<PAGE> 1
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, 1998
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:
16,423,563 shares of common stock, par value $.01, outstanding at August 7,
1998.
<PAGE> 2
PART I. ITEM 1. FINANCIAL STATEMENTS
- ------------------------------------
GIBSON GREETINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 90,000 $ 114,267 $ 106,033
Trade receivables 27,340 30,325 15,069
Inventories 79,867 59,424 71,461
Prepaid expenses 3,914 4,435 2,974
Deferred income taxes 32,930 41,399 37,351
------------------ ----------------- -----------------
Total current assets 234,051 249,850 232,888
PLANT AND EQUIPMENT, NET 72,290 85,376 89,641
DEFERRED INCOME TAXES 27,635 18,524 17,926
OTHER ASSETS, NET 89,388 89,572 90,760
------------------ ----------------- -----------------
$ 423,364 $ 443,322 $ 431,215
================== ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Debt due within one year $ 451 $ 7,890 $ 7,886
Accounts payable 17,485 11,810 12,624
Income taxes payable 4,084 14,502 5,540
Other current liabilities 65,323 68,443 74,799
------------------ ----------------- -----------------
Total current liabilities 87,343 102,645 100,849
LONG-TERM DEBT 7,923 24,158 24,379
SALES AGREEMENT PAYMENTS DUE AFTER ONE YEAR 10,616 11,612 13,675
OTHER LIABILITIES 40,330 23,163 22,210
------------------ ----------------- -----------------
Total liabilities 146,212 161,578 161,113
------------------ ----------------- -----------------
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, 17,110,497, 17,023,306 and 16,900,773
shares issued, respectively 171 170 169
Paid-in capital 54,363 52,872 49,973
Retained earnings 232,010 235,353 225,179
Accumulated other comprehensive income 783 733 732
------------------ ----------------- -----------------
287,327 289,128 276,053
Less treasury stock, at cost, 691,601, 556,601
and 494,601 shares, respectively 10,175 7,384 5,951
------------------ ----------------- -----------------
Total stockholders' equity 277,152 281,744 270,102
------------------ ----------------- -----------------
$ 423,364 $ 443,322 $ 431,215
================== ================= =================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
GIBSON GREETINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES $ 104,977 $ 92,663 $ 206,726 $ 192,276
--------------- --------------- --------------- ---------------
COST AND EXPENSES
Operating expenses:
Cost of products sold 41,941 31,072 81,547 67,286
Selling, distribution and administrative
expenses 53,953 51,501 105,640 103,535
Restructuring charge - - 26,100 -
--------------- --------------- --------------- ---------------
Total operating expenses 95,894 82,573 213,287 170,821
--------------- --------------- --------------- ---------------
OPERATING INCOME (LOSS) 9,083 10,090 (6,561) 21,455
--------------- --------------- --------------- ---------------
Financing expenses:
Interest expense 1,125 2,382 2,300 4,636
Interest income (1,484) (1,522) (3,180) (2,970)
--------------- --------------- --------------- ---------------
Total financing (income) expenses, net (359) 860 (880) 1,666
--------------- --------------- --------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES 9,442 9,230 (5,681) 19,789
Income tax provision (benefit) 3,870 3,879 (2,338) 8,365
--------------- --------------- --------------- ---------------
NET INCOME (LOSS) $ 5,572 $ 5,351 $ (3,343) $ 11,424
=============== =============== =============== ===============
NET INCOME (LOSS) PER SHARE:
Basic $ 0.34 $ 0.33 $ (0.20) $ 0.70
=============== =============== =============== ===============
Diluted $ 0.33 $ 0.32 $ (0.20) $ 0.68
=============== =============== =============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
GIBSON GREETINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,343) $ 11,424
------------- -------------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation including write-down of display fixtures 11,317 11,049
Impairment of plant and equipment 12,967 -
Loss on disposal of plant and equipment 853 305
Deferred income taxes (642) 5,913
Amortization of deferred costs and intangibles 9,702 12,393
Change in assets and liabilities:
Trade receivables, net 2,985 27,354
Inventories (20,443) (6,392)
Prepaid expenses 521 (16)
Other assets, net of amortization (8,424) (14,038)
Accounts payable 5,675 (796)
Income taxes payable (10,418) (10,276)
Other current liabilities (3,120) (6,639)
Other liabilities 4,131 115
All other, net 9 2
------------- -------------
Total adjustments 5,113 18,974
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,770 30,398
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment (12,150) (8,568)
Proceeds from sale of plant and equipment 140 81
Note receivable from The Ink Group (1,094) -
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (13,104) (8,487)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt, net (11,634) (16,534)
Issuance of common stock 1,492 2,501
Acquisition of common stock for treasury (2,791) -
------------- -------------
NET CASH USED IN FINANCING ACTIVITIES (12,933) (14,033)
------------- -------------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (24,267) 7,878
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 114,267 98,155
------------- -------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 90,000 $ 106,033
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,810 $ 1,425
Income taxes 8,755 12,729
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
GIBSON GREETINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND RESTRUCTURING PLAN
- -----------------------------------------------------
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, 1998, December 31, 1997 and June 30, 1997, the results of its
operations for the three and six months ended June 30, 1998 and 1997 and its
cash flows for the six months ended June 30, 1998 and 1997. The accompanying
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
Use of Estimates -
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts could differ from those estimates.
Comprehensive Income -
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard (SFAS) No. 130 - "Reporting Comprehensive Income" in June
1997. The Company adopted SFAS No. 130 in the first quarter of 1998.
Comprehensive income (loss) was $5,559 and $5,438 for the three months and
$(3,293) and $11,285 for the six months ended June 30, 1998 and 1997,
respectively. Comprehensive income(loss) includes foreign currency translation
adjustments, net of taxes, of $(13) and $87 for the three months and $50 and
$(139) for the six months ended June 30, 1998 and 1997, respectively.
Restructuring Plan -
On March 31, 1998, the Company announced a restructuring plan (the Plan) under
which the Company will outsource its principal manufacturing operations
currently performed at its Cincinnati, Ohio headquarters. Implementation of the
Plan began in the second quarter of 1998 and is expected to be substantially
complete by the end of the fourth quarter of 1998. The total cost of the Plan is
expected to be $26,100 before income taxes and was recognized as a separate
component of operating expenses in the first quarter of 1998. In addition, the
Company will invest an estimated $30,000 to $35,000 over a 30 month period to
significantly upgrade or replace its existing business information systems. The
investment in business information systems will be expensed as incurred or
capitalized as appropriate in accordance with AICPA Statement of Position 98-1 -
"Accounting for the Costs of Software Developed or Obtained for Internal Use."
Management believes these plans will enhance the Company's flexibility and
operating efficiency while lowering fixed costs and improving customer service.
The Company has recognized within the total restructuring cost approximately
$17,100 representing costs related to the facility, $5,800 related to
involuntary employee severance, and $3,200 in other costs. The facility costs of
$17,100 include an adjustment of $12,967 to write-off the capitalized lease
asset, leasehold improvements, and certain furniture and equipment (included in
plant and equipment) associated with the Cincinnati manufacturing operations;
and a reserve of $4,133 included in other liabilities representing the amount by
which total future lease commitments and related operating costs of the
Cincinnati facility exceed the recorded lease obligation and estimated sublease
income over the remaining term of the lease. The recorded lease obligation,
representing the portion of the capital lease obligation (see Note 5) associated
with the Cincinnati facility of $12,040 has been reclassified from debt to other
liabilities. Involuntary employee severance costs and other costs are included
in other current liabilities. As a result of the restructuring and the
information systems plans, approximately 480 employees will be terminated,
consisting of approximately 415 plant operations and manufacturing personnel and
approximately 65 employees from various support and administrative functions
within the Company. The involuntary severance package which was communicated to
employees on March 31, 1998 includes salary continuation, subsidized medical
coverage during the salary continuation period, professional outplacement
assistance and career counseling. The termination of these employees will result
in the curtailment of a defined benefit pension plan. The curtailment is
expected to result in a gain of approximately $3,900 before income taxes, as
estimated by an actuary, which will be recognized as positions are eliminated.
5
<PAGE> 6
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:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Trade receivables $ 61,380 $ 85,537 $ 53,660
Less reserves for returns, allowances, cash discounts
and doubtful accounts 34,040 55,212 38,591
------------ ------------ ------------
$ 27,340 $ 30,325 $ 15,069
============ ============ ============
NOTE 4 - INVENTORIES
- --------------------
Inventories consist of the following:
June 30, December 31, June 30,
1998 1997 1997
------------ ------------ ------------
Finished goods $ 48,226 $ 43,098 $ 49,132
Work-in-process 22,187 10,082 14,312
Raw materials and supplies 9,454 6,244 8,017
------------ ------------ ------------
$ 79,867 $ 59,424 $ 71,461
============ ============ ============
NOTE 5 - DEBT
- -------------
Debt consists of the following:
June 30, December 31, June 30,
1998 1997 1997
------------ ------------ ------------
Senior notes bearing interest at 9.33%, retired on June 1, 1998 $ - $ 11,428 $ 11,428
Industrial revenue bonds bearing interest at 9.25%, payable in
semi-annual installments of $300, secured by plant
and equipment 300 600 900
Other notes bearing interest at a weighted average rate of
5.20%, payable in quarterly installments, secured by the
same assets securing the industrial revenue bonds 229 301 372
------------ ------------ ------------
529 12,329 12,700
Capital lease obligation, payable in monthly installments
through 2013, net of $12,040 included in other liabilities
at June 30,1998 7,845 19,719 19,565
------------ ------------ ------------
8,374 32,048 32,265
Less debt due within one year 451 7,890 7,886
------------ ------------ ------------
$ 7,923 $ 24,158 $ 24,379
============ ============ ============
</TABLE>
6
<PAGE> 7
Effective April 24, 1998, the Company entered into a $30,000, 364-day revolving
credit agreement that will provide for borrowings in an amount adequate for the
Company's needs over the term of the facility. This facility replaced a 364-day
revolving credit agreement providing $40,000 which expired in late April 1998.
Under the terms of its Senior Note Agreement, the Company prepaid $4,285 in
principal, without premium, on June 1, 1998, in addition to the $7,143 principal
amount the Company was required to pay under the Note Agreement. As a result of
these payments and prior retirements, all Senior Notes have been repaid in their
entirety.
In connection with the sale of Cleo Inc. (Cleo), a former wholly-owned
subsidiary, the Company renegotiated its long-term lease agreement for certain
of its principal facilities. The initial lease term of this amended agreement
runs through November 30, 2013, with one 10-year renewal option available. The
basic rent under the lease contains scheduled rent increases every five years,
including the renewal period. The lease contains a purchase option in 2005 (and
again in 2010) at the fair market value of the properties at the date of
exercise. As a condition of the lease, all property taxes, insurance costs and
operating expenses are to be paid by the Company. For accounting purposes, this
lease has been treated as a capital lease.
Minimum rental commitments under the noncancelable capital lease obligation,
including the amount recorded in other liabilities, as of June 30, 1998 are as
follows:
<TABLE>
<CAPTION>
Capital
Year Ending June 30, Lease
----------------------------- -------------
<S> <C>
1999 $ 3,100
2000 3,100
2001 3,513
2002 3,720
2003 3,720
Thereafter 47,071
-------------
Net minimum commitments 64,224
Less amount representing interest 44,339
------------
Present value of net minimum lease commitments $ 19,885
=============
</TABLE>
NOTE 6 - COMPUTATION OF NET INCOME (LOSS) PER SHARE
- ---------------------------------------------------
The Company adopted SFAS No. 128 - "Earnings per Share" in the fourth quarter of
1997. All previously reported earnings per share (EPS) amounts have been
restated to conform to the new presentation. Assuming the exercise of all
outstanding contracts to issue common stock, the effect on EPS was antidilutive
for the six months ended June 30, 1998; therefore such exercises were not
considered.
The following table reconciles basic weighted average shares outstanding to
diluted weighted average shares outstanding for the three and six months ended
June 30, 1998 and 1997. There are no adjustments to net income (loss) for the
basic or diluted EPS computations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Basic weighted average shares outstanding 16,397,397 16,335,321 16,389,058 16,285,899
Effect of dilutive securities - stock options held by employees 657,217 529,501 - 500,325
------------ ------------- ------------- ------------
Diluted weighted average shares outstanding 17,054,614 16,864,822 16,389,058 16,786,224
============ ============= ============= ============
</TABLE>
NOTE 7 - LEGAL MATTERS
- ----------------------
In July 1994, immediately following the Company's announcement of an inventory
misstatement at Cleo, which resulted in an overstatement of the Company's
previously reported 1993 consolidated net income, five purported class actions
were commenced by certain stockholders. These suits were consolidated and a
Consolidated Amended Class Action Complaint against the Company, its then
Chairman, President and Chief Executive Officer, its then Chief Financial
Officer and the former President and Chief Executive Officer of Cleo was filed
in October 1994, in the United States District Court for the Southern District
of Ohio (In Re Gibson Securities Litigation). The Complaint alleged violations
of the federal securities laws and sought unspecified damages for an asserted
7
<PAGE> 8
public disclosure of false information regarding the Company's earnings. In
August 1996, the Court certified the case as a class action. The Court
subsequently concluded that the certified class representative could represent
only those class members who purchased Gibson stock after April 19, 1994 and
before July 1, 1994. All other claims were dismissed. In April and June 1998,
the Court granted motions for summary judgment filed by the Company, by its
former Chairman, President and Chief Executive Officer, by its former Chief
Financial Officer and by Cleo's former President and Chief Executive Officer.
Only a third party claim by the Company against its former auditor for
professional malpractice, a counterclaim by the former auditor against the
Company for unpaid fees and cross-claims and counterclaims between the auditor
and the former President and Chief Executive Officer of Cleo remain in the
action. Plaintiff has appealed the Court's granting of summary judgments for the
individual defendants and the Company. The third-party claim, counterclaim and
cross-claims will be scheduled for trial in the spring of 1999.
The Company presently is unable to predict the effect of the ultimate resolution
of the matter described above upon the Company's results of operations and cash
flows. As of this date, however, management does not expect that such resolution
would result in a material adverse effect upon the Company's total net worth.
In addition, the Company is a defendant in certain other routine litigation
which is not expected to result in a material adverse effect on the Company's
net worth, total cash flows or operating results.
NOTE 8 - SUBSEQUENT EVENTS
- --------------------------
On July 3, 1998, the Company acquired a majority interest in The Ink Group, a
leading publisher of alternative greeting cards, calendars, mugs, address books
and diaries based in Sydney, Australia, with operations also in New Zealand and
the United Kingdom, for $1,000 and an agreement to provide operating loans which
totaled $6,800 as of August 12, 1998. Under terms of the transaction, the
Company acquired 60% ownership of The Ink Group's operating companies in
Australia and New Zealand and 100% ownership of its subsidiary in the United
Kingdom. The Ink Group will continue to operate under its existing name and its
senior management will remain in place.
On July 30, 1998, the Company increased by $1,437 its investment in The Virtual
Mall Inc., a company providing digital greetings through the Internet doing
business as Greet Street. The market value of the investment in The Virtual Mall
Inc. is not readily determinable and the investment is therefore recorded at
cost.
On August 12, 1998, the Company announced its July 31, 1997 stock repurchase
program has been extended until July 31, 1999. This program provides for the
repurchase of up to one million shares of common stock. As of June 30, 1998,
195,000 shares had been repurchased pursuant to the program.
On August 12, 1998, the Company signed a ten year lease agreement to occupy
approximately 148,000 square feet of office space with a base annual rent of
$2,190 increasing 3% each year. The lease starts January 1, 1999. The Company
will relocate its corporate headquarters to this new facility.
<PAGE> 9
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
- -----------------------------------------------------------------------------
AND FINANCIAL CONDITION
- -----------------------
RESULTS OF OPERATIONS
- ---------------------
On March 31, 1998, the Company announced a restructuring plan (the Plan) and
recorded an expected total cost of $26.1 million for the Plan in the results of
operations of the first quarter of 1998. The Plan is designed to enhance the
Company's flexibility and operating efficiency, lower fixed costs and improve
customer service. In connection with the Plan, the Company will outsource all
card, gift wrap and other manufacturing operations currently performed at its
Cincinnati, Ohio headquarters. Implementation of the Plan began in the second
quarter of 1998 and is expected to be substantially complete by the end of the
fourth quarter of 1998.
In addition, the Company announced and has initiated a significant investment in
business information systems. The Company will invest an estimated $30.0 to
$35.0 million over a 30 month period to significantly upgrade or replace its
existing business information systems. Management has analyzed its computer
hardware and software in connection with the Company's need for improved
information systems as well as the potential dating problems that may arise with
the Year 2000. Management has decided to replace core business applications
which support sales and customer services, procurement and distribution, and
finance and accounting with Enterprise Resource Planning (ERP) software. The
primary purpose of the ERP software is to add functionality and efficiency to
the business processes of the Company as well as address the Year 2000 issue.
The Company expects these plans to generate annual savings of approximately
$10.0 million before income taxes by the year 2000 and to be accretive to
earnings beginning in 1999.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE
- ----------------------------------------------------------------------------
MONTHS ENDED JUNE 30, 1997
- --------------------------
Revenues in the second quarter of 1998 increased 13.3% to $105.0 million from
revenues of $92.7 million in the second quarter of 1997 reflecting increased
shipments from the Company's Card Division and Gibson Greetings International
Limited (Gibson International), the Company's subsidiary based in the United
Kingdom, partially offset by a decrease in sales at The Paper Factory of
Wisconsin, Inc. (The Paper Factory), the Company's retail subsidiary. Increased
shipments at the Card Division were due to Silly Slammers, the Company's popular
beanbag toy. Lower sales at The Paper Factory primarily resulted from fewer
stores than a year ago. Increased revenues were also aided by lower returns and
allowances. Overall, returns and allowances were 9.5% of sales for the three
months ended June 30, 1998 compared to returns and allowances of 12.5% for the
comparable period in 1997 reflecting decreased seasonal provisions and lower
customer allowances. The Company continues to face strong competitive pressures
with regard to both price and terms of sale.
Total operating expenses were $95.9 million in the second quarter of 1998
representing a 16.1% increase from total operating expenses of $82.6 million in
the second quarter of 1997. Cost of products sold as a percent of revenues was
39.9% for the second quarter of 1998 versus 33.5% for the second quarter of
1997. The increase was primarily due to a change in product sales mix and higher
product costs associated with new products, new designs and other product
improvements. Selling, distribution and administrative expenses as a percent of
revenues were 51.4% for the second quarter of 1998 versus 55.6% for the second
quarter of 1997 primarily due to expense reduction programs partially offset by
increased selling and marketing expenses to support new product programs and
expenditures for business information systems projects.
Interest income (net) of $0.4 million was recorded in the second quarter of 1998
compared to interest expense (net) of $0.9 million for the second quarter of
1997. The improvement resulted from lower interest expense due to a reduction in
interest-bearing obligations.
Pretax income for the second quarter of 1998 was $9.4 million compared to pretax
income for the second quarter of 1997 of $9.2 million. The effective income tax
rate was 41.0% for the second quarter of 1998 and 42.0% for the second quarter
of 1997.
Net income for the three months ended June 30,1998 was $5.6 million compared
with net income of $5.4 million for the comparable period in 1997.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS
- -------------------------------------------------------------------------------
ENDED JUNE 30, 1997
- -------------------
Revenues for the six months ended June 30, 1998 increased 7.5% to $206.7 million
from revenues of $192.3 million for the six months ended June 30, 1997. The
increase reflected higher shipments for the Card Division and Gibson
International, partially offset by slightly lower sales at The Paper Factory.
Higher shipments at the Card Division were attributed to Silly Slammer sales
which offset shipment decreases of other products due to lost accounts. Returns
and allowances also declined from the year ago period. Overall, returns and
allowances were 14.5% of sales for the six months ended June 30, 1998 compared
to returns and allowances of 17.5% for the comparable period in 1997 reflecting
decreased seasonal provisions and lower customer allowances.
9
<PAGE> 10
Total operating expenses were $213.3 million for the six months ended June 30,
1998 compared to $170.8 million for the six months ended June 30, 1997. Included
in the six months ended June 30, 1998 is the restructuring charge of $26.1
million recorded in the first quarter of 1998. Total operating expenses without
the restructuring charge were $187.2 million for the six months ended June 30,
1998. Cost of products sold as a percent of revenues was 39.5% for the six
months ended June 30, 1998 versus 35.0% for the six months ended June 30, 1997.
The increase was primarily due to a change in product sales mix reflecting Silly
Slammer sales and from other higher product costs. Selling, distribution and
administrative expenses as a percent of revenues were 51.1% for the six months
ended June 30, 1998 versus 53.8% for the six months ended June 30, 1997
primarily due to a reduction in administrative and other expenses. These
reductions were partially offset by higher selling and marketing expenses
associated with new product programs and expenditures on business information
systems projects.
Interest income (net) of $0.9 million was recorded for the six months ended June
30, 1998 compared to interest expense (net) of $1.7 million for the six months
ended June 30, 1997. The improvement resulted from higher interest income on
invested cash balances and lower interest expense due to a reduction in
interest-bearing obligations.
Pretax loss for the six months ended June 30, 1998 was $5.7 million compared to
pretax income for the six months ended June 30, 1997 of $19.8 million. The
pretax loss for the six months ended June 30, 1998 includes the $26.1 million
restructuring charge recorded in the first quarter of 1998. Without the
restructuring charge, pretax income for the six months ended June 30, 1998 would
have been $20.4 million. The effective income tax rate was 41.2% for the six
months ended June 30, 1998 compared to an effective income tax rate of 42.3% for
the six months ended June 30, 1997.
Net loss for the six months ended June 30, 1998 was $3.3 million compared with
net income of $11.4 million for the comparable period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash provided by operating activities in the first six months of 1998 was $1.8
million compared to $30.4 million for the comparable period in 1997. The
decrease from 1997 was primarily due to higher trade receivables resulting from
the sales increase and lower reserves for returns and allowances, and increased
inventories to support Silly Slammer sales and the outsourcing transition.
Cash used in investing activities in the first six months of 1998 was $13.1
million compared to cash used in investing activities of $8.5 million in the
first six months of 1997. The increase in cash used in investing activities
represents capital expenditures, which increased due to display fixtures and
business information systems spending, and a note receivable from The Ink Group,
which was subsequently purchased in July 1998 (see Note 8 of Notes to Condensed
Consolidated Financial Statements).
Cash used in financing activities for the six months ended June 30, 1998 was
$12.9 million compared to cash used in financing activities of $14.0 million for
the comparable period of 1997. Under the terms of its Senior Note Agreement, the
Company prepaid $4.3 million in principal, without premium, on June 1, 1998, in
addition to the $7.1 million principal amount the Company was required to pay
under the Note Agreement. As a result of these payments and prior retirements,
all Senior Notes have been repaid in their entirety.
Effective April 24, 1998, the Company entered into a $30.0 million, 364-day
revolving credit agreement that will be utilized, if needed, for working capital
purposes. This credit line replaced the previous agreement that expired in late
April 1998.
In accordance with the Company's restructuring plan, approximately $5.8 million
will be spent on involuntary employee severance and outplacement costs and
approximately $2.0 million on related expenses during the 12 month period ending
March 31, 1999, with most of the expenditures projected to occur in the second
half of 1998. Restructuring expenditures for the first six months of 1998
totaled $0.7 million.
Management continues to address the Year 2000 issue. As discussed above, the
Company has implemented a major business information systems plan to replace
core business applications with ERP software. The installation of ERP software
will also address the Year 2000 issue associated with the software being
replaced. The Company has completed the vendor selection phase for the ERP
software and related hardware, and is preparing for the pilot phase, which is
expected to continue through 1998. As of June 30, 1998, expenditures for the ERP
project totaled $1.7 million of which $1.1 million has been expensed in the
results of operations for the six months ended June 30, 1998 and $0.6 million
has been capitalized.
In addition, the Company is upgrading software systems not addressed by the ERP
project to correct potential problems associated with the Year 2000. While the
ability of third parties, with whom the Company transacts business, to address
adequately their Year 2000 issues is outside the Company's control, the Company
intends to discuss with its vendors and customers the possibility of any
10
<PAGE> 11
interface difficulties which may affect the Company, and to the extent necessary
and possible will develop appropriate contingency plans. Management is in the
process of estimating the total cost to address its Year 2000 issues.
Management believes that substantially all Year 2000 issues will be addressed
prior to December 31, 1999, although the ERP project will extend beyond that
date.
The Company is carrying significant cash balances. Other than general working
capital needs, capital expenditures, other asset spending, the restructuring
plan, the business information systems projects, and a stock repurchase plan,
there currently are no commitments for the use of this cash; however, management
is evaluating various alternatives, including strategic acquisitions. 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 Note 7 of Notes to
Condensed Consolidated Financial Statements)
Management does not believe that there are any trends, events, commitments or
uncertainties, except for the plans discussed above and for previously disclosed
items (see Notes 1, 7 and 8 of Notes to Condensed Consolidated Financial
Statements), and aside from normal seasonal fluctuations and general industry
competitive conditions, that should be expected to have a material effect on the
results of operations, financial condition, liquidity or capital resources of
the Company. However, except for the historical information contained herein,
the matters discussed are forward-looking statements which involve risks and
uncertainties. There are numerous important factors that could adversely affect
the Company, including but not limited to competitive pressures with regard to
price and terms of sale, unforeseen financial difficulties of significant
customers, lack of market acceptance of the Company's new products and other
economic, competitive, governmental and technological factors affecting the
Company's operations, markets, products, services and prices. Because of these,
as well as other factors, historical information should not be relied upon as an
indicator of future financial performance.
PART I. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------
Not applicable.
PART II. OTHER INFORMATION
- --------------------------
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
The information presented in Note 7 of Notes to Condensed Consolidated Financial
Statements (Part I. Item 1.) is incorporated by reference in response to this
item.
ITEM 2. CHANGES IN SECURITIES
- -----------------------------
In accordance with the Company's 1996 Nonemployee Director Stock Plan, on April
23, 1998, the Company issued 387 shares of common stock to each of the
nonemployee directors: G. M. Gibson, R. P. Kirby, C.D. Lindberg, A. L. Pezzillo,
C. St. Martin and C. A. Wainwright. The shares were issued in lieu of cash
consideration for approximately one-half of the directors' annual retainer fees.
These issuances were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ---------------------------------------
Not applicable.
11
<PAGE> 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
The Annual Meeting of Stockholders of the Company was held on April 23, 1998 for
the purpose of electing two directors. The results of the election are as
follows:
<TABLE>
<CAPTION>
Against
or Broker
For Withheld Abstentions Non-Votes
--------------- --------------- --------------- ---------------
Election of Directors:
<S> <C> <C> <C> <C>
Frank J. O'Connell 15,571,901 86,338 - -
Charlotte St. Martin 15,619,903 28,336 - -
</TABLE>
ITEM 5. OTHER INFORMATION
- -------------------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
a) Exhibit 10(a) Amendment No. 2 and Restatement dated April 24, 1998 to
Form of Credit Agreement dated as of April 26, 1996 by
and among Gibson Greetings, Inc., The Lenders Thereto
and The Bank of New York , as Agent.
Exhibit 27 Financial Data Schedule (contained in EDGAR filing
only).
b) Reports on Form 8-K None.
12
<PAGE> 13
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 14, 1998
---------------
By: /s/ James T. Wilson
-------------------
James T. Wilson
Executive Vice President-
Finance and Operations and
Chief Financial Officer
(principal financial officer)
By: /s/ Paul W. Farley
------------------
Paul W. Farley
Vice President - Controller and
Assistant Treasurer
(principal accounting officer)
13
<PAGE> 14
Exhibit 10(a)
AMENDMENT NO. 2 AND RESTATEMENT
TO CREDIT AGREEMENT
-------------------
AMENDMENT NO. 2 AND RESTATEMENT (this "AMENDMENT"), dated as of April
24, 1998, to the Credit Agreement, dated as of April 26, 1996, by and among
GIBSON GREETINGS, INC. (the "BORROWER"), the Lenders party thereto and THE BANK
OF NEW YORK, as agent for the Lenders (in such capacity, the "AGENT"), as
amended by Amendment No. 1 and Restatement, dated as of April 4, 1997 (as so
amended, and as further amended, supplemented or otherwise modified from time to
time, the "CREDIT AGREEMENT").
RECITALS
--------
I. Capitalized terms used herein which are defined in the Credit
Agreement shall have the meanings therein defined.
II. The Borrower has requested that the Agent and the Lenders agree to
amend the Credit Agreement upon the terms and conditions set forth herein, and
the Agent and the Lenders are willing so to agree.
In consideration of the covenants, conditions and agreements
hereinafter set forth, and for other good and valuable consideration, the
receipt and adequacy of which are acknowledged, it is agreed as follows:
1. The definition of "Commitment Termination Date" in Section 1.1 of
the Credit Agreement is amended by deleting the date "April 24, 1998" therefrom,
and substituting therefor the date "April 23, 1999".
2. Section 1.1 of the Credit Agreement is amended by inserting therein,
in alphabetical order, a new definition as follows:
"APPLICABLE PERCENTAGE": (a) at all times during which the
applicable Pricing Level set forth below is in effect: (i) with respect
to each Eurodollar Advance, the percentage set forth below under the
heading "Eurodollar Advance" and adjacent to such applicable period,
and (ii) with respect to the Commitment Fee, the percentage set forth
below under the heading "Commitment Fee":
<TABLE>
<CAPTION>
Pricing Eurodollar Commitment
Level Advance Fee
----- ------- ---
<S> <C> <C>
I 0.750% 0.250%
II 0.875% 0.300%
III 1.000% 0.375%
</TABLE>
(b) For purposes of this definition, the following terms shall
have the following meanings:
"PRICING LEVEL I": (i) Leverage is less than 15%, and
(ii) Interest Coverage is greater than 500%.
"PRICING LEVEL II": (i) Leverage is less than 20%,
(ii) Interest Coverage is greater than 425%, and (iii) Pricing
Level I is inapplicable.
"PRICING LEVEL III": Pricing Levels I and II are
inapplicable.
(c) For purposes of this definition, Leverage and Interest
Coverage shall each be based upon the financial statements most
recently delivered pursuant to Sections 7.7(a) or 7.7(c), as the case
may be, provided, however, that in the event the Borrower shall be in
default of its obligations under either such Section, Pricing Level III
shall be in effect until such default is cured or waived.
14
<PAGE> 15
2. Subsection (a) of Section 3.4 of the Credit Agreement is amended and
restated in its entirety as follows:
(a) Prior to Maturity. Except as otherwise provided in Section
3.4(b) and Section 3.4(c), the Advances shall bear interest on the unpaid
principal balance thereof at the applicable interest rate or rates per annum set
forth below:
ADVANCES RATE
-------- ----
Each ABR Advance Alternate Base Rate.
Each Eurodollar Advance Eurodollar Rate
applicable thereto
PLUS the Applicable
Percentage.
2. The first sentence of Section 3.11 of the Credit Agreement is
amended by deleting all of the text following the phrase "at a rate per annum
equal to" and substituting therefor the phrase "the Applicable Percentage on the
average daily excess of (a) the Aggregate Commitment Amount, over (b) the
aggregate outstanding principal balance of the Loans."
3. Section 8.1 of the Credit Agreement is amended by deleting the
amount "$15,000,000" from subsection (e) and substituting therefor the amount
"$35,000,000".
4. (a) Notwithstanding anything to the contrary contained in any Loan
Document, the Lenders shall reallocate among themselves, without recourse,
representation or warranty, such rights and obligations as shall cause their
respective Commitment Amounts to be as set forth on Annex A attached hereto.
From and after the Amendment Effective Date, the Agent shall make all payments
in respect of the interests reallocated hereby (including payments of principal,
interest, fees and other amounts) to each Lender in proportion to such Annex A.
(a) Each of The Sanwa Bank, Limited, Chicago Branch, and The
Sumitomo Bank, Limited, Chicago Branch, are hereby released from all obligations
under the Loan Documents.
2. Sections 1 - 6 of this Amendment shall not be effective until such
date (the "Amendment Effective Date") as each of the following conditions shall
have been satisfied:
(a) The Agent shall have received counterparts of this
Amendment executed by the Borrower, the Guarantor and each of the Lenders.
(b) The Agent shall have received an opinion of counsel to the
Borrower and the Guarantor in form and substance reasonably satisfactory to the
Agent.
(a) The Agent shall have received a certificate, in all
respects satisfactory to the Agent, of the Secretary of each of the Borrower and
the Guarantor, (i) attaching a true and complete copy of the resolutions of its
Board of Directors and of all documents evidencing other necessary corporate
action (in form and substance satisfactory to the Agent) taken by it to
authorize the execution and delivery of this Amendment and the transactions
contemplated hereby, and (ii) setting forth the incumbency of its officer or
officers who may sign this Amendment, including therein a signature specimen of
such officer or officers.
(d) The Borrower shall have paid the reasonable fees and
disbursements of counsel to the Agent which shall have accrued up to the date
hereof.
(e) On and as of the Amendment Effective Date, there shall
exist no Default or Event of Default, and all of the representations and
warranties of each Loan Party contained in the Loan Documents shall be true and
correct with the same effect as though such representations and warranties had
been made on the Amendment Effective Date.
(f) The Agent shall have received such other documents, each
in form and substance reasonably satisfactory to the Agent, as the Agent shall
reasonably require in connection with this Amendment.
15
<PAGE> 16
(g) All legal matters incident to the execution and delivery
of this Amendment shall be reasonably satisfactory to Special Counsel.
(h) All accrued Commitment Fees owed to each of The Sanwa
Bank, Limited, Chicago Branch and The Sumitomo Bank, Limited, Chicago Branch,
shall have been paid through the Amendment Effective Date.
2. On the date hereof, the Borrower hereby (a) reaffirms and admits the
validity and enforceability of the Loan Documents and all of the obligations of
the Loan Parties thereunder, (b) agrees and admits that no Loan Party has any
defenses to or offsets against any such obligation, (c) represents and warrants
that no Default or Event of Default has occurred and is continuing, and that
each of the representations and warranties made by each Loan Party in the Loan
Documents is true and correct with the same effect as though such representation
and warranty had been made on such date, and (d) certifies that no amendment,
supplement, or modification to the certificate of incorporation or by-laws of
any Loan Party has been made since April 26, 1996.
3. In all other respects, the Loan Documents shall remain in full force
and effect, and no amendment in respect of any term or condition of any Loan
Document contained herein shall be deemed to be an amendment in respect of any
other term or condition contained in any Loan Document.
4. This Amendment may be executed in any number of counterparts all of
which, taken together, shall constitute one Amendment. In making proof of this
Amendment, it shall only be necessary to produce the counterpart executed and
delivered by the party to be charged.
5. THIS AMENDMENT IS BEING EXECUTED AND DELIVERED IN, AND IS INTENDED
TO BE PERFORMED IN, THE STATE OF NEW YORK AND SHALL BE CONSTRUED AND ENFORCEABLE
IN ACCORDANCE WITH, AND BE GOVERNED BY, THE INTERNAL LAWS OF THE STATE OF NEW
YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.
IN WITNESS WHEREOF, the parties have caused this Amendment to
be duly executed as of the date first written above.
GIBSON GREETINGS, INC.
By: /s/ James T. Wilson
------------------------------------
Name: James T. Wilson
----------------------------------
Title: Exec. V.P. Finance,
----------------------------------
Operations & CFO
----------------------------------
THE BANK OF NEW YORK,
Individually and as Agent
By: /s/ Edward J. Dougherty, III
------------------------------------
Name: Edward J. Dougherty, III
----------------------------------
Title: Vice President
----------------------------------
U.S. Commercial Banking
----------------------------------
FIFTH THIRD BANK
By: /s/ A.K. Hauck
------------------------------------
Name: A.K. Hauck
----------------------------------
Title: Vice President
----------------------------------
16
<PAGE> 17
HARRIS TRUST AND SAVINGS BANK
By: /s/ W. A. McDonnell
-------------------------------------
Name: W. A. McDonnell
-----------------------------------
Title: Vice President
----------------------------------
NBD BANK, N.A.
By: /s/ Scott A. Dvornik
-------------------------------------
Name: Scott A. Dvornik
-----------------------------------
Title: Vice President
----------------------------------
THE SANWA BANK, LIMITED,
CHICAGO BRANCH
By: /s/ James P. Byrnes
-------------------------------------
Name: James P. Byrnes
-----------------------------------
Title: First Vice President
----------------------------------
THE SUMITOMO BANK, LIMITED,
CHICAGO BRANCH
By: /s/ John H. Kemper
-------------------------------------
Name: John H. Kemper
-----------------------------------
Title: Senior Vice President
----------------------------------
CONSENTED AND AGREED TO:
THE PAPER FACTORY OF WISCONSIN, INC.
By: /s/ Paul W. Farley
------------------------------
Name: Paul W. Farley
-----------------------------
Title: Asst. Treasurer
----------------------------
17
<PAGE> 18
AMENDMENT NO. 2 AND RESTATEMENT
-------------------------------
ANNEX A
-------
<TABLE>
<CAPTION>
COMMITMENT
LENDER AMOUNT
------ ------
<S> <C>
The Bank of New York $ 9,000,000
Fifth Third Bank $ 7,000,000
Harris Trust and
Savings Bank $ 7,000,000
NBD Bank, N.A. $ 7,000,000
----------
TOTAL: $30,000,000
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GIBSON
GREETINGS, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE SIX MONTHS ENDED JUNE
30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERECE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 90,000
<SECURITIES> 0
<RECEIVABLES> 61,380
<ALLOWANCES> 34,040
<INVENTORY> 79,867
<CURRENT-ASSETS> 234,051
<PP&E> 173,957
<DEPRECIATION> 101,667
<TOTAL-ASSETS> 423,364
<CURRENT-LIABILITIES> 87,343
<BONDS> 0
0
0
<COMMON> 171
<OTHER-SE> 276,981
<TOTAL-LIABILITY-AND-EQUITY> 423,364
<SALES> 206,726
<TOTAL-REVENUES> 206,726
<CGS> 81,547
<TOTAL-COSTS> 213,287
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,300
<INCOME-PRETAX> (5,681)
<INCOME-TAX> (2,338)
<INCOME-CONTINUING> (3,343)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,343)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
