company entered into a noncancelable
operating lease for approximately 150,000 square feet of office space in
Covington, Kentucky, of which approximately 33,000 square feet has been
subleased back to the lessor as of February 1, 2000 at a rate equal to that
being paid by the Company. The lease and the related sublease arrangement, which
expire in December 2008, contain lease rates which escalate on an annual basis.
The Company has a noncancelable long-term lease for certain of its principal
facilities, including its former corporate headquarters, which runs through
November 30, 2013, with one 10-year renewal option available. The basic rent
under the lease contains scheduled rent increases every five years, including
the renewal period. The lease contains a purchase option in 2005 (and again in
2010) at the fair market value of the properties at 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. For accounting purposes, this lease has
been treated as a capital lease (see Note 8).
The Company also leases additional distribution and administrative facilities,
sales offices and personal property under noncancelable operating leases which
expire on various dates through 2004. Certain of these leases contain renewal
and escalating rental payment provisions as well as contingent payments.
Rental expense for the years ended December 31, 1999, 1998 and 1997, on all real
and personal property, was $9,585, $12,884 and $15,743, respectively.
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Minimum rental commitments under noncancelable leases as of December 31, 1999
are as follows:
CAPITAL OPERATING
LEASES LEASES
Year Ending December 31,
2000 $ 4,001 $ 8,860
2001 4,828 7,428
2002 3,857 5,145
2003 3,720 4,078
2004 3,720 2,746
Thereafter 41,800 10,946
------ ------
Net minimum commitments 61,926 $39,203
=======
Less amount representing interest 39,290
------
Present value of net minimum lease commitments (see Note 3) $22,636
=======
Total net minimum rental commitments have not been reduced by future minimum
sublease rentals of $4,980 under the Company's operating lease for its
Covington, Kentucky corporate headquarters.
MANAGEMENT INFORMATION SYSTEMS UPGRADE - The Company is in the process of
investing up to $35,000 to implement a major management information systems plan
to replace core business applications which support sales and customer services,
procurement and manufacturing, distribution and finance with Enterprise Resource
Planning (ERP) software. As of December 31, 1999 and 1998, approximately $30,200
and $10,800, respectively, had been spent on the ERP project.
CONTRACT COMMITMENTS - The Company has several long-term customer sales
agreements which require payments and credits for each of the years in the
four-year period ended December 31, 2003, of $5,964, $2,572, $2,366 and $1,547,
respectively, and no payments and credits thereafter. These amounts are included
as other current liabilities or other liabilities in the accompanying
consolidated balance sheet as of December 31, 1999.
During January 2000, the Company entered into a sales agreement with a customer
which requires payments totaling $7,650 over the life of the contract - $2,850
in 2000 and $1,200 in each of the years in the four-year period ended December
31, 2004.
In addition, in the ordinary course of business, the Company has entered into
various contracts including contracts with third-party suppliers with which the
Company contracted in connection with outsourcing its manufacturing operations.
LETTERS OF CREDIT - At December 31, 1999 and 1998, the Company had outstanding
letters of credit of $387 and $4,388, respectively, which served to
collateralize the Company's obligations to third parties for the purchase of
inventory. In addition, at December 31, 1999, the Company had a $500 standby
letter of credit related to certain of its office facilities. The fair value of
these letters of credit approximates contract values.
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EMPLOYMENT AGREEMENTS - The Company has employment agreements with certain
executives which provide for, among other things, minimum annual base
salaries which may be adjusted periodically, continued payment of salaries
in certain circumstances and incentive bonuses. Certain agreements further
provide for employment termination payments, including payments contingent
upon any person becoming the beneficial owner of 30% or more of the
Company's outstanding common stock. See Note 17.
15. LEGAL PROCEEDINGS
The Company is a defendant in certain routine litigation which is not
expected to result in a material adverse effect on the Company's net
worth, total cash flows or operating results.
16. ACQUISITIONS AND DIVESTITURES
On July 3, 1998, the Company acquired a majority interest in The Ink
Group, based in Sydney, Australia, with additional operations in New
Zealand and the United Kingdom, for $1,000 and an agreement to provide
operating loans. These operating loans totaled $9,399 as of December 31,
1999. The Company acquired 60% ownership of The Ink Group's operating
companies in Australia and New Zealand and 100% ownership of its operating
company in the United Kingdom. This transaction was accounted for using
the purchase method of accounting, resulting in the Company recording
goodwill totaling $10,495. The pro forma effect of the acquisition was not
material to the Company's results of operations for 1998 or 1997.
On August 31, 1998, the Company sold The Paper Factory to PFW Acquisition
Corp. for $36,216, which approximated the Company's investment. The Paper
Factory's sales totaled $46,635 for the eight-month period in 1998 and
$86,149 for full-year 1997.
17. SUBSEQUENT EVENTS
AMERICAN GREETINGS TRANSACTION - Pursuant to the Merger Agreement
described in Note 2, on March 9, 2000, American Greetings completed its
merger with the Company by acquiring 97.4% of the Company's outstanding
common shares, thereby triggering the change-in-control provisions
contained in certain of the Company's agreements. Included in these
provisions were the following: i) accelerated payment of the balance owed
under employee retention agreements (see "Other Current Assets" in Note
1); ii) increased termination benefits under executive employment
contracts; and iii) Egreetings' right to repurchase at fair market value
(as defined in the stock purchase agreement) all common shares of
Egreetings held by the Company. As of March 30, 2000, Egreetings' right to
repurchase had expired. On that date, the Company's investment in
Egreetings had a market value of approximately $39,369, based on the $5
13/16 per share closing price quoted in the Nasdaq National Market.
In addition, on March 30, 2000, American Greetings repaid and terminated
the Company's Secured Credit Agreement. Accordingly, the debt covenant
violations referred to in Note 8 became no longer applicable.