PAGE
<PAGE>
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 June 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 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>
June 30, December 31, June 30,
1994 1993 1993
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 5,957 $ 9,477 $ 15,234
Trade receivables, net 50,584 192,163 34,365
Inventories 192,427 125,138 185,527
Prepaid expenses 5,814 4,207 4,675
Prepaid income taxes 8,702 - -
Deferred income taxes 36,333 36,796 29,255
--------- --------- ---------
Total current assets 299,817 367,781 269,056
--------- --------- ---------
PLANT AND EQUIPMENT, net 122,087 116,900 118,117
NOTES RECEIVABLE, net 1,075 - -
OTHER ASSETS, net 85,553 86,924 79,722
--------- --------- ---------
$ 508,532 $ 571,605 $ 466,895
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Debt due within one year $ 33,102 $ 66,187 $ 1,887
Accounts payable 22,512 18,835 17,553
Income taxes payable - 13,071 177
Other current liabilities 70,682 60,479 47,244
--------- --------- ---------
Total current liabilities 126,296 158,572 66,861
--------- --------- ---------
DEFERRED INCOME TAXES 423 (854) 1,365
LONG-TERM DEBT 63,695 74,365 76,835
OTHER LIABILITIES 35,003 21,854 18,298
--------- --------- ---------
Total liabilities 225,417 253,937 163,359
--------- --------- ---------
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
16,508,469 shares issued,
respectively 166 165 165
Paid-in capital 46,019 45,209 44,615
Retained earnings 242,677 277,891 264,279
Foreign currency adjustment 193 291 365
--------- --------- ---------
289,055 323,556 309,424
Less treasury stock, at cost,
483,701, 473,344 and 473,344
shares, respectively 5,940 5,888 5,888
--------- --------- ---------
Total stockholders' equity 283,115 317,668 303,536
--------- --------- ---------
$ 508,532 $ 571,605 $ 466,895
========= ========= =========
</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 Six Months Ended
June 30, June 30,
1994 1993 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 90,648 $ 83,964 $ 184,077 $ 168,871
Costs and expenses:
Operating expenses:
Cost of products sold 43,538 30,813 79,566 61,809
Selling, distribution
and administrative
expenses 61,237 49,256 119,089 98,917
--------- --------- --------- ---------
Total operating
expenses 104,775 80,069 198,655 160,726
--------- --------- --------- ---------
Operating income (loss)
before financing and
derivative transaction
expenses (14,127) 3,895 (14,578) 8,145
Financing and derivative
transaction expenses:
Interest expense, net of
capitalized interest 2,055 1,761 4,029 3,417
Interest income (188) (338) (509) (767)
Loss on derivative
transactions, net 3,295 - 19,746 -
--------- --------- --------- ---------
Total financing and
derivative transaction
expenses, net 5,162 1,423 23,266 2,650
--------- --------- --------- ---------
Income (loss) before
income taxes (19,289) 2,472 (37,844) 5,495
Income taxes (5,611) 1,257 (5,846) 2,478
--------- --------- --------- ---------
Net income (loss) $ (13,678) $ 1,215 $ (31,998) $ 3,017
========= ========= ========= =========
Net income (loss) per share $ (.85) $ .08 $ (1.98) $ .19
========= ========= ========= =========
Dividends per share $ .10 $ .10 $ .20 $ .20
========= ========= ========= =========
</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>
Six Months Ended
June 30,
1994 1993
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (31,998) $ 3,017
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and write-down of display fixtures 11,449 11,085
Loss on disposal of plant and equipment 2,818 2,420
Loss on derivative transactions, net 19,746 -
Deferred income taxes 1,740 729
Amortization of deferred costs and other
intangibles 10,546 7,543
Change in assets and liabilities:
Decrease in trade receivables, net 141,579 135,269
Increase in inventories (67,289) (58,546)
Increase in prepaid expenses (1,607) (182)
Increase in prepaid income taxes (8,702) -
Increase in notes receivable, net (1,075) -
Increase in other assets, net of amortization (9,175) (6,793)
Increase in accounts payable 3,677 1,297
Decrease in income taxes payable (13,071) (9,880)
Increase (decrease) in other current
liabilities 10,203 (6,632)
Increase (decrease) in other liabilities (6,597) 3,258
All other, net (125) 155
---------- ----------
Total adjustments 94,117 79,723
---------- ----------
Net cash provided by operating activities 62,119 82,740
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment (19,467) (16,809)
Proceeds from sale of plant and equipment 56 80
Acquisition of The Paper Factory of Wisconsin, Inc.,
net of cash acquired - (24,782)
---------- ----------
Net cash used in investing activities (19,411) (41,511)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in short-term borrowings (40,320) (39,208)
Issuance of long-term debt - 8,075
Payments on long-term debt (3,451) (1,339)
Issuance of common stock 811 179
Acquisition of common stock for treasury (52) -
Dividends paid (3,216) (3,207)
---------- ----------
Net cash used in
financing activities (46,228) (35,500)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (3,520) 5,729
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 9,477 9,505
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 5,957 $ 15,234
========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest, net of amounts capitalized $ 3,975 $ 4,050
Income taxes 14,039 11,624
</TABLE>
[FN]
See accompanying notes to condensed consolidated financial statements.
PAGE
<PAGE>
GIBSON GREETINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 1994 and 1993
(Dollars in thousands except per share amounts)
(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 June 30, 1994, December 31, 1993 and June 30, 1993, the results
of its operations for the six months ended June 30, 1994 and 1993 and its cash
flows for the six months ended June 30, 1994 and 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 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.
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.
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.
PAGE
<PAGE>
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.
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:
June 30, December 31, June 30,
1994 1993 1993
--------- --------- ---------
Trade receivables $ 88,060 $ 245,682 $ 74,737
Less reserve for returns,
allowances, cash discounts
and doubtful accounts 37,476 53,519 40,372
--------- --------- ---------
$ 50,584 $ 192,163 $ 34,365
========= ========= =========
Note 4 - Inventories
Inventories consist of the following:
June 30, December 31, June 30,
1994 1993 1993
--------- --------- ---------
Finished goods $ 125,076 $ 74,268 $ 120,971
Work-in-process 19,907 13,147 15,202
Raw materials and supplies 47,444 37,723 49,354
--------- --------- ---------
$ 192,427 $ 125,138 $ 185,527
========= ========= =========
Note 5 - Interest Expense
There was no capitalized interest for the three-months and six-month periods
ended June 30, 1994 and 1993.
PAGE
<PAGE>
Note 6 - 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:
1994 1993
---------- ----------
Three months ended June 30, 16,111 16,708
========== ==========
Six months ended June 30, 16,154 16,076
========== ==========
Note 7 - Derivative Transactions
The Company has two interest rate derivative transactions outstanding at June
30, 1994 which are recorded at fair market value and will result in a minimum
loss of $3,000 and a maximum potential loss of $27,575. The transactions
mature in June and August 1995 and may be liquidated at any time prior to
maturity. 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 Company recorded a net loss in the
accompanying condensed consolidated statements of income of $19,746 for the
six months ended June 30, 1994 which is comprised of the $3,000 minimum loss
to be paid upon maturity, an additional $16,895 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 unrealized loss to record these transactions at market
value for the three months ended June 30, 1994 is $3,295. The current market
value was determined by a financial institution's valuation model based on the
projected future value of the transactions at maturity.
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 and its maximum loss would 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 June 30, 1994, the six-month LIBOR rate was 5.25% and the swap
spread was 25.2 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 June 30, 1994 are as
follows:
Six-month LIBOR Band - 3.9% to 5.9% $15,035
Swap Spread 7,960
-------
$22,995
=======
PAGE
<PAGE>
Based on the stated maturity dates, the $15,035 accrual for the loss is shown
as an Other Current Liability while the $7,960 accrual is shown as an Other
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.
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. 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 operating income was
approximately $8.8 million at December 31, 1993 and for the year then ended.
The December 31, 1993 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.
At March 31, 1994, the Cleo inventories remained overstated by approximately
$8.8 million. 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 $3.1 million unrealized loss on two
derivative transactions which did not qualify as hedges in its restated 1993
financial statements, together with the recognition of a $.1 million
previously deferred gain from certain derivative transactions terminated
during 1994 which also did not qualify as hedges, had the effect of reducing
the Company's loss on derivative transactions, net loss, and net loss per
share for the three months ended March 31, 1994 by $3.2 million, $3.2 million
and $.20, respectively, from amounts previously reported.
Results of Operations
Revenues in the second quarter increased 8.0% to $90.6 million from the
previous year. This was principally due to sales by The Paper Factory of
Wisconsin, Inc. (The Paper Factory) which was acquired June 1, 1993.
Increases in domestic and international sales of greeting cards were offset by
higher sales allowances reflecting competitive pressure. Returns and
allowances were 17.5% of sales for the three months ended June 30, 1994
compared to 16.4% for the same period in 1993. For the six months ended June
30, 1994, revenues increased 9.0% to $184.1 million from 1993 reflecting The
Paper Factory's sales. Returns and allowances were 19.5% of sales for the six
months ended June 30, 1994 compared to 20.5% for the same period in 1993.
PAGE
<PAGE>
Operating expenses totaled $104.8 million in the second quarter of 1994
representing a 30.9% increase over the corresponding quarter in 1993. Cost of
products sold, as a percent of revenues, were 48.0% versus 36.7% for the
second quarter of 1993. The increase was primarily due to the impact of the
acquisition of The Paper Factory combined with an increase at Cleo. The Paper
Factory is a highly seasonal business which traditionally posts most of its
revenues and profits in the third and fourth quarters. 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. The second quarter
1994 results reflect an obsolescence charge resulting from an extensive review
of Cleo's inventory as well as additional charges for sales returns and
allowances for customer discounts at Cleo. Selling, distribution and
administrative expenses, as a percent of revenues, increased to 67.6% from
58.7% primarily due to the impact of the acquisition of The Paper Factory
combined with 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 $198.7 million for the six months ended June 30,
1994 representing a 23.6% increase over 1993. Cost of products sold, as a
percent of revenues, were 43.2% versus 36.6% in 1993 reflecting the full
impact of The Paper Factory in 1994 and the 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 64.7% from
58.6% 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.
For the three months ended June 30, 1994, the Company recorded an unrealized
market value loss of $3.3 million on two derivative transactions outstanding
at June 30, 1994, which do not qualify as hedges. For the six months ended
June 30, 1994, the Company recorded a net loss on derivative transactions of
$19.7 million consisting of an unrealized market value loss of $19.8 million
and the recognition of a $.1 million gain, all from derivative transactions
which do not qualify as hedges. The market value of derivative transactions
outstanding at June 30, 1994 was determined by a financial institution model
based on the projected future value of the transactions at maturity.
Second quarter pretax loss of $19.3 million compared with pretax income for
1993 of $2.5 million. Pretax loss for the six months ended June 30, 1994 was
$37.8 million compared with 1993 pretax income of $5.5 million.
Effective tax rates for the three months and six months ended June 30, 1994
were 29.1% and 15.4%, respectively compared with 50.8% and 45.1% for the same
periods in 1993. The effective 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 exceeded the statutory rates in part due to the goodwill
associated with The Paper Factory acquisition.
Net loss for the second quarter of 1994 was $13.7 million compared with 1993
net income of $1.2 million. For the six months ended June 30, 1994, net loss
was $32.0 million compared with 1993 net income of $3.0 million.
PAGE
<PAGE>
Financing and derivative transaction expenses The Company has two interest
rate derivative transactions outstanding at June 30, 1994, which are recorded
at fair market value. These two transactions have caps on the Company's total
exposure and replace previous uncapped positions that were entered into
subsequent to December 31, 1993. Except for the 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.
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 interest rate derivative transactions that had a
negative market value, on that date, of $17.5 million. The two new
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 recorded a net loss in the accompanying condensed
consolidated statements of income of $19.7 million for the six months ended
June 30, 1994 which is comprised of the $3 million minimum loss to be paid
upon maturity and an additional $16.8 million unrealized loss based upon the
fair market value of the transactions on that date and the recognition of $.1
million in proceeds from derivative transactions deemed not to qualify as
hedges. The current market value was determined by a financial institution's
valuation model 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.
The combined effect of these two transactions is that the Company's losses
will be between $3 million and $27.575 million. The Company's losses would 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 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. See also Note 7 of Notes to
Condensed Consolidated Financial Statements.
If held to maturity, and if market conditions at maturity are the same as
existed on June 30, 1994, the transactions would result in a total realized
loss of approximately $19.0 million. The additional $4.0 million unrealized
loss that is being recognized currently results from future adverse movements
projected by the financial institution's valuation model. If those projected
adverse movements do not occur, or if favorable movements occur, gains in an
amount determined by then current market conditions would be recognized in
future periods to reverse the prior recognition of unrealized losses, up to a
net loss of $3 million in the best case at maturity of the transactions.
Similarly, if there are further future adverse movements, the Company could be
required to recognize up to an additional $4.575 million of loss.
The full amount of the $23.0 million loss, representing the termination value
at June 30, 1994, had no cash flow impact in the first six 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.
PAGE
<PAGE>
Liquidity and Capital Resources
Cash flows from operating activities for the first six months of 1994 provided
$62.1 million in cash compared to $82.7 million for the same period in 1993.
The decline from 1993 reflected the net loss, excluding the non-cash
charge related to the loss on derivative transactions, partially offset by
increased collection of trade receivables from the previous year-end.
Cash used in investing activities for plant and equipment purchases in 1994
was $19.5 million compared to $16.8 million in 1993. The increase in capital
expenditures was largely due to an increase in fixture purchases.
Cash used in financing activities in the first half of 1994 was $46.2 million
compared to $35.5 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 June 30, 1994 was $33.1 million versus $1.9
million at June 30, 1993 reflecting increased cash requirements by certain
domestic operations.
Other current liabilities increased $23.4 million from the same period in 1993
primarily due to the current portion of the loss on derivative transactions of
$15.0 million and the timing of other payments. Other liabilities increased
$16.7 million from the same period in 1993 reflecting the $8.0 million
noncurrent portion of the loss on derivative transactions as well as an
increase in the noncurrent portion of amounts due on sales agreements. The
latter increase reflected new sales agreements and renewed agreements in 1994.
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.
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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
The Annual Meeting of Shareholders of the Company was held April 21, 1994 for
the following purposes:
To elect two directors;
The results of the matters voted on are as follows:
Against
or Broker
For Withheld Abstentions Non-Votes
---------- -------- ----------- ---------
Election of Directors:
Frank Stanton 13,664,125 80,429 - -
Roger T. Staubach 13,656,757 87,797 - -
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits None
b) Reports on Form 8-K
The Company filed a Form 8-K with the
Securities and Exchange Commission on
April 19, 1994 attaching the Company's
press release dated April 19, 1994.
No financial statements were required
to be filed in connection with the
report.
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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
