<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 March 31, 1999
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: 15,831,897 shares of common
stock, $.01 par value, outstanding at May 7, 1999.
<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>
March 31, December 31, March 31,
1999 1998 1998
--------- ------------ ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 23,079 $ 44,267 $111,500
Trade receivables, net 60,169 71,438 30,569
Inventories 73,982 84,489 59,013
Prepaid expenses 6,596 4,958 4,350
Deferred income taxes 34,630 39,897 37,717
-------- -------- --------
Total current assets 198,456 245,049 243,149
PLANT AND EQUIPMENT, NET 78,961 75,906 71,231
DEFERRED INCOME TAXES 30,280 28,445 27,310
OTHER ASSETS, NET 89,921 88,051 92,617
-------- -------- --------
$397,618 $437,451 $434,307
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Debt due within one year $ 117 $ 155 $ 7,592
Accounts payable 18,169 32,990 16,100
Income taxes payable 482 13,415 5,041
Other current liabilities 55,231 61,494 70,783
-------- -------- --------
Total current liabilities 73,999 108,054 99,516
LONG-TERM DEBT 9,300 10,384 12,161
OTHER LIABILITIES 46,709 47,535 51,787
-------- -------- --------
Total liabilities 130,008 165,973 163,464
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 8 AND 9)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00; 5,300,000 shares
authorized, none issued -- -- --
Common stock, par value $.01; 50,000,000 shares
authorized; 17,123,498 issued at March 31, 1999 and
December 31, 1998; 17,058,339 issued at March 31, 1998 171 171 170
Paid-in capital 54,926 54,926 53,614
Retained earnings 234,129 237,536 226,438
Accumulated other comprehensive income 383 844 796
-------- -------- --------
289,609 293,477 281,018
Less treasury stock, at cost; 1,291,601 shares at
March 31, 1999 and December 31, 1998;
691,601 shares at March 31, 1998 21,999 21,999 10,175
-------- -------- --------
Total stockholders' equity 267,610 271,478 270,843
-------- -------- --------
$397,618 $437,451 $434,307
======== ======== ========
</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
March 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
REVENUES $ 83,468 $ 101,749
--------- ---------
COST AND EXPENSES
Operating expenses:
Cost of products sold 37,102 39,606
Selling, distribution and administrative expenses 52,067 51,687
Restructuring charge -- 26,100
--------- ---------
Total operating expenses 89,169 117,393
--------- ---------
OPERATING LOSS (5,701) (15,644)
--------- ---------
Financing expenses:
Interest expense, net of capitalized interest 751 1,175
Interest income (726) (1,696)
--------- ---------
Total financing expenses, net 25 (521)
--------- ---------
LOSS BEFORE INCOME TAXES (5,726) (15,123)
Income tax benefit (2,319) (6,208)
--------- ---------
NET LOSS $ (3,407) $ (8,915)
========= =========
NET LOSS PER SHARE:
Basic $ (0.22) $ (0.54)
========= =========
Diluted $ (0.22) $ (0.54)
========= =========
</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>
Three Months Ended
March 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,407) $ (8,915)
--------- ---------
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation including write-down of display fixtures 5,132 5,630
Impairment of plant and equipment -- 12,967
Loss on disposal of plant and equipment 499 100
Deferred income taxes 3,432 (5,104)
Amortization of deferred costs and goodwill 6,495 4,879
Change in assets and liabilities:
Trade receivables, net 11,519 (244)
Inventories 10,507 411
Prepaid expenses (1,638) 85
Other assets, net of amortization (8,365) (7,924)
Accounts payable (14,821) 4,290
Income taxes payable (12,933) (9,461)
Other current liabilities (6,263) 2,340
Other liabilities (826) 4,972
All other, net (555) 12
--------- ---------
Total adjustments (7,817) 12,953
--------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (11,224) 4,038
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment (8,593) (4,514)
Proceeds from sale of plant and equipment 1 13
Investment in E-greetings Network (250) --
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (8,842) (4,501)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt, net (1,122) (255)
Issuance of common stock -- 742
Acquisition of common stock for treasury -- (2,791)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (1,122) (2,304)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (21,188) (2,767)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 44,267 114,267
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,079 $ 111,500
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 67 $ 1,211
Income taxes 7,182 8,401
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
GIBSON GREETINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND RESTRUCTURING CHARGE
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
March 31, 1999, December 31, 1998 and March 31, 1998, the results of its
operations for the three months ended March 31, 1999 and 1998 and its cash flows
for the three months ended March 31, 1999 and 1998. 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, 1998.
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 LOSS
The Company's comprehensive loss was $(3,868) and $(8,852) for the quarters
ended March 31, 1999 and 1998, respectively, and includes foreign currency
translation adjustments, net, of $(461) and $63.
RESTRUCTURING CHARGE
During the first quarter of 1998, the Company recorded asset write-downs and
other charges of $26,100 in connection with a restructuring plan (the Plan)
announced March 31, 1998 under which the Company has outsourced its principal
manufacturing operations formerly performed at its Cincinnati, Ohio
headquarters. The costs related to the Plan, which were recognized as a separate
component of operating expenses in the first quarter of 1998, included
approximately $17,100 related to the facility, $5,800 related to involuntary
severance of approximately 480 employees and $3,200 in other costs.
The facility costs of $17,100 include an adjustment of $12,967 to write off the
capitalized lease asset, leasehold improvements and certain machinery and
equipment (included in plant and equipment) associated with the Cincinnati
operations, and a reserve of $4,133 included in other liabilities representing
the amount by which total future lease commitments and related operating costs
of the Cincinnati facility exceed the recorded lease obligation and estimated
sublease income over the remaining term of the lease. The recorded lease
obligation of $12,040, representing the portion of the capital lease obligation
associated with the Cincinnati facility, has been reclassified from debt to
other liabilities (see Note 5). Involuntary employee severance costs and other
costs are included in other current liabilities.
The termination of employees in connection with the Plan resulted in a
curtailment of a defined benefit pension plan, and a curtailment gain of $3,045
before income taxes was recognized as a restructuring gain in the third quarter
of 1998, resulting in a net pretax restructuring charge for the year of $23,055.
Approximately $500 of the restructuring reserve was used for payment of various
miscellaneous costs during the three months ended March 31, 1999.
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 consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
--------- ------------ ---------
<S> <C> <C> <C>
Trade receivables $108,054 $128,136 $ 75,915
Less reserves for returns, allowances, cash discounts
and doubtful accounts 47,885 56,698 45,346
-------- -------- --------
$ 60,169 $ 71,438 $ 30,569
======== ======== ========
</TABLE>
NOTE 4 - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
--------- ------------ ---------
<S> <C> <C> <C>
Finished goods $49,718 $54,523 $42,003
Work-in-process 22,304 27,498 10,100
Raw materials and supplies 1,960 2,468 6,910
------- ------- -------
$73,982 $84,489 $59,013
======= ======= =======
</TABLE>
NOTE 5 - DEBT
Debt consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
--------- ------------ ---------
<S> <C> <C> <C>
Financing arrangement bearing variable interest (6.52%
at March 31, 1999) $ 1,269 $ 2,449 $ --
Senior notes bearing interest at 9.33%, retired on
June 1, 1998 -- -- 11,428
Industrial revenue bonds bearing interest at 9.25%,
retired on August 1, 1998 -- -- 300
Other notes bearing interest at a weighted average rate
of 5.20%, payable in quarterly installments 117 155 265
------- ------- -------
1,386 2,604 11,993
Capital lease obligation payable in monthly installments
through 2013, net of $12,040 included in other liabilities 8,031 7,935 7,760
------- ------- -------
9,417 10,539 19,753
Less debt due within one year 117 155 7,592
------- ------- -------
$ 9,300 $10,384 $12,161
======= ======= =======
</TABLE>
Effective May 11, 1999, the Company entered into a 364-day revolving credit
agreement which provides $30,000 for general corporate purposes, replacing a
similar facility that expired in April 1999. There were no borrowings
outstanding under the former agreement at March 31, 1999.
6
<PAGE> 7
In November 1998, the Company replaced the existing debt of The Ink Group
Companies (The Ink Group) with an Australian-Dollar-denominated multi-option
financing arrangement (Financing Arrangement) which is scheduled to expire
January 31, 2000. Effective May 1, 1999, the maximum amount available under the
Financing Arrangement increased to approximately $4,100. Depending upon the
financing option elected, borrowings under the Financing Arrangement bear
interest at varying rates, which are based upon prevailing rates. During the
first quarter of 1999, the average interest rate for borrowings under the
Financing Arrangement was 6.79%. Borrowings under the Financing Arrangement have
been classified as long-term debt based on management's ability and intent to
refinance borrowings on a long-term basis.
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,
all Senior Notes have been repaid in their entirety.
The Company's debt agreements contain customary covenants and events of
defaults.
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 term of this agreement runs through November
30, 2013. The basic rent under the lease contains scheduled rent increases every
five years. All property taxes, insurance costs and operating expenses are 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 March 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Capital
Quarter Ending March 31, Lease
------------------------------- --------------
<S> <C>
2000 $ 3,100
2001 3,307
2002 3,720
2003 3,720
2004 3,720
Thereafter 44,590
------------
Net minimum commitments 62,157
Less amount representing interest 42,086
-------------
Present value of net minimum lease commitments $ 20,071
==============
</TABLE>
NOTE 6 - INTEREST EXPENSE
Capitalized interest totaled $185 and $0 for the three months ended March 31,
1999 and 1998, respectively.
NOTE 7 - COMPUTATION OF NET LOSS PER SHARE
Due to the Company's net loss and the resulting antidilutive nature of
outstanding stock options, 15,831,897 and 16,380,622 actual weighted average
shares outstanding were used to compute both the basic and diluted loss per
share for the three months ended March 31, 1999 and 1998, respectively. In
addition, there are no adjustments to net loss for the basic or diluted loss per
share computations.
NOTE 8 - 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
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.
7
<PAGE> 8
On June 15, 1998, the Court entered judgment for the Company and each individual
defendant on all remaining claims asserted by the plaintiff class. Plaintiff's
appeal of the judgment to the Sixth Circuit Court of Appeals was dismissed as
untimely due to remaining claims and counterclaims between the Company and its
former auditor in connection with a Third Party Complaint which the Company had
filed against the auditor. In December 1998, the Company and its former auditor
reached a settlement of all claims between them. Plaintiff re-filed its appeal
of the judgment for defendant. Subsequently, the Company and the plaintiff
agreed to a settlement which will be presented to the District Court for
approval at a hearing expected to take place in May 1999.
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 9 - COMMITMENTS
The Company is in the process of investing $30,000 - $35,000 to implement a
major management information systems plan to replace core business applications
which support sales and customer services, procurement and manufacturing,
distribution and finance with Enterprise Resource Planning (ERP) software. As of
March 31, 1999, approximately $12,500 has been spent on the ERP project since
it was initiated in the first quarter of 1998.
NOTE 10 - ACQUISITIONS AND DIVESTITURES
On July 3, 1998, the Company acquired a majority interest in The Ink Group,
based in Sydney, Australia, with additional operations in New Zealand and the
United Kingdom, for $1,000 and an agreement to provide operating loans. These
operating loans totaled approximately $8,500 as of March 31, 1999. The Company
acquired 60% ownership of The Ink Group's operating companies in Australia and
New Zealand and 100% ownership of its operating company in the United Kingdom.
This transaction was accounted for using the purchase method of accounting,
resulting in the Company recording goodwill totaling $10,495.
On August 31, 1998, the Company sold The Paper Factory of Wisconsin, Inc. (The
Paper Factory) to PFW Acquisition Corp. for $36,216, which approximated the
Company's investment. The Paper Factory's sales totaled $15,510 for the three
months ended March 31, 1998.
8
<PAGE> 9
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
INTRODUCTION
Gibson Greetings, Inc. (the Company) operates in a highly competitive industry
dominated by two companies. The Company's mass-merchandiser customer base, which
typically operates on low margins, is particularly susceptible to financial
constraints and to offers of more favorable terms from competitors of the
Company which have significantly greater financial resources. As a result, the
Company has, for some time, faced strong competitive pressures with regard to
both price and terms of sale. It is anticipated that these pressures will
continue and contribute to the Company reporting full-year 1999 results that
are expected to be significantly below the earnings of $0.97 per diluted share
reported for the twelve months ended December 31, 1998, excluding the
restructuring charge recorded in 1998.
On July 3, 1998, the Company acquired a majority interest in The Ink Group
Companies (The Ink Group), a leading publisher of alternative cards, calendars,
address books and diaries based in Sydney, Australia, with additional operations
in New Zealand and the United Kingdom, for $1.0 million and an agreement to
provide operating loans. The Company acquired 60% ownership of The Ink Group's
operating companies in Australia and New Zealand and 100% ownership of its
operating company in the United Kingdom.
On August 31, 1998, the Company sold The Paper Factory of Wisconsin, Inc. (The
Paper Factory) to PFW Acquisition Corp. for $36.2 million, which approximated
the Company's investment. The Paper Factory operated retail stores under the
names of The Paper Factory, Greetings 'n More and Great Party, which were
located primarily in manufacturers' outlet shopping centers.
RESTRUCTURING CHARGE
During the first quarter of 1998, the Company recorded asset write-downs and
other charges of $26.1 million in connection with a restructuring plan (the
Plan) announced March 31, 1998 under which the Company has outsourced its
principal manufacturing operations formerly performed at its Cincinnati, Ohio
headquarters. The costs related to the Plan, which were recognized as a separate
component of operating expenses in the first quarter of 1998, included
approximately $17.1 million related to the facility, $5.8 million related to
involuntary severance of approximately 480 employees and $3.2 million in other
costs.
The facility costs of $17.1 million include an adjustment of $13.0 million to
write off the capitalized lease asset, leasehold improvements and certain
machinery and equipment (included in plant and equipment) associated with the
Cincinnati operations, and a reserve of $4.1 million included in other
liabilities representing the amount by which total future lease commitments and
related operating costs of the Cincinnati facility exceed the recorded lease
obligation and estimated sublease income over the remaining term of the lease.
The recorded lease obligation of $12.0 million, representing the portion of the
capital lease obligation associated with the Cincinnati facility, has been
reclassified from debt to other liabilities. Involuntary employee severance
costs and other costs are included in other current liabilities.
The termination of employees in connection with the Plan resulted in a
curtailment of a defined benefit pension plan, and a curtailment gain of $3.0
million before income taxes was recognized as a restructuring gain in the third
quarter of 1998, resulting in a net pretax restructuring charge for the year of
$23.1 million.
Approximately $0.5 million of the restructuring reserve was used for payment of
various miscellaneous costs during the three months ended March 31, 1999.
MANAGEMENT INFORMATION SYSTEMS UPGRADE
The Company is in the process of investing $30 - $35 million to implement a
major management information systems plan to replace core business applications
which support sales and customer services, procurement and manufacturing,
distribution and finance with Enterprise Resource Planning (ERP) software. While
the primary purpose of the ERP software is to add functionality and efficiency
to the Company's business processes, installation of the software is also
expected to address Year 2000 issues associated with the software being
replaced.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE
MONTHS ENDED MARCH 31, 1998
Pretax loss totaled $5.7 million in the first quarter of 1999 (the 1999 quarter)
compared to $15.1 million in the first quarter of 1998 (the 1998 quarter), which
included the $26.1 million restructuring charge. Net loss was $3.4 million, or
$0.22 per diluted share, in the 1999 quarter compared to $8.9 million, or $0.54
per diluted share, in the 1998 quarter. Excluding the restructuring charge, 1998
first quarter net income per diluted share was $0.38.
Revenues in the 1999 quarter decreased 18.0% to $83.5 million from revenues of
$101.7 million in the 1998 quarter, reflecting decreased revenues at the
Company's Card Division and the effect of the sale of The Paper Factory, which
had sales totaling $15.5 million in the 1998 quarter. Decreased revenues at the
Card Division reflect increased shipments of everyday and seasonal greeting
9
<PAGE> 10
cards and Silly Slammers, the Company's talking beanbag toy, being offset by
higher discounts and increased returns and allowances. Decreased revenues at the
Card Division of $6.6 million were partially offset by increased revenues of
$3.8 million from the Company's international operations. Overall, returns and
allowances were 27.2% of shipments for the 1999 quarter compared to 22.3% for
the 1998 quarter, excluding the effect of The Paper Factory revenues in 1998,
resulting from an increase in seasonal and everyday return provisions and higher
customer allowances.
Total operating expenses were $89.2 million in the first quarter of 1999
compared to $91.3 million, excluding the restructuring charge, in the first
quarter of 1998. Cost of products sold as a percent of revenues was 44.4% for
the 1999 quarter versus 38.9% for the 1998 quarter. The increase, as a
percentage of revenues, was primarily due to the lower revenues resulting from
higher sales deductions, as well as to the costs associated with improved
product quality and new greeting card designs at the Card Division. Selling,
distribution and administrative expenses were 62.4% of revenues in the 1999
quarter compared to 50.8% in the 1998 quarter. This increase, as a percentage
of revenues, primarily resulted from the previously discussed decline in
revenues and from higher operating expenses, particularly selling and marketing
expenses associated with setting up new accounts at the Card Division, and the
addition of The Ink Group. These increases were partially offset by a reduction
in operating expenses due to the sale of The Paper Factory.
The Company recorded net interest expense of less than $0.1 million in the first
quarter of 1999 compared to $0.5 million of net interest income in the first
quarter of 1998. The change reflects the combined effects of decreased earnings
on the Company's lower invested cash balance and decreased interest expense
resulting from the mid-year 1998 retirement of the senior notes.
The effective income tax rate for the 1999 quarter was 40.5% compared to 41.1%
in the 1998 quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in the Company's operating activities totaled $11.2 million for the
first quarter of 1999 compared to cash provided by operating activities of $4.0
million for the comparable period in 1998. This decrease was largely due to the
$5.7 million pretax loss during the 1999 quarter compared to pretax income
of $11.0 million during the 1998 quarter, excluding the effect of the
restructuring charge. Also significantly contributing to the decrease were the
net effects of changes in operating assets and liabilities - most notably trade
receivables, inventories and accounts payable. As a result of the unusually high
balances in these working capital components at December 31, 1998 and their
subsequent reductions during the first three months of 1999, the
quarter-to-quarter change in cash provided by (used in) trade receivables,
inventories and accounts payable activities totaled $11.8 million, $10.1 million
and ($19.1 million), respectively.
As of March 31, 1999, the Company's trade receivables and inventories have
increased $29.6 million and $15.0 million, respectively, compared to March 31,
1998. The increase in trade receivables reflected a higher level of shipments
concentrated late in the first quarter of 1999, an increase in past due trade
receivables at the Card Division and growth of the Company's international
operations. The increase in inventories was primarily due to the growth of the
Company's Silly Slammers product lines and the transition to outsourced
manufacturing, partially offset by the effect of the sale of The Paper Factory.
Cash used in investing activities for plant and equipment purchases totaled $8.6
million in the first quarter of 1999 compared to $4.5 million in the first
quarter of 1998. Increased capital spending during 1999 reflects expenditures
related to the Company's project to replace numerous of its existing management
information systems applications with new ERP software, and increased display
fixture purchases by the Company's Card Division. During the 1999 quarter, cash
was also used to make an additional $0.3 million investment in E-greetings
Network, a company which provides digital greetings through the Internet. During
April 1999, the Company invested an additional $3.1 million in E-greetings
Network.
Cash used in financing activities for the first three months of 1999 was $1.1
million, relating primarily to the payment of a portion of the balance
outstanding on The Ink Group's financing arrangement. During the comparable 1998
period, cash used in financing activities totaled $2.3 million, primarily
reflecting the Company's repurchase of 135,000 shares of common stock to be held
as treasury stock as part of its stock repurchase program.
Effective May 11, 1999, the Company entered into a 364-day revolving credit
agreement which provides $30.0 million for general corporate purposes, replacing
a similar facility that expired in April 1999.
Capital expenditures for 1999 are expected to be in the $43 - $48 million range
or $5 - $10 million higher than the 1998 level. Included in the projected 1999
capital expenditures is $20 - $25 million related to the Company's ERP project.
10
<PAGE> 11
Management believes that its existing cash, and 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 sales agreements, as well as for financing existing
operations, currently projected capital expenditures including those for
information systems, anticipated long-term sales agreements consistent with
industry practices and other contingencies.
YEAR 2000 READINESS
The Year 2000 problem is the result of two potential malfunctions that could
have an impact on the Company's systems and equipment. The first problem arises
due to computers being programmed to use two rather than four digits to define
the applicable year. The second problem arises where embedded microchips and
micro-controllers have been designed using two rather than four digits to define
the applicable year. Certain of the Company's computer programs and building
infrastructure components (e.g., telecommunications, alarm and HVAC systems)
that are date sensitive, may recognize a date using "00" as the year 1900 rather
than the year 2000. If uncorrected, the problem could result in computer system
and program failures or equipment malfunctions that could result in a disruption
of business operations (such as billing and collection, tracking inventory,
maintaining product supply flow and shipping product).
In general, the Company's Year 2000 project consists of four phases -
assessment, remediation, validation and implementation - and is categorized into
the following four divisions:
INFORMATION TECHNOLOGY (IT) - software essential for day-to-day
operations (including both internally developed and third-party
software).
IT INFRASTRUCTURE - mainframe, network, telecommunications interfaces
and self-contained operating systems.
NON-IT INFRASTRUCTURE - telecommunications equipment, elevators, public
safety equipment (e.g., security and fire) and HVAC systems.
THIRD-PARTY BUSINESS PARTNERS AND INTERMEDIARIES - business partners,
including foreign entities, on which the Company relies for
manufacturing, supply and shipping of its products, and customers to
whom the Company sells its products.
As discussed above, the Company is in the process of investing $30 - $35 million
to implement a major business information systems plan to replace certain core
business applications with ERP software. The installation of the ERP software is
expected to also address Year 2000 issues associated with the software being
replaced, with substantially all such Year 2000 issues being satisfactorily
addressed prior to the end of 1999 despite the ERP project being expected to
extend beyond this date. The Company is also in the process of upgrading
software systems not addressed by the ERP project to correct potential problems
associated with the Year 2000. Given the material importance of the Company's
relationships with third-party business partners to its everyday business
processes, in addition to addressing the software and infrastructure issues, the
Company is continuing the process of contacting third-party business partners in
an effort to obtain the information necessary to address Year 2000 issues.
The Company anticipates completing, in all material respects, its entire Year
2000 project by the end of the 1999 third quarter, and its efforts are currently
on schedule. As of March 31, 1999, expenditures for the ERP project totaled
$12.5 million, of which $1.5 million was expensed in the results of operations
for the year ended December 31, 1998, and $1.7 million and $9.3 million was
capitalized in 1999 and 1998, respectively. The Company estimates it will spend
approximately $2 - $2.5 million, in total, on Year 2000 software upgrades not
related to the ERP project. As of March 31, 1999, the Company had spent an
estimated $1.3 million on such upgrades.
From a forward-looking perspective, the extent and magnitude of the Year 2000
problem, as it will affect the Company both before and for some period after
January 1, 2000, are difficult to predict or quantify. The Company is in the
process of developing contingency plans in the event its Year 2000
efforts are not accurately or timely completed, including identifying
alternative sources of products and services currently provided by various third
parties. While the Company presently believes that the timely completion of its
Year 2000 efforts will limit exposure so that the Year 2000 will not pose
material operational problems, the Company has not received assurances that all
third parties on which it relies will be compliant. Additionally, if Year 2000
modifications or upgrades are not accomplished in a timely manner or proper
contingency plans are not implemented, the Company's Year 2000 related failures
could have a material adverse impact on operations.
The costs and completion dates of the Company's Year 2000 efforts are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes and the ability of the Company's
significant suppliers, customers and others with which it conducts business to
identify and resolve their own Year 2000 issues.
11
<PAGE> 12
OTHER INFORMATION
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,
loss of or unforeseen financial difficulties of significant customers, lack of
market acceptance of the Company's 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.
12
<PAGE> 13
PART I. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In light of the Company's reduced level of outstanding debt ($1.4 million at
March 31, 1999, excluding capitalized lease obligations), the Company's market
risk related to fluctuations in interest rates is minimal. Therefore, the
Company's market risk is primarily related to fluctuations in foreign currency
exchange rates arising from its transactions with international customers and
subsidiary operations in the United Kingdom, Australia and New Zealand.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information presented in Note 8 of Notes to Condensed Consolidated Financial
Statements (Part I. Item 1.) is incorporated by reference in response to this
item.
ITEMS 2 - 5.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
Exhibit 10.1 Extension dated as of March 31, 1999 to Employment
Agreement between Gibson Greetings, Inc. and Gregory
Ionna. Employment Agreement, dated as of December 28,
1996, incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
Exhibit 27.1 Financial Data Schedule for quarter ended March 31,
1999.
Exhibit 27.2 Amended Financial Data Schedule for year ended
December 31, 1998.
b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed by the Company during the period covered
by this report.
14
<PAGE> 1
EXHIBIT 10.1
March 30, 1999
Mr. Gregory Ionna
Executive Vice President
Card Division
Gibson Greetings, Inc.
2100 Section Road
Cincinnati, Ohio 45237
Re: Employment Agreement - Extension Through March 31, 2000
-------------------------------------------------------
Dear Greg:
In accordance with our recent discussions, this letter serves as a contract
confirming your continuing employment as Executive Vice President of the Card
Division of Gibson Greetings, Inc. through March 31, 2000, and represents an
extension of our letter of agreement of December 28, 1996, a copy of which is
attached and incorporated into this contract by reference.
You and the Company hereby agree to the following modifications to the December
28, 1996 Employment Agreement:
A) Paragraph 1 shall be amended to read as follows:
You have agreed to serve the Company on a full-time basis as a
senior executive employee, and the Company agrees to employ
you as such, for a period of one year commencing as of April
1, 1999 and ending on March 31, 2000. Your employment and this
Agreement may be extended thereafter by mutual agreement. In
the event that either you or the Company elect not to extend
your employment after March 31, 2000, then you shall be
treated as having been "terminated without Cause" and you
shall be entitled to those termination benefits set forth in
Paragraph 5, and you shall be recognized as having been fully
vested in the Supplemental Executive Retirement Plan with
eligibility to receive SERP retirement benefits in accordance
with the provisions of the Plan at age 55 or at such earlier
time as may be allowed by the Plan.
<PAGE> 2
Mr. Gregory Ionna
March 30, 1999
Page 2
B) Paragraph 2 shall be amended to read as follows:
Your annual salary, which became effective on February 1,
1999, shall be $260,000, which amount may be increased from
time to time by the Company in accordance with the Company's
salary administration program. In addition, you will qualify
for participation in the Incentive Bonus Program.
C) Paragraph 5 shall be amended to read as follows:
The Company reserves the right to terminate your employment at
any time during the term of this Agreement. Except where
termination is pursuant to Paragraph 4, or is a "termination
for Cause" as defined in Paragraph 6, the Company will pay to
you immediately upon such termination, two times your yearly
salary at the salary level in effect on the date of
termination, plus any unpaid bonus under the Incentive Bonus
Program with respect to a completed calendar year of
employment. In addition, you will continue to be covered at
the Company's cost under the Company's medical benefits plan
until you commence new employment or until two years from the
date of termination, whichever occurs first. In the event any
person, corporation, partnership or joint venture becomes the
beneficial owner of thirty percent (30%) or more of the voting
securities of the Company then the provisions of this
Paragraph for two times salary and bonus shall be
automatically revised to 2.9 times such salary plus any unpaid
bonus but subject to the provisions of the attached Exhibit A.
Further, upon the consummation of such a change of ownership
you may, within 30 days, elect to terminate your employment
and if you make such an election the Company, upon such
termination shall a) immediately pay to you 2.9 times your
yearly salary plus any unpaid bonus under the Incentive Bonus
Program with respect to a completed calendar year of
employment; and b) shall make all other payments and provide
all other benefits to you as contained herein as if such
termination occurred "without Cause" as provided in Paragraph
1 (as amended) above.
D) Paragraph 8 shall be amended to read as follows:
<PAGE> 3
Mr. Gregory Ionna
March 30, 1999
Page 3
In the event that your employment with the Company is
terminated for any reason, by you or by the Company, you agree
that, for a period of one year following such termination of
employment, you shall not, without the prior written consent
of the Company in any way solicit or recruit any employee of
the Company, its affiliates or subsidiaries, for any
employment, consulting or other arrangement for your benefit
or the benefit of any third party. Further, in the event of
such a termination, you agree that for a period of one year
after such termination you will not compete, directly or
indirectly, with the Company or with any division, subsidiary,
or affiliate of Gibson Greetings, Inc. or participate as a
director, officer, employee consultant, advisor, partner or
joint venturer in any business engaged in the manufacture or
sale of greeting cards, gift wrap or other products produced
by the Company, or any division, subsidiary or affiliate of
Gibson Greetings, Inc., without the prior written consent of
the Company.
E) Paragraph 6 shall remain unchanged EXCEPT that the
reference to "March 31, 1999" contained in the first
sentence shall be amended to read "March 31, 2000."
F) All other provisions of the December 28, 1996
contract, namely, Paragraphs 3, 4, 7, 9, 10 and 11,
shall remain unchanged and shall continue to be
binding and in full force and effect.
To indicate your acceptance of and willingness to be bound by this Agreement,
please sign and return one duplicate original of this letter.
Sincerely,
Gibson Greetings, Inc.
By /s/ Karen L. Kemp
--------------------
Date 3/31/99
--------------------
AGREED:
/s/ Gregory Ionna
- ------------------------
Gregory Ionna
3/31/99
- ------------------------
Date
<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 QUARTER ENDED MARCH 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,179
<SECURITIES> 18,900
<RECEIVABLES> 108,054
<ALLOWANCES> 47,885
<INVENTORY> 73,982
<CURRENT-ASSETS> 198,456
<PP&E> 157,595
<DEPRECIATION> 78,634
<TOTAL-ASSETS> 397,618
<CURRENT-LIABILITIES> 73,999
<BONDS> 9,300
0
0
<COMMON> 171
<OTHER-SE> 267,439
<TOTAL-LIABILITY-AND-EQUITY> 397,618
<SALES> 83,249
<TOTAL-REVENUES> 83,468
<CGS> 37,102
<TOTAL-COSTS> 89,169
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> (5,726)
<INCOME-TAX> (2,319)
<INCOME-CONTINUING> (3,407)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,407)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GIBSON
GREETINGS INC.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,567
<SECURITIES> 38,700
<RECEIVABLES> 128,136
<ALLOWANCES> 56,698
<INVENTORY> 84,489
<CURRENT-ASSETS> 245,049
<PP&E> 153,560
<DEPRECIATION> 77,654
<TOTAL-ASSETS> 437,451
<CURRENT-LIABILITIES> 108,054
<BONDS> 10,384
0
0
<COMMON> 171
<OTHER-SE> 271,307
<TOTAL-LIABILITY-AND-EQUITY> 437,451
<SALES> 407,933
<TOTAL-REVENUES> 408,530
<CGS> 179,903
<TOTAL-COSTS> 405,424
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,454)
<INCOME-PRETAX> 4,560
<INCOME-TAX> 2,377
<INCOME-CONTINUING> 2,183
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,183
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
