PAGE
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-11902
GIBSON GREETINGS, INC.
Incorporated under the laws IRS Employer
of the State of Delaware Identification No. 52-1242761
2100 Section Road, Cincinnati, Ohio 45237
Telephone Number: Area Code 513-841-6600
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 August 22, 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,
1993 1992 1992
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 540 $ 9,505 $ 290
Trade receivables, net 101,038 169,605 92,521
Inventories 190,564 118,758 185,424
Prepaid expenses 5,213 4,301 4,173
Prepaid income taxes - - 7,274
Deferred income taxes 33,813 31,947 26,225
--------- --------- ---------
Total current assets 331,168 334,116 315,907
--------- --------- ---------
PLANT AND EQUIPMENT, net 117,850 112,712 111,660
OTHER ASSETS, net 79,552 54,276 50,545
--------- --------- ---------
$ 528,570 $ 501,104 $ 478,112
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Debt due within one year $ 41,962 $ 31,911 $ 31,116
Accounts payable 26,333 14,738 26,141
Income taxes payable 3,941 9,931 -
Other current liabilities 55,289 53,275 45,499
--------- --------- ---------
Total current liabilities 127,525 109,855 102,756
--------- --------- ---------
DEFERRED INCOME TAXES 618 2,693 3,896
LONG-TERM DEBT 74,441 70,175 69,514
OTHER LIABILITIES 21,336 15,040 13,892
--------- --------- ---------
Total liabilities 223,920 197,763 190,058
--------- --------- ---------
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,
16,530,067, 16,506,919 and
16,506,719 shares issued,
respectively 165 165 165
Paid-in capital 45,089 44,436 44,088
Retained earnings 264,917 264,469 249,388
Foreign currency adjustment 367 159 301
--------- --------- ---------
310,538 309,229 293,942
Less treasury stock, at cost,
473,344, 473,344 and 473,344
shares, respectively 5,888 5,888 5,888
--------- --------- ---------
Total stockholders' equity 304,650 303,341 288,054
--------- --------- ---------
$ 528,570 $ 501,104 $ 478,112
========= ========= =========
</TABLE>
[FN]
See accompanying notes to condensed consolidated financial statements.
PAGE
<PAGE>
<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,
1993 1992 1993 1992
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 142,296 $ 115,556 $ 311,167 $ 273,720
Costs and expenses:
Operating expenses:
Cost of products sold 77,519 70,643 139,328 126,244
Selling, distribution
and administrative
expenses 58,012 63,225 156,929 157,064
--------- --------- --------- ---------
Total operating
expenses 135,531 133,868 296,257 283,308
--------- --------- --------- ---------
Operating income (loss)
before financing and
derivative transaction
expenses 6,765 (18,312) 14,910 (9,588)
Financing and derivative
transaction expenses:
Interest expense, net of
capitalized interest 1,945 1,997 5,362 5,375
Interest income (127) (244) (894) (950)
Loss on derivative
transactions, net 1,879 - 1,879 -
--------- --------- --------- ---------
Total financing
and derivative
transaction
expenses, net 3,697 1,753 6,347 4,425
--------- --------- --------- ---------
Income (loss) before
income taxes and
cumulative effect
of accounting changes 3,068 (20,065) 8,563 (14,013)
Income taxes 826 (7,736) 3,304 (5,313)
--------- --------- --------- ---------
Income (loss) before
cumulative effect of
accounting changes 2,242 (12,329) 5,259 (8,700)
Cumulative effect of change
in accounting for
postretirement benefits
other than pensions, net of
income taxes of $1,609 - - - (2,487)
Cumulative effect of change
in accounting for income
taxes - - - 1,038
--------- --------- --------- ---------
Net income (loss) $ 2,242 $ (12,329) $ 5,259 $ (10,149)
========= ========= ========= =========
Income (loss) per share
before cumulative effect
of accounting changes $ .14 $ (.75) $ .33 $ (.53)
Cumulative effect per share
of change in accounting
for postretirement benefits
other than pensions, net of
income taxes - - - (.15)
Cumulative effect per share
of change in accounting for
income taxes - - - .06
--------- --------- --------- ---------
Net income (loss) per share $ .14 $ (.75) $ .33 $ (.62)
========= ========= ========= =========
Dividends per share $ .10 $ .10 $ .30 $ .29
========= ========= ========= =========
</TABLE>
[FN]
See accompanying notes to condensed consolidated financial statements.
PAGE
<PAGE>
<TABLE>
GIBSON GREETINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1993 1992
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,259 $ (10,149)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and write-down of display fixtures 18,022 18,334
Loss on disposal of plant and equipment 3,556 3,293
Loss on derivative transactions, net 1,879 -
Deferred income taxes (4,576) 94
Amortization of deferred costs and other
intangibles 15,617 27,800
Change in assets and liabilities:
Decrease in trade receivables, net 68,596 113,506
Increase in inventories (63,583) (70,785)
Increase in prepaid expenses (720) (54)
Increase in prepaid income taxes - (7,274)
Increase in other assets, net of amortization (15,730) (13,338)
Increase in accounts payable 10,077 10,879
Decrease in income taxes payable (6,116) (19,898)
Increase (decrease) in other current
liabilities 1,413 (1,607)
Increase (decrease) in other liabilities (3,658) 6,363
All other, net 174 227
---------- ----------
Total adjustments 24,951 67,540
---------- ----------
Net cash provided by operating activities 30,210 57,391
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment (24,673) (22,541)
Proceeds from sale of plant and equipment 121 23
Acquisition of The Paper Factory of Wisconsin, Inc.,
net of cash acquired (24,782) -
---------- ----------
Net cash used in investing activities (49,334) (22,518)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings 7,950 (41,000)
Issuance of long-term debt 8,075 -
Payments on long-term debt (1,708) (657)
Issuance of common stock 653 1,929
Acquisition of common stock for treasury - (49)
Dividends paid (4,811) (4,647)
---------- ----------
Net cash provided by (used in)
financing activities 10,159 (44,424)
---------- ----------
NET DECREASE IN CASH AND EQUIVALENTS (8,965) (9,551)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 9,505 9,841
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 540 $ 290
========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest, net of amounts capitalized $ 5,048 $ 7,426
Income taxes 14,014 19,022
</TABLE>
[FN]
See accompanying notes to condensed consolidated financial statements.
PAGE
<PAGE>
GIBSON GREETINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 1993 and 1992
(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, 1993, December 31, 1992 and September 30, 1992,
the results of its operations for the nine months ended September 30, 1993 and
1992 and its cash flows for the nine months ended September 30, 1993 and 1992.
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 have been amended and restated to reflect the correction of such
overstatement as well as the accrual of an unrealized market value loss of
$3,100 on two derivative transactions outstanding at December 31, 1993, which
did not qualify as hedges, and the recognition of a $1,982 previously deferred
gain from certain derivative transactions entered into and/or terminated
during 1993 which also did not qualify as hedges. The net effect of these two
derivative adjustments, a loss of $1,118, was recognized in the 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 accompanying condensed consolidated financial statements at September 30,
1993 and for the three and nine months then ended have been 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 accompanying
restated condensed 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
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.
The Company suggests that these financial statements be read in conjunction
with the consolidated financial statements and notes included in the Company's
1992 Annual Report to Stockholders.
PAGE
<PAGE>
Certain prior year amounts in the consolidated financial statements have been
reclassified to conform with the 1993 presentation.
The Company implemented Statement of Financial Accounting Standards (SFAS) No.
106 - "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
effective as of January 1, 1992. This standard requires that the cost of
these benefits, which are primarily retiree health care and life insurance
benefits, be recognized in the financial statements during the employees'
active working lives. In prior years, the Company recognized these costs on a
cash basis.
Effective January 1, 1992, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109 -"Accounting for Income Taxes." This
Statement utilizes the liability method of accounting for income taxes.
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of currently enacted tax laws. Prior to 1992,
the Company accounted for income taxes using Accounting Principles Board
Opinion No. 11.
The cumulative effect of the accounting change of $1,038 due to the
implementation of SFAS No. 109 was reflected in the Company's previously
reported first quarter 1992 results. As a result of the implementation of
SFAS 109, previously reported net loss of $11,187 ($.69 per share) decreased
to a net loss of $10,149 ($.62 per share) for the nine months ended September
30, 1992.
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's valuation model
based on the projected value of the transactions at maturity.
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 - Acquisition of The Paper Factory of Wisconsin, Inc.
On June 1, 1993, the Company acquired The Paper Factory of Wisconsin, Inc.
(The Paper Factory) for $25.1 million in a business combination accounted for
as a purchase. The Paper Factory operates retail stores located primarily in
manufacturers' outlet shopping centers. The results of The Paper Factory are
not material and are included in the consolidated financial statements since
the date of acquisition. The total cost of the acquisition exceeded the fair
value of the net assets of The Paper Factory by $26.2 million. In connection
with the acquisition, the Company assumed liabilities of approximately $11.6
million.
PAGE
<PAGE>
Note 4 - Trade Receivables
Trade receivables consist of the following:
September 30, December 31, September 30,
1993 1992 1992
--------- --------- ---------
Trade receivables $ 139,280 $ 223,022 $ 132,071
Less reserve for returns,
allowances, cash discounts
and doubtful accounts 38,242 53,417 39,550
--------- --------- ---------
$ 101,038 $ 169,605 $ 92,521
========= ========= =========
Note 5 - Inventories
Inventories consist of the following:
September 30, December 31, September 30,
1993 1992 1992
--------- --------- ---------
Finished goods $ 137,762 $ 67,736 $ 139,856
Work-in-process 15,829 12,867 15,207
Raw materials and supplies 36,973 38,155 30,361
--------- --------- ---------
$ 190,564 $ 118,758 $ 185,424
========= ========= =========
Note 6 - Interest Expense
Capitalized interest for the three-month and nine-month periods ended
September 30, 1993 and 1992 was $0, $0, $20 and $74, respectively.
Note 7 - Net Income Per Share
The weighted average number of shares of common stock and equivalents
outstanding used in computing net income per share is as follows:
1993 1992
---------- ----------
Three months ended September 30, 16,121 16,065
========== ==========
Nine months ended September 30, 16,091 16,121
========== ==========
PAGE
<PAGE>
Note 8 - Derivative Transactions
The Company periodically enters into interest rate swap or derivative
transactions with the intent to manage the interest rate sensitivity of
portions of its debt. At September 30, 1993, the Company had four outstanding
interest rate swap/derivative positions with a total notional amount of
$96,000. Two agreements, with terms similar to the related bonds, are
constituted as hedges and effectively change the Company's interest rate on
$3,000 of industrial revenue bonds to 6.67% through February 1998. The other
two agreements 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 last 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 the two
derivative transactions, as determined by a financial institution's valuation
model 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 accompanying
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 accompanying
Consolidated Statement of Income for the three and nine months ended September
30, 1993 as a component of "Loss on derivative transactions, net."
On March 4, 1994, the Company announced that, based on trading of
swap/derivative positions subsequent to year-end, the Company entered into new
transactions which will result in a minimum loss of $3,000 and a maximum
potential loss of $27,575. The new transactions, which mature in June and
August 1995, may be liquidated at any time prior to maturity and had an
estimated cost of termination of approximately $17,500 at March 4, 1994.
These positions will continue to be reported at current fair market value
until they mature or are closed out, and fluctuations in such value will
affect earnings in future periods. The combined effect of these two
transactions is that the Company's losses will be between $3,000 and $27,575.
The Company's losses would be minimized at $3,000 if the six-month LIBOR rate
is at or below 3.90% on June 7, 1995 and the basis point spread for interest
rate swaps (the "swap spread") relative to the 10.75% U.S. Treasury Note
maturing August 15, 2005 is at or above 33.5 basis points on August 15, 1995.
On the other hand, its losses would be maximized at $27,575 if the six-month
LIBOR rate equals or exceeds 5.90% on June 7, 1995 and the swap spread is 20
basis points or less on August 15, 1995. The Company may elect to liquidate
the transactions at any time prior to maturity based on market conditions
prevailing at the time. As of June 30, 1994, the six-month LIBOR rate was
5.25% and the swap spread was 25.2 basis points. These transactions are still
held by the Company and, at June 30, 1994, had an estimated net cost of
termination of $22,995.
PAGE
<PAGE>
Note 9 - 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. A prompt notice of appeal was filed in the United States
Court of Appeals for the District of Columbia Circuit. The Company believes
it has substantial defenses to the charges, and these defenses have been
presented in briefs in the Company's appeal. The appeal is scheduled to be
heard on September 14, 1994. A decision is expected later in 1994 or early in
1995.
On July 1, 1994, the Company announced that it had determined that the
inventory of Cleo at December 31, 1993 had been overstated, resulting in an
approximate 20% overstatement of the Company's previously reported 1993
consolidated net income. See Note 1.
In early July, 1994, five purported class actions were commenced by certain
stockholders (the "Suits") against the Company and its Chairman, President and
Chief Executive Officer in the United States District Court for the Southern
District of Ohio, each alleging violations of the federal securities laws and,
in the case of two of the Suits, breach of common law duties and seeking
unspecified damages for an asserted public disclosure of false information
regarding the Company's earnings. Each of the Suits points to the inventory
valuation issue at Cleo as the basis for its claims. The Company intends to
vigorously defend the Suits.
The Securities and Exchange Commission is conducting a private investigation
to determine whether the Company or any of its officers, directors and
employees have engaged in conduct in violation of certain provisions of the
Securities Exchange Act of 1934 and the rules and regulations thereunder. The
Company believes that such investigation is focused principally on the
derivative transactions and the overstatement of the Cleo inventory discussed
in Note 1 and the Company's public statements and accounting systems with
respect thereto. The Company is cooperating in such investigation.
In addition, the Company is a defendant in certain other litigation.
Management does not believe that an adverse outcome as to any or all of these
matters would have a material adverse effect on the Company's net worth or
total cash flows; however, the impact on the statement of operations in a
given year could be material.
PAGE
<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.
The overstatement of inventory and income before income taxes was approximately
$8.8 million at December 31, 1993 and for the year then ended. The December 31,
1993 consolidated financial statements have been amended and restated to reflect
the correction of such overstatement as well as the accrual of an unrealized
market value loss of $3.1 million on two derivative transactions outstanding at
December 31, 1993, which did not qualify as hedges, partially offset by the
recognition of a $2.0 million previously deferred gain from certain derivative
transactions entered into and/or terminated during 1993 which also did not
qualify as hedges. The net effect of these two derivative adjustments, a loss
of $1.1 million, has been recognized in the 1993 consolidated financial
statements as these adjustments became significant in light of the reduction in
the Company's net income resulting from the restatement of Cleo inventory. In
total, the above changes reduced net income and net income per share for the
year ended December 31, 1993 from amounts previously reported by $6.0 million
and $.38, respectively.
The Company determined that $1.4 million of the $8.8 million inventory and
income before income taxes overstatement related to the third quarter.
Accordingly, the accompanying condensed consolidated financial statements at
September 30, 1993 and for the three and nine months then ended have been
amended and restated to reflect the correction of such overstatement.
Additionally, the Company accrued 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 recognized 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 net effect
of these two derivative adjustments, a loss of $1.9 million, was recognized in
the accompanying restated condensed consolidated financial statements as these
adjustments became significant in light of the reduction in the Company's net
income resulting from the restatement of Cleo inventory. In total, the above
changes reduced net income and net income per share for the three and nine
months then ended from amounts previously reported by $1.9 million and $.12,
respectively.
PAGE
<PAGE>
Results of Operations
Revenues in the third quarter increased 23.1% to $142.3 million from the
previous year reflecting increases in seasonal cards partially offset by
declines in giftwrap and shipments to Phar-Mor, Inc. (Phar-Mor). A decline in
business acquisition costs, partially offset by higher competitive allowances
also contributed to the increase. The decline in business acquisition costs
reflects lower amortization costs resulting from the write-off of long-term
sales contracts with Phar-Mor totaling $16.4 million in 1992. Phar-Mor, the
Company's largest customer in 1991, filed for bankruptcy in September 1992.
Excluding these write-offs, 1992 third quarter revenues would have been $132.0
million. For the nine months ended September 30, 1993, revenues increased 13.7%
to $311.2 million from 1992. Increases in everyday and seasonal cards were
partially offset by declines in giftwrap and related products and decreased
shipments to Phar-Mor. Excluding the Phar-Mor write-offs, total revenues for
the nine months ended September 30, 1992 would have been $290.1 million. The
acquisition of The Paper Factory on June 1, 1993 also contributed to increases
in revenues for both the three-month and nine-month periods ended September 30,
1993.
Operating expenses, as a percent of revenues, declined in the third quarter of
1993 compared to the prior year's third quarter, and totaled $135.5 million.
Cost of products sold ratios decreased from last year primarily due to favorable
product costs partially offset by change in product mix, pricing pressures and
customer discounts which adversely affected gross margins from Cleo's sales of
gift wrap and paper products. The Company expects that these conditions
adversely affecting Cleo's results will continue in 1994 and that Cleo will
incur a loss for 1994. In addition, the Company has recently completed an
extensive review of Cleo's inventory and anticipates that it will record, in the
second quarter of 1994, obsolescence charges against the book value of certain
of Cleo's inventory. Selling, distribution and administrative expenses, as a
percent of revenues, decreased to 40.8%, reflecting lower bad debt expense and
other expense, net, partially offset by goodwill amortization and certain other
purchase accounting related expenses attributable to the acquisition of The
Paper Factory as well as start-up costs of certain international operations.
The 1992 expenses included a bad debt provision of $5.9 million, the write-off
of the unamortized cost of greeting card fixtures of $5.1 million and work force
restructuring charges of $1.4 million related to the Phar-Mor bankruptcy.
Excluding all charges related to Phar-Mor, 1992 selling, distribution and
administrative expenses, as a percent of revenues, would have been 38.5%.
Financing and derivative transaction expenses for the three months and nine
months ended September 30, 1993 increased over 1992 primarily due to net losses
on certain interest rate derivative transactions of $1.9 million. The Company
recorded a net loss on derivative transactions with a financial institution for
the three and nine months ended September 30, 1993 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 value of
derivative transactions outstanding at September 30, 1993 was determined by a
financial institution's valuation model based on the projected future value of
the transactions at maturity.
PAGE
<PAGE>
Operating expenses for the nine months ended September 30, 1993, as a percent of
revenues, decreased from the prior nine-month period, due to a lower product
cost ratio of 44.8% and a lower selling, distribution and administrative expense
ratio of 50.4%, as compared to comparable ratios of 46.1% and 57.4%,
respectively, in 1992 which reflected the Phar-Mor bankruptcy. Excluding the
charges related to Phar-Mor, the 1992 selling, distribution and administrative
ratio would have been 49.9%. Operating expenses in 1993 were adversely affected
by international operations' start-up costs and the acquisition of The Paper
Factory. Cost of products sold were adversely affected by change in product
mix, pricing pressures and customer discounts which adversely affected gross
margins from Cleo's sales of gift wrap and paper products.
Third quarter pretax income of $3.1 million was $23.1 million higher than last
year and represented 2.2% of total revenues. Pretax income for the nine months
ended September 30, 1993 was $8.6 million and represented 2.8% of revenues
compared to a pretax loss of $14.0 million for 1992.
Effective tax rates for the three months and nine months ended September 30,
1993 were 26.9% and 38.6%, respectively, compared with 38.6% and 37.9% for the
same periods in 1992. Recently enacted tax laws raised the statutory tax rate
for corporations from 34% to 35%, retroactive to January 1, 1993. Partially
offsetting the adverse impact of the 1% increase in effective tax rates in 1993
and future periods is the favorable adjustment of $.8 million recorded in the
third quarter of 1993 due to the revaluation of certain deferred tax assets.
Income before the cumulative effect of accounting changes was $5.3 million for
the first nine months of 1993 and represented 1.7% of revenues compared to a
loss of $8.7 million for the first nine months of 1992.
During 1992, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 106 - "Employers' Accounting for Postretirement Benefits Other Than
Pensions," retroactive to January 1, 1992. Upon adoption, the Company incurred
a one-time charge of $2.5 million, net of income taxes of $1.6 million,
attributable to the cumulative effect of the adoption of this accounting change.
The impact on net income per share was $.15. In addition, the Company adopted
SFAS No. 109 - "Accounting for Income Taxes" which resulted in a credit of $1.1
million or $.06 per share for the cumulative effect of this change.
Net income for the third quarter of 1993 was $2.2 million and represented 1.6%
of total revenues compared to a net loss of $12.3 million in 1992. For the nine
months ended September 30, 1993, net income of $5.3 million represented 1.7% of
total revenues compared to a net loss of $10.1 million in 1992.
Liquidity and Capital Resources
Cash flows from operating activities for the first nine months of 1993 provided
$30.2 million in cash compared to $57.4 million for the same period in 1992.
The decline from 1992 reflected lower trade receivable decreases from the
previous year-end and lower amortization of deferred costs and other
intangibles. This was partially offset by higher net income, lower decreases in
income taxes payable and lower inventory increases. Improvements realized in
inventory control programs were partially offset by inventory acquired in
connection with the purchase of The Paper Factory. The net increase in other
assets from September 30, 1992 reflected the increase in goodwill of $26.2
million associated with the acquisition of The Paper Factory in the second
quarter of 1993.
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Net cash used in investing activities totaled $49.3 million in the nine months
ended September 30, 1993 compared with $22.5 million in the nine months ended
September 30, 1992. Cash used in investing activities for plant and equipment
purchases in 1993 was $24.7 million compared to $22.5 million in 1992. The
increase in capital expenditures reflected the purchase of a distribution center
by the Company's U.K. based subsidiary. In addition, the acquisition of The
Paper Factory 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 1993 was $10.2
million compared to cash used of $44.4 million in 1992. Debt due within one
year increased $6.2 million versus a decrease of $41.7 million reflecting an
increase in short-term borrowings.
In April, 1993 the Company consummated a new $210 million, three-year revolving
credit facility, replacing the similar existing facility. The facility will
provide funds for general corporate purposes and future growth.
The Company periodically enters into interest rate swap or derivative
transactions with a financial institution to manage the interest rate
sensitivity of a portion of its debt. Certain of the derivative transactions
executed during 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) have been recognized as a component of
the loss on derivative transactions, net in the accompanying 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 accompanying condensed consolidated financial statements at September 30,
1993. The market value of the derivative transactions at September 30, 1993 was
determined by a financial institution's valuation model based on the projected
future value of the transactions at maturity.
On March 4, 1994, the Company announced that, based on trading of
swap/derivative positions subsequent to year-end, the Company had entered into
two new transactions with a financial institution which will result in a minimum
loss of $3.0 million and a maximum potential loss of $27.575 million. The new
transactions, which mature in June and August 1995, may be liquidated at any
time prior to maturity and had an estimated cost of termination of approximately
$17.5 million at March 4, 1994. As these positions do not constitute effective
hedges, they are reported at their current fair market value until they mature
or are closed out, and fluctuations in such value will affect earnings in future
periods. The combined effect of these two transactions is that the Company's
losses on these transactions will be between $3.0 million and $27.575 million.
The Company's losses would be minimized at $3.0 million if the six-month LIBOR
rate is at or below 3.90% on June 7, 1995 and the basis point spread for
interest rate swaps (the "swap spread") relative to the 10.75% U.S. Treasury
Note maturing August 15, 2005 is at or above 33.5 basis points on August 15,
1995. On the other hand, its losses would be maximized at $27.575 million if
the six-month LIBOR rate equals or exceeds 5.90% on June 7, 1995 and the swap
spread is 20 basis points or less on August 15, 1995. The Company may elect to
liquidate the transactions at any time prior to maturity based on market
conditions prevailing at the time. As of June 30, 1994, the six-month LIBOR
rate was 5.25% and the swap spread was 25.2 basis points. These transactions
are still held by the Company and, at June 30, 1994, had an estimated net cost
of termination of approximately $23.0 million.
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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.
It is management's intent to file those statements with the lenders within
thirty days of the original deadline which is permissible under the debt
agreements. Additionally, these agreements contain covenants related to
material adverse changes and material litigation. Management believes that the
Company is not in violation of these covenants.
Management 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).
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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.
In early July, 1994, five purported class actions (Vladimir v. Gibson Greetings,
Inc., Steiner v. Gibson Greetings, Inc., Gambal v. Gibson Greetings, Inc., Arosa
v. Gibson Greetings, Inc., and Kates v. Gibson Greetings, Inc.) were commenced
by certain stockholders (the "Suits") against the Company and its Chairman,
President and Chief Executive Officer in the United States District Court for
the Southern District of Ohio, each alleging violations of the federal
securities laws and, in the case of two of the Suits, breach of common law
duties and seeking unspecified damages for an asserted public disclosure of
false information regarding the Company's earnings. Each of the Suits points to
the inventory valuation issue at Cleo as the basis for its claims. The Company
intends to vigorously defend the Suits.
The Securities and Exchange Commission is conducting a private investigation to
determine whether the Company or any of its officers, directors and employees
have engaged in conduct in violation of certain provisions of the Securities
Exchange Act of 1934 and the rules and regulations thereunder. The Company
believes that such investigation is focused principally on the derivative
transactions and the overstatement of the Cleo inventory discussed in Part I,
Item 2 hereof and the Company's public statements and accounting systems with
respect thereto. The Company is cooperating in such investigation.
In 1989, unfair labor practice charges were filed against the Company as an
outgrowth of a strike at its Berea, Kentucky facility. Remedies sought include
back pay from August 8, 1989 and reinstatement of employment for approximately
200 employees. In February 1990, the General Counsel of the National Labor
Relations Board ("NLRB") issued a complaint based on certain of the allegations
of these charges (In the Matter of Gibson Greetings, Inc. and International
Brotherhood of Fireman and Oilers, AFL-CIO, Cases 9-CA-26706, 27660, 26875.) On
December 18, 1991, an Administrative Law Judge of the NLRB issued a recommended
order, which included reinstatements and back pay affecting approximately 160
strikers, based on findings that the Company had violated certain provisions of
the National Labor Relations Act. On May 7, 1993, the NLRB upheld the
Administrative Law Judge's decision in some respects, and enlarged the number of
strikers entitled to back pay to approximately 240. A prompt notice of appeal
was filed in the United States Court of Appeals for the District of Columbia
Circuit. The Company believes it has substantial defenses to the charges, and
these defenses have been presented in briefs in the Company's appeal. The
appeal is scheduled to be heard on September 14, 1994. A decision is expected
later in 1994 or early in 1995.
In addition, the Company is a defendant in certain other litigation.
Management does not believe that an adverse outcome as to any or all of these
matters would have a material adverse effect on the Company's net worth or total
cash flows; however, the impact on the statement of operations in a given year
could be material.
Item 2. Changes In Securities
Not applicable.
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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 None.
b) Reports on Form 8-K None.
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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 August 29, 1994
By:/s/ William L. Flaherty
------------------------
William L. Flaherty
Vice President-Finance
Principal Financial
and Accounting Officer
