PAGE
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 16,095,829
shares of common stock, par value $.01, outstanding at November 7, 1994.
<PAGE>
<PAGE>
<TABLE>
Part I., Item 1, Financial Statements
GIBSON GREETINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
(Unaudited)
<CAPTION>
September 30, December 31, September 30,
1994 1993 1993
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 899 $ 9,477 $ 540
Trade receivables, net 126,285 192,163 101,038
Inventories 197,742 125,138 190,564
Prepaid expenses 5,580 4,207 5,213
Prepaid income taxes 7,422 - -
Deferred income taxes 37,582 36,796 33,813
--------- --------- ---------
Total current assets 375,510 367,781 331,168
--------- --------- ---------
PLANT AND EQUIPMENT, net 124,083 116,900 117,850
NOTES RECEIVABLE, net 875 - -
OTHER ASSETS, net 115,708 86,924 79,552
--------- --------- ---------
$ 616,176 $ 571,605 $ 528,570
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Debt due within one year $ 96,608 $ 66,187 $ 41,962
Accounts payable 34,085 18,835 26,333
Income taxes payable - 13,071 3,941
Other current liabilities 100,731 60,479 55,289
--------- --------- ---------
Total current liabilities 231,424 158,572 127,525
--------- --------- ---------
DEFERRED INCOME TAXES (629) (854) 618
LONG-TERM DEBT 63,315 74,365 74,441
OTHER LIABILITIES 40,178 21,854 21,336
--------- --------- ---------
Total liabilities 334,288 253,937 223,920
--------- --------- ---------
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, 16,533,267 and
16,530,067 shares issued,
respectively 166 165 165
Paid-in capital 46,057 45,209 45,089
Retained earnings 241,427 277,891 264,917
Foreign currency adjustment 178 291 367
--------- --------- ---------
287,828 323,556 310,538
Less treasury stock, at cost,
483,701, 473,344 and 473,344
shares, respectively 5,940 5,888 5,888
--------- --------- ---------
Total stockholders' equity 281,888 317,668 304,650
--------- --------- ---------
$ 616,176 $ 571,605 $ 528,570
========= ========= =========
</TABLE>
[FN]
See accompanying notes to condensed consolidated financial statements.
PAGE
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<TABLE>
GIBSON GREETINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 153,026 $ 142,296 $ 337,103 $ 311,167
Costs and expenses:
Cost of products sold 86,480 77,519 166,046 139,328
Selling, distribution and
administrative expenses 66,699 58,012 185,788 156,929
--------- --------- --------- ---------
Total operating
expenses 153,179 135,531 351,834 296,257
--------- --------- --------- ---------
Operating income (loss)
before financing and
derivative transaction
expenses (153) 6,765 (14,731) 14,910
Financing and derivative
transaction expenses:
Interest expense 2,656 1,945 6,685 5,362
Interest income (142) (127) (651) (894)
(Gain) loss on derivative
transactions, net (2,277) 1,879 17,469 1,879
--------- --------- --------- ---------
Total financing and
derivative transaction
expenses, net 237 3,697 23,503 6,347
--------- --------- --------- ---------
Income (loss) before
income taxes (390) 3,068 (38,234) 8,563
Income taxes (749) 826 (6,595) 3,304
--------- --------- --------- ---------
Net income (loss) $ 359 $ 2,242 $ (31,639) $ 5,259
========= ========= ========= =========
Net income (loss) per share $ .02 $ .14 $ (1.96) $ .33
========= ========= ========= =========
Dividends per share $ .10 $ .10 $ .30 $ .30
========= ========= ========= =========
</TABLE>
[FN]
See accompanying notes to condensed consolidated financial statements.
PAGE
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<TABLE>
GIBSON GREETINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1994 1993
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (31,639) $ 5,259
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and write-down of display fixtures 17,505 18,022
Loss on disposal of plant and equipment 4,703 3,556
Loss on derivative transactions, net 17,469 1,879
Deferred income taxes (561) (4,576)
Amortization of deferred costs and other
intangibles 15,901 15,617
Change in assets and liabilities:
Decrease in trade receivables, net 65,878 68,596
Increase in inventories (72,604) (63,583)
Increase in prepaid expenses (1,373) (720)
Increase in prepaid income taxes (7,422) -
Increase in notes receivable, net (875) -
Increase in other assets, net of amortization (44,685) (15,730)
Increase in accounts payable 15,250 10,077
Decrease in income taxes payable (13,071) (6,116)
Increase in other current liabilities 22,783 1,413
Increase (decrease) in other liabilities 18,324 (3,658)
All other, net (226) 174
---------- ----------
Total adjustments 36,996 24,951
---------- ----------
Net cash provided by operating activities 5,357 30,210
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment (29,419) (24,673)
Proceeds from sale of plant and equipment 165 121
Acquisition of The Paper Factory of Wisconsin, Inc.,
net of cash acquired - (24,782)
---------- ----------
Net cash used in investing activities (29,254) (49,334)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings 23,180 7,950
Issuance of long-term debt - 8,075
Payments on long-term debt (3,833) (1,708)
Issuance of common stock 849 653
Acquisition of common stock for treasury (52) -
Dividends paid (4,825) (4,811)
---------- ----------
Net cash provided by financing activities 15,319 10,159
---------- ----------
NET DECREASE IN CASH AND EQUIVALENTS (8,578) (8,965)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 9,477 9,505
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 899 $ 540
========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 5,202 $ 5,048
Income taxes 14,237 14,014
</TABLE>
[FN]
See accompanying notes to condensed consolidated financial statements.
PAGE
<PAGE>
GIBSON GREETINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 1994 and 1993
(Amounts in thousands except per share data)
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include
the accounts of Gibson Greetings, Inc. and its subsidiaries (the Company).
Intercompany transactions and balances have been eliminated in consolidation.
The unaudited condensed consolidated financial statements have been prepared
in accordance with Article 10-01 of Regulation S-X of the Securities and
Exchange Commission and, as such, do not include all information required by
generally accepted accounting principles. However, in the opinion of the
Company, these financial statements contain all adjustments, consisting of
only normal recurring adjustments, necessary to present fairly the financial
position as of September 30, 1994, December 31, 1993 and September 30, 1993,
the results of its operations for the three and nine months ended September
30, 1994 and 1993 and its cash flows for the nine months ended September 30,
1994 and 1993. The Company suggests that the accompanying financial
statements be read in conjunction with the consolidated financial statements
and notes included in the Company's Annual Report on Form 10-K/A for the year
ended December 31, 1993.
On July 1, 1994, the Company announced that it had determined that the
inventory of Cleo, Inc. (Cleo), a wholly-owned subsidiary, at December 31,
1993 had been overstated, resulting in an approximate 20% overstatement of the
Company's previously reported 1993 consolidated net income. The Company
believes such overstatement resulted from a deliberate attempt by one or more
Cleo personnel to overstate income before income taxes. The overstatement of
inventory and income before income taxes was $8,806 at December 31, 1993 and
for the year then ended. The December 31, 1993 consolidated financial
statements were amended and restated to reflect the correction of such
overstatement as well as the accrual of an unrealized market value loss of
$3,100 on two derivative transactions outstanding at December 31, 1993, which
did not qualify as hedges, and the recognition of a $1,982 previously deferred
gain from certain derivative transactions entered into and/or terminated
during 1993 which also did not qualify as hedges. The net effect of these two
derivative adjustments, a loss of $1,118, was recognized in the 1993
consolidated financial statements as these adjustments became significant in
light of the reduction in the Company's net income resulting from the
restatement of Cleo inventory. The above changes reduced 1993 net income and
net income per share from amounts previously reported by $6,013 and $.38,
respectively.
The Company determined that $1,400 of the $8,806 inventory and income before
income taxes overstatement related to the third quarter of 1993. Accordingly,
the September 30, 1993 condensed consolidated financial statements were
amended and restated to reflect the correction of such overstatement.
Additionally, the Company accrued an unrealized market value loss of $2,990 on
two derivative transactions outstanding at September 30, 1993 which did not
qualify as hedges and recognized a $1,111 previously deferred gain from
certain derivative transactions entered into and/or terminated during the
first nine months of 1993 which also did not qualify as hedges. The net
effect of these two derivative adjustments, a loss of $1,879, was recognized
in the restated September 30, 1993 condensed consolidated financial statements
as these adjustments became significant in light of the reduction in the
PAGE
<PAGE>
Company's net income resulting from the restatement of Cleo inventory. The
above changes reduced net income and net income per share for the three and
nine months then ended from amounts previously reported by $1,903 and $.12,
respectively.
At March 31, 1994, the Cleo inventories remained overstated by $8,806.
Accordingly, the March 31, 1994 condensed consolidated financial statements
were amended and restated to reflect the correction of such overstatement.
The correction had no impact on loss before income taxes, net loss or net loss
per share for the three months ended March 31, 1994. The impact of the
Company's recognition of a $3,100 unrealized loss on the two derivative
transactions which did not qualify as hedges in its restated 1993 financial
statements, together with the recognition of a $149 gain from certain
derivative transactions terminated during 1994 which also did not qualify as
hedges, had the effect of reducing the Company's net loss on derivative
transactions, net loss, and net loss per share for the three months ended
March 31, 1994 by $3,249, $3,249 and $.20, respectively, from amounts
previously reported.
Interest rate swap and derivative transactions that do not qualify as hedges
are recorded at their fair market value, which is the estimated amount that
the Company would receive or pay to terminate the transactions at the
reporting date as determined by a financial institution based on the projected
value of the transactions at maturity.
The Company's debt agreements contain certain covenants including limitations
on dividends based on a formula related to net income, stock sales and certain
restricted investments. At September 30, 1994, the amount of unrestricted
retained earnings available for dividends was $38,305.
Certain prior year amounts in the consolidated financial statements have been
reclassified to conform with the 1994 presentation.
Note 2 - Seasonal Nature of Business
Because of the seasonal nature of the Company's business, results of
operations for interim periods are not necessarily indicative of results for
the full year.
Note 3 - Trade Receivables
Trade receivables consist of the following:
September 30, December 31, September 30,
1994 1993 1993
--------- --------- ---------
Trade receivables $ 162,440 $ 245,682 $ 139,280
Less reserve for returns,
allowances, cash discounts
and doubtful accounts 36,155 53,519 38,242
--------- --------- ---------
$ 126,285 $ 192,163 $ 101,038
========= ========= =========
PAGE
<PAGE>
Note 4 - Inventories
Inventories consist of the following:
September 30, December 31, September 30,
1994 1993 1993
--------- --------- ---------
Finished goods $ 142,732 $ 74,268 $ 137,762
Work-in-process 14,889 13,147 15,829
Raw materials and supplies 40,121 37,723 36,973
--------- --------- ---------
$ 197,742 $ 125,138 $ 190,564
========= ========= =========
Note 5 - Interest Expense
There was no capitalized interest for the three-month and nine-month periods
ended September 30, 1994 and 1993.
Note 6 - Net Income (Loss) Per Share
The weighted average number of shares of common stock and equivalents
outstanding used in computing net income (loss) per share is as follows:
1994 1993
---------- ----------
Three months ended September 30, 16,107 16,121
========== ==========
Nine months ended September 30, 16,138 16,091
========== ==========
PAGE
<PAGE>
Note 7 - Derivative Transactions
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 interest rate derivative transactions that had a negative market value,
on that date, of $17,500. These two new transactions have caps on the
Company's total exposure and replace 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.
As discussed in Note 8 below, the Company has filed suit against Bankers Trust
Company and its affiliate BT Securities alleging that in connection with the
sale of these and earlier derivatives to the Company they 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 Company's suit seeks damages of approximately $23,000, plus
$50,000 punitive damages, and asks that the Court declare the Company's two
existing derivative transactions with Bankers Trust to be unenforceable. The
following information about the Company's derivative transactions is provided,
for disclosure purposes, and is subject, in its entirety, to the Company's
litigation position against Bankers Trust Company and its affiliate. The
actual effects upon the Company of these derivative transactions will depend
upon the outcome of this litigation.
At September 30, 1994 the two interest rate derivative transactions entered
into on March 4, 1994 are outstanding and are recorded at fair market value.
These new transactions will result in a minimum loss of $3,000 and a maximum
potential loss of $27,575. These positions mature in June and August 1995 and
may be liquidated at any time prior to maturity. They will continue to be
reported at current fair market value until they mature or are closed out, and
fluctuations in such value will affect earnings in future periods. Except for
these two positions and two relatively minor ($3,000 notional value) interest
rate swaps on industrial revenue bonds, the Company has discontinued entering
into transactions of this nature. The Company recorded a net loss in the
accompanying condensed consolidated statements of income of $17,469 for the
nine months ended September 30, 1994 which is comprised of the $3,000 minimum
loss to be paid upon maturity, an additional $14,618 unrealized loss to record
these transactions at market value and the recognition of a $149 gain from
certain derivative transactions terminated during 1994 which also did not
qualify as hedges. The reduction in loss to record these transactions at
market value for the three months ended September 30, 1994 is $2,277. The
current market value was determined by a financial institution based on the
projected future value of the transactions at maturity.
PAGE
<PAGE>
The Company cannot realize a gain at maturity on either open transaction.
Each transaction has a $25,000 notional value. On one transaction, the
Company's minimum loss will be $3,000; its maximum loss will be $17,500,
depending on the six-month LIBOR rate on June 7, 1995. The Company is
adversely impacted at the rate of $72.5 for each basis point that the six-
month LIBOR rate on that date exceeds 3.90%, up to a maximum of 5.90%. On the
other transaction, the Company's maximum loss is capped at $10,075, depending
on the basis point spread for interest rate swaps (the "swap spread") on
August 15, 1995 relative to the 10.75% U.S. Treasury Note maturing August 15,
2005. The Company is adversely impacted if such swap spread on that date is
less than 33.5 basis points, with the amount of its loss calculated at the
rate of $746.3 for each basis point, and with its exposure capped if such
spread is less than 20 basis points. The Company will realize no loss on this
transaction if the swap spread is at or above 33.5 basis points on August 15,
1995. As of September 30, 1994, the six-month LIBOR rate was 5.75% and the
swap spread was 27.4 basis points. The Company may elect to liquidate the
transactions at any time prior to maturity based on market conditions
prevailing at the time.
The negative market values of these two positions at September 30, 1994 were
as follows:
Six-month LIBOR Band - 3.9% to 5.9% $16,188
Swap Spread 4,530
-------
$20,718
=======
Based on the stated maturity dates, the $20,718 accrual for the loss is shown
as an Other Current Liability in the accompanying condensed consolidated
balance sheet. As required by SFAS No. 109, the Company has recorded the tax
benefit from the loss on these derivative transactions and an offsetting
valuation allowance for the full amount of the estimated tax benefit due to
current uncertainties surrounding the amount, timing and characteristics of
the loss.
At September 30, 1993, the Company had two interest rate derivative
transactions outstanding, different than those discussed above, that did not
qualify as hedges. The first attempted to limit the Company's exposure
against rising short-term rates on a notional amount of $60,000 through 1995.
The second position provided the Company with a maximum 1.0% annuity on
$30,000 through August 1994 predicated on short-term rates remaining in a
specified range. The estimated current market value of these two derivative
transactions, as determined by a financial institution based on a projected
future value of the transactions at maturity, was a loss of $2,990 at
September 30, 1993 and was accrued in the restated condensed consolidated
financial statements at September 30, 1993 and for the three and nine months
then ended. The Company received proceeds of approximately $1,111 relating to
certain derivative transactions, which also did not qualify as hedges and
which were either entered into or terminated during 1993. Such proceeds have
been reflected in the restated condensed consolidated statement of income for
the three and nine months ended September 30, 1993 as a component of "(Gain)
loss on derivative transactions, net."
PAGE
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Note 8 - Legal Matters
In 1990, a complaint was issued against the Company alleging certain unfair
labor practices in connection with a strike at one of its facilities. On
December 18, 1991, an Administrative Law Judge of the National Labor Relations
Board ("NLRB") issued a recommended order, which included reinstatement and
back pay affecting approximately 160 strikers, based on findings that the
Company had violated certain provisions of the National Labor Relations Act.
On May 7, 1993, the NLRB upheld the Administrative Law Judge's decision in
some respects, and enlarged the number of strikers entitled to back pay to
approximately 240. 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 later in 1994 or early in 1995.
On July 1, 1994, the Company announced that it had determined that the
inventory of Cleo at December 31, 1993 had been overstated, resulting in an
approximate 20% overstatement of the Company's previously reported 1993
consolidated net income. See Note 1.
On July 1, 1994, 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 have been 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.
This Complaint alleges violations of the federal securities laws and seeks
unspecified damages for an asserted public disclosure of false information
regarding the Company's earnings. The Company intends to vigorously defend
the suit and has filed an Answer denying any wrongdoing and a Third Party
Complaint against its former auditor for contribution against any judgment
adverse to the Company. The plaintiffs' motion for class certification is to
be heard on November 18, 1994.
The Securities and Exchange Commission is conducting a private investigation
to determine whether the Company or any of its officers, directors and
employees have engaged in conduct in violation of certain provisions of the
Securities Exchange Act of 1934 and the rules and regulations thereunder. The
Company believes that such investigation is focused principally on the
derivative transactions and the overstatement of the Cleo inventory discussed
in Note 1 and the Company's public statements and accounting systems with
respect thereto. The Company is cooperating in such investigation.
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 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 seeks damages
of approximately $23,000 plus $50,000 punitive damages and asks that the court
declare the Company's existing derivative transactions with Bankers Trust to
be unenforceable. Bankers Trust has filed an Answer denying the allegations
and a counterclaim seeking enforcement of the existing derivative
transactions.
PAGE
<PAGE>
On October 21, 1994, an individual, alleging herself to be a shareholder of
the Company, filed a purported derivative action in the United States District
Court for the Southern District of Ohio against each of the Company's current
directors, a former director, the Company's Chief Financial Officer, the
Company's former Chief Financial Officer, former Treasurer and another former
employee of the Company. The Complaint alleges that the individual defendants
breached certain fiduciary duties to the Company in connection with certain
derivative transactions with Bankers Trust and in connection with the
misstatement of earnings. The Company is also named in the action as a
"nominal defendant." Although the action is ostensibly brought on behalf of
the Company, the plaintiff made no request that the Board of Directors
consider her claims before filing suit, as the Company believes she is
required to do. The defendants' responses to the plaintiff's complaint is not
yet due.
In addition, the Company is a defendant in certain other litigation.
Management does not believe that an adverse outcome as to any or all of these
matters would have a material adverse effect on the Company's net worth or
total cash flows; however, the impact on the statement of operations in a
given year could be material.
PAGE
<PAGE>
Part I., Item 2., Management's Discussion and Analysis of Results of Operations
and Financial Condition
Introduction
On July 1, 1994, the Company announced that it had determined that the inventory
of Cleo at December 31, 1993 had been overstated, resulting in an approximate
20% overstatement of the Company's previously reported 1993 consolidated net
income. The Company believes such overstatement resulted from a deliberate
attempt by one or more Cleo personnel to overstate income before income taxes.
As a result of this overstatement, it was necessary for the Company to amend and
restate its December 31, 1993 consolidated financial statements and its
September 30, 1993 and March 31, 1994 condensed consolidated financial
statements. The adjustments made are described above in Note 1 to the Condensed
Consolidated Financial Statements included in this quarterly report and should
be reviewed in conjunction with the discussions of "Results of Operations" and
"Liquidity and Capital Resources" presented below.
Results of Operations
Revenues in the third quarter increased 7.5% to $153.0 million from the previous
year. This increase largely reflected increases in domestic and international
sales of greeting cards as well as increased sales by The Paper Factory of
Wisconsin, Inc. (The Paper Factory), partially offset by lower sales of Cleo
products combined with higher sales allowances reflecting competitive pressure.
Returns and allowances were 14.8% of sales for the three months ended September
30, 1994 compared to 9.9% for the same period in 1993. For the nine months
ended September 30, 1994, revenues increased 8.3% to $337.1 million from 1993
reflecting the higher sales of greeting cards and sales by The Paper Factory.
Returns and allowances were 17.4% of sales for the nine months ended September
30, 1994 compared to 16.0% for the same period in 1993.
Operating expenses totaled $153.2 million in the third quarter of 1994 versus
$135.5 million in the corresponding quarter in 1993. Cost of products sold, as
a percent of revenues, were 56.5% versus 54.5% for the third quarter of 1993.
The increase was primarily due to increases at Cleo and competitive pricing
pressure and increases in sales allowances at the Company's greeting card
division. In addition, the change in product mix, pricing pressures and
customer discounts which had adversely affected gross margins from Cleo's sales
of gift wrap and paper products in 1993, as discussed in the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1993, continued in 1994
and the Company expects Cleo to incur a loss for the full twelve months ended
December 31, 1994. Selling, distribution and administrative expenses, as a
percent of revenues, increased to 43.6% from 40.8% primarily due to increased
expenditures for programs implemented by the Company to improve customer service
and to increase sales and marketing efforts primarily with respect to the
Company's greeting card division.
Operating expenses totaled $351.8 million for the nine months ended September
30, 1994 representing an 18.8% increase over 1993. Cost of products sold, as a
percent of revenues, were 49.3% versus 44.8% in 1993 reflecting the full impact
of The Paper Factory in 1994, obsolescence charges at Cleo and the change in
product mix, pricing pressures and customer discounts at Cleo which are expected
to continue throughout 1994. Selling, distribution and administrative expenses,
as a percent of revenues, increased to 55.1% from 50.4% primarily due to the
acquisition of The Paper Factory combined with costs associated with programs to
improve customer service and to increase selling and marketing efforts primarily
with respect to the Company's greeting card division.
PAGE
<PAGE>
For the three months ended September 30, 1994, the Company recorded a reduction
in the loss of $2.3 million on two derivative transactions outstanding at
September 30, 1994, which do not qualify as hedges. For the nine months ended
September 30, 1994, the Company recorded a net loss on derivative transactions
which do not qualify as hedges of $17.5 million consisting of a $3 million
minimum loss to be paid upon maturity, an additional $14.6 million unrealized
loss based on the fair market value of the transactions on that date and the
recognition of a $.1 million gain. For the three and nine months ended September
30, 1993 the Company recorded a net loss on derivative transactions of $1.9
million, consisting of the accrual of an unrealized market value loss of $3.0
million on two derivative transactions outstanding at September 30, 1993, which
did not qualify as hedges, and the recognition of a $1.1 million previously
deferred gain from certain derivative transactions entered into and/or
terminated during the first nine months of 1993 which also did not qualify as
hedges. The market values of derivative transactions outstanding at September
30, 1994 and September 30, 1993 were determined by a financial institution based
on the projected future value of the transactions at maturity. These positions
will continue to be reported at current fair market value until they mature or
are closed out. See "Financing and derivative transaction expenses" below.
Third quarter pretax loss was $.4 million compared with pretax income for 1993
of $3.1 million. Pretax loss for the nine months ended September 30, 1994 was
$38.2 million compared with 1993 pretax income of $8.6 million.
The effective tax rates at which the 1994 loss was benefitted differs from the
statutory rates due principally to allowances provided against tax benefits
related to the derivative transactions as realization of such tax benefits in
the carryforward period is not assured. The tax rates for the 1993 period
differ from the statutory rates in part due to the goodwill associated with The
Paper Factory acquisition and allowances provided against tax benefits related
to derivative transactions.
Net income for the third quarter of 1994 was $.4 million compared with 1993 net
income of $2.2 million. For the nine months ended September 30, 1994, net loss
was $31.6 million compared with 1993 net income of $5.3 million.
Financing and derivative transaction expenses The Company has two interest rate
derivative transactions outstanding at September 30, 1994, which are recorded at
fair market value. Except for these two positions (described below) and two
relatively minor ($3 million notional value) interest rate swaps on industrial
revenue bonds, the Company has discontinued trading in any swap/derivative
positions.
PAGE
<PAGE>
On March 4, 1994, the Company felt compelled to enter into the two outstanding
interest rate derivative transactions in order to replace and to cap its
exposure on two prior uncapped interest rate derivative transactions that had a
negative market value, on that date, of $17.5 million. As discussed in Item 1
of Part II of this report on Form 10-Q, the Company has filed suit against
Bankers Trust Company and its affiliate BT Securities alleging that in
connection with the sale of these and earlier derivatives to the Company they
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 Company's suit seeks damages of approximately $23 million,
plus $50 million punitive damages, and asks that the Court declare the Company's
two existing derivative transactions with Bankers Trust to be unenforceable.
The following information about the Company's derivative transactions is
provided, for disclosure purposes, and is subject, in its entirety, to the
Company's litigation position against Bankers Trust Company and its affiliate.
The actual effects upon the Company of these derivative transactions will depend
upon the outcome of this litigation.
The two new March 4, 1994 transactions, which are recorded at fair market value,
have a set minimum floor loss of $3 million at maturity and a maximum potential
loss of $27.575 million. The Company's losses will be minimized at $3 million
if the six-month LIBOR rate is at or below 3.90% on June 7, 1995 and the basis
point spread for interest rate swaps (the "swap spread") relative to the 10.75%
U.S. Treasury Note maturing August 15, 2005 is at or above 33.5 basis points on
August 15, 1995. On the other hand, its losses will be maximized at $27.575
million if the six-month LIBOR rate equals or exceeds 5.90% on June 7, 1995 and
the swap spread is 20 basis points or less on August 15, 1995. As of September
30, 1994, the six-month LIBOR rate was 5.75%, the swap spread was 27.4 basis
points and the negative market value of these transactions was $20.7 million.
The full amount of the $20.7 million loss, representing the termination value at
September 30, 1994, had no cash flow impact in the first nine months of 1994;
cash will not be required until maturity for each of the respective positions
unless they are liquidated prior thereto. The positions may be liquidated and
paid out at any time prior to maturity and the Company will continue to review
the desirability of liquidating them on an ongoing basis.
Certain of the derivative transactions executed during the first nine months of
1993 did not qualify as effective interest rate hedges and, accordingly, the
proceeds realized from such transactions (approximately $1.1 million) were
recognized as a component of the loss on derivative transactions, net in the
restated condensed consolidated statement of income for the three and nine
months ended September 30, 1993. Additionally, the estimated current market
value of two derivative transactions outstanding at September 30, 1993, which
likewise did not qualify as effective interest rate hedges, was a loss of $3.0
million which was accrued in the restated condensed consolidated financial
statements at September 30, 1993.
Liquidity and Capital Resources
Cash flows from operating activities for the first nine months of 1994 provided
$5.4 million in cash compared to $30.2 million for the same period in 1993. The
decline from 1993 reflected the net loss from operations, excluding the non-cash
charge related to the loss on derivative transactions; higher increases in other
assets, net of amortization and inventories; and larger decreases in income
taxes payable partially offset by a larger increase in other current liabilities
and other liabilities. The increase in other assets reflected higher prepaid
amounts on new sales agreements.
PAGE
<PAGE>
Other current liabilities increased $45.4 million from the same period in 1993
primarily due to the loss on derivative transactions of $20.7 million and the
timing of other payments. Other liabilities increased $18.8 million from the
same period in 1993 primarily due to an increase in the noncurrent portion of
amounts due on sales agreements reflecting new and renewed sales agreements in
1994.
Net cash used in investing activities totaled $29.3 million in the nine months
ended September 30, 1994 compared with $49.3 million in the nine months ended
September 30, 1993. Cash used in investing activities for plant and equipment
purchases in 1994 was $29.4 million compared to $24.7 million in 1993. The
increase in capital expenditures was largely due to an increase in fixture
purchases. Prior year reflected the acquisition of The Paper Factory which was
financed with cash and $8.1 million of long-term debt issued to the former
shareholders of The Paper Factory.
Cash provided by financing activities in the first nine months of 1994 was $15.3
million compared to $10.2 million in 1993. Prior year included the issuance of
$8.1 million of long-term debt issued to the former shareholders of The Paper
Factory. Debt due within one year at September 30, 1994 was $96.6 million versus
$42.0 million at September 30, 1993 reflecting increased cash requirements by
certain domestic operations.
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. 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 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, as well as for financing existing operations,
currently projected capital expenditures, anticipated long-term sales agreements
consistent with industry trends and other contingencies. (See Part II, Item 1).
PAGE
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
On July 1, 1994, the Company announced that it had determined that the inventory
of Cleo at December 31, 1993 had been overstated, resulting in an approximate
20% overstatement of the Company's previously reported 1993 consolidated net
income. See Part I, Item 2 hereof.
On July 1, 1994, immediately following the announcement of the inventory
misstatement of 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 have been consolidated (In Re Gibson Greetings Securities
Litigation) 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. This Complaint alleges violations of the federal
securities laws and seeks unspecified damages for an asserted public disclosure
of false information regarding the Company's earnings. The Company intends to
vigorously defend the suit and has filed an Answer denying any wrongdoing and a
Third Party Complaint against its former auditor for contribution against any
judgment adverse to the Company. The plaintiffs' motion for class certification
is to be heard on November 18, 1994.
The Securities and Exchange Commission is conducting a private investigation to
determine whether the Company or any of its officers, directors and employees
have engaged in conduct in violation of certain provisions of the Securities
Exchange Act of 1934 and the rules and regulations thereunder. The Company
believes that such investigation is focused principally on the derivative
transactions and the overstatement of the Cleo inventory discussed in Part I,
Item 2 hereof and the Company's public statements and accounting systems with
respect thereto. The Company is cooperating in such investigation.
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 seeks damages of
approximately $23 million plus $50 million punitive damages and asks that the
court declare the Company's existing derivative transactions with Bankers Trust
to be unenforceable. Bankers Trust has filed an Answer denying the allegations
and a counterclaim seeking enforcement of the existing derivative transactions.
PAGE
<PAGE>
On October 21, 1994, an individual, alleging herself to be a shareholder of the
Company, filed a purported derivative action in the United States District Court
for the Southern District of Ohio against each of the Company's current
directors, a former director, the Company's Chief Financial Officer, the
Company's former Chief Financial Officer, former Treasurer and another former
employee of the Company (Rocks v. Gibson Greetings, et. al.). The Complaint
alleges that the individual defendants breached certain fiduciary duties to the
Company in connection with certain derivative transactions with Bankers Trust
and in connection with the misstatement of earnings. The Company is also named
in the action as a "nominal defendant." Although the action is ostensibly
brought on behalf of the Company, the plaintiff made no request that the Board
of Directors consider her claims before filing suit, as the Company believes she
is required to do. The defendants' responses to the plaintiff's complaint is
not yet due.
In 1989, unfair labor practice charges were filed against the Company as an
outgrowth of a strike at its Berea, Kentucky facility. Remedies sought include
back pay from August 8, 1989 and reinstatement of employment for approximately
200 employees. In February 1990, the General Counsel of the National Labor
Relations Board ("NLRB") issued a complaint based on certain of the allegations
of these charges (In the Matter of Gibson Greetings, Inc. and International
Brotherhood of Fireman and Oilers, AFL-CIO, Cases 9-CA-26706, 27660, 26875.) On
December 18, 1991, an Administrative Law Judge of the NLRB issued a recommended
order, which included reinstatements and back pay affecting approximately 160
strikers, based on findings that the Company had violated certain provisions of
the National Labor Relations Act. On May 7, 1993, the NLRB upheld the
Administrative Law Judge's decision in some respects, and enlarged the number of
strikers entitled to back pay to approximately 240. 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 later in 1994 or early in 1995.
In addition, the Company is a defendant in certain other litigation.
Management does not believe that an adverse outcome as to any or all of these
matters would have a material adverse effect on the Company's net worth or total
cash flows; however, the impact on the statement of operations in a given year
could be material.
PAGE
<PAGE>
Item 2. Changes In Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits Employment Agreement between Gibson Greetings, Inc.
and Ralph J. Olson, dated June 24, 1994.
b) Reports on Form 8-K
The Company filed a Form 8-K with the Securities and
Exchange Commission on July 1, 1994 (date of report:
July 1, 1994) attaching the Company's press release dated
July 1, 1994. No financial statements were required to
be filed in connection with the report.
PAGE
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Gibson
Greetings, Inc. has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GIBSON GREETINGS, INC.
Date November 14, 1994
By:/s/ William L. Flaherty
-----------------------
William L. Flaherty
Vice President-Finance
Principal Financial
and Accounting Officer
PAGE
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 899
<SECURITIES> 0
<RECEIVABLES> 162440
<ALLOWANCES> 36155
<INVENTORY> 197742
<CURRENT-ASSETS> 375510
<PP&E> 124083
<DEPRECIATION> 17505
<TOTAL-ASSETS> 616176
<CURRENT-LIABILITIES> 231424
<BONDS> 63315
<COMMON> 166
0
0
<OTHER-SE> 281722
<TOTAL-LIABILITY-AND-EQUITY> 616176
<SALES> 336574
<TOTAL-REVENUES> 337103
<CGS> 166046
<TOTAL-COSTS> 351834
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3177
<INTEREST-EXPENSE> 6685
<INCOME-PRETAX> (38234)
<INCOME-TAX> (6595)
<INCOME-CONTINUING> (31639)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31639)
<EPS-PRIMARY> (1.96)
<EPS-DILUTED> (1.96)
</TABLE>
PAGE
<PAGE>
EXHIBIT 10(A)
June 24, 1994
Mr. Ralph J. Olson
President and Chief Operating Officer
Gibson Card Division
Gibson Greetings, Inc.
2100 Section Road
Cincinnati, OH 45237
Dear Ralph:
Gibson Greetings, Inc. and I are very pleased that you have
agreed to continue to serve as President and Chief Operating
Officer of the Gibson Card Division and as a Vice President of
Gibson Greetings, Inc. ("the Company"). As President and Chief
Operating Officer of the Gibson Card Division, you will continue
to report directly to the Company's Chief Executive Officer. It
is understood that, during the term of this agreement, you may
receive additional assignments or be reassigned to such other
senior executive positions in which you are willing to serve the
Company. The following terms and conditions will govern your
service to the Company.
1. You will serve the Company on a full-time basis as a senior
executive employee, and the Company will employ you as such,
at an annual salary of $288,000, which amount will be
adjusted from time to time by the Company throughout the
term of this Agreement in accordance with the Company's
salary administration program. The term of this Agreement
shall extend indefinitely until it is terminated by the
Company upon giving you one (1) year advance written notice
or until it is terminated pursuant to Paragraph 11 or 12.
This Agreement and your employment shall at all times remain
subject to earlier termination for cause as defined in
Paragraph 4 hereof.
2. As a participant in the Company's Executive Bonus Plan, you
will be eligible for a bonus for the remaining term of this
Agreement.
3. On June 25, 1991, you were granted 10,000 restricted shares
of the Company's common stock. The restrictions lapsed as
to two thousand such shares on each of April 5, 1993 and
April 5, 1994 and shall lapse as to an additional two
PAGE
<PAGE>
Mr. Ralph Olson
June 24, 1994
Page 2
thousand such shares on April 5 of each of the following
three years. Lapsing of restrictions on each such date
shall be conditioned upon your continued employment by the
Company. If any person becomes the beneficial owner of
fifty percent (50%) or more of the voting power of the
Company's securities, or if any person becomes owner of all
or substantially all of the Company's assets, or if the
Company participates in a merger or reorganization in which
it is not the surviving corporation, the lapsing of
restrictions on all such shares shall be immediate.
4. In the event your employment is terminated by the Company
either during the term of this Agreement, or within eighteen
months subsequent to the termination of the Agreement, for
reasons other than cause or disability, and other than as
provided under Paragraph 5 hereof, you will be paid within
thirty days of such termination a lump sum severance payment
equal to one and one-half times the total of the salary and
the most recent annual Executive Bonus Plan payment paid to
you during the twelve months immediately prior to your
termination. Executive outplacement services, including
reimbursement for miscellaneous and telephone expenses for
up to six months, will be provided at no cost to you if you
are terminated by the Company for other than cause or
disability. As used in this Agreement, "cause" shall mean
dishonesty, gross negligence or willful misconduct in the
performance of your duties or a willful and material breach
of this Agreement. The severance payment noted above will
be grossed up for excise taxes, if applicable.
5. In the event any person becomes the beneficial owner of
fifty percent (50%) or more of the voting power of the
Company's securities, and you are not retained by that
person in substantially the same capacity and salary as
contemplated herein for at least eighteen months from the
date of said change in beneficial ownership, then upon your
termination under this Paragraph, you will be paid, in a
lump sum within thirty days of your termination, an amount
equal to three times the total of the salary and the most
recent annual Executive Bonus Plan payment paid to you
during the twelve months immediately prior to your
termination. This termination payment is in lieu of any
payments to which you may otherwise be entitled under
Paragraph 4 hereof and will be grossed up for excise taxes,
if applicable.
PAGE
<PAGE>
Mr. Ralph Olson
June 24, 1994
Page 3
6. You will be covered by the Company's programs for executives
which include: executive physical examinations, life
insurance, tax preparation and financial planning
assistance.
7. You will be a participant in the Company's Supplemental
Executive Retirement Plan (SERP).
8. You will be covered by the Company's group insurance plan,
which presently includes medical, dental and life insurance.
The amount of your life insurance shall be $600,000.
9. Every three years, you will be provided a new automobile of
the Cadillac or Lincoln class, which automobile will be
owned or leased by the Company. The Company will provide
adequate insurance for the automobile and occupants and will
pay all required maintenance and operating expenses. You
will have the right to purchase such automobile at its
depreciated net book value upon expiration of this Agreement
or any renewal hereof.
10. You will be eligible for four weeks of paid vacation during
each year this Agreement remains in effect.
11. In the event you are unable to perform your duties hereunder
due to illness or other incapacity, which incapacity
continues for more than six consecutive or nonconsecutive
months in any twelve-month period, the Company shall have
the right, on not less than 30 days' written notice to you,
to terminate this Agreement. In the event of your death
during your employment hereunder, your salary shall cease as
of the last day of the sixth full calendar month following
the month in which your death occurs. Except for such
salary continuation rights and except for certain stock
option rights, this Agreement shall terminate as of the date
of death and you shall be entitled to no additional
compensation under the other provisions of this Agreement.
12. In the event you voluntarily terminate your employment
during the term of this Agreement, or if the Company
terminates this Agreement and your employment for cause,
your right to all compensation hereunder shall cease as of
the date of termination. Termination of employment shall
terminate this Agreement with the exception of the
provisions of Paragraphs 13, 14 and 17.
13. Also in the event you voluntarily terminate your employment
hereunder or retire, or if the Company terminates this
PAGE
<PAGE>
Mr. Ralph Olson
June 24, 1994
Page 4
Agreement and your employment for cause, you agree that for
a period of one and one-half years after such termination,
you will not compete, directly or indirectly, with the
Company or with any division, subsidiary or affiliate of the
Company or participate as a director, officer, employee,
consultant, advisor, partner or joint venturer in any
business engaged in the manufacture or sale of greeting
cards, gift wrap or other products produced or sold by the
Company, or by any division, subsidiary or affiliate of the
Company, without the Company's prior written consent.
14. In connection with this Agreement, you agree to receive
confidential information of the Company in confidence, and
not to disclose to others, assist others in the application
of, or use for your own gain, such information, or any part
thereof, unless and until it has become public knowledge or
has come into the possession of others by legal and
equitable means. You further agree that, upon termination
of employment with the Company, all documents, records,
notebooks, and similar writings, including copies thereof,
then in your possession, whether prepared by you or by
others, will be left with or returned promptly to the
Company. For purposes of this Paragraph 14, "confidential
information" means information concerning Company's
finances, plans, sales, products, processes and services, or
those of Company's subsidiaries, divisions or affiliates,
which is disclosed to you or known by you as a consequence
of or through your employment with the Company, and which is
not generally known in the industry in which the Company or
its subsidiaries, divisions or affiliates are or may become
engaged.
15. Nothing herein is intended to be granted to you in lieu of
any rights or privileges to which you may be entitled as an
executive employee of the Company under any retirement,
insurance, hospitalization, or other plan which may now or
hereafter be in effect.
16. This Agreement sets forth the entire understanding between
the parties with respect to the subject matter hereof and
may not be modified or amended except by a writing signed by
the party to be charged.
17. This Agreement shall inure to the benefit of and be binding
upon you and your legal representatives as well as the
Company, its successors and assigns including, without
limitation, any person, partnership, corporation or other
PAGE
<PAGE>
Mr. Ralph Olson
June 24, 1994
Page 5
entity which may acquire all, or substantially all, of the
Company's assets and business.
To indicate your acceptance of and willingness to be bound by
this Agreement, please sign and return one duplicate original of
this letter.
Sincerely,
GIBSON GREETINGS, INC.
/s/Benjamin J. Sottile
Benjamin J. Sottile
Chairman of the Board,
President and
Chief Executive Officer
BJS/HLC/dk
ACCEPTED AND AGREED TO:
/s/Ralph J. Olson
Ralph J. Olson
Date:June 24, 1994
